Chapter 6 - Capital allowances

Question 1

What is machinery?

Answer 1

Machinery includes all machines, motor vehicles and computers.

Question 2

What is plant?

Answer 2

Plant includes such things as office furniture and equipment.

In general, if an asset performs an active function in the business it is considered to be plant whereas if an asset is passive and merely part of the setting in which the business
is carried on it does not qualify as plant.

Question 3

What are two types of expenditure which are specified in legislation as qualifying for capital allowances on plant and machinery?

Answer 3

1. Building alterations incidental to the installation of plant and machinery
2. Licence to use computer software

Question 4

Who is entitled to capital allowances?

Answer 4

Capital allowances are available to a taxable person who incurs capital expenditure on assets to be used for the purposes of a trade carried on by that person.

Question 5

For capital allowance computations, can the disposal value of an asset exceed its original cost?

Answer 5

No

Question 6

What is the disposal value of an asset which is given away or sold for less than market value?

Answer 6

The disposal value will be the market value on the date of disposal.

Question 7

What is the disposal value of an asset which is scrapped or destroyed?

Answer 7

The disposal value is the scrap value or the compensation received, as appropriate.

Question 8

If a business ceases, should a capital allowance be brought into the capital allowances calculation and balancing adjustments calculated?

Answer 8

Yes

Question 9

What does FYA stand for?

Answer 9

First-year allowance

Question 10

What does AIA stand for?

Answer 10

Annual investment allowance

Question 11

What does TWDV stand for?

Answer 11

Tax written down value

Question 12

What does WDA stand for?

Answer 12

Writing down allowance

Question 13

Are capital allowances for a sole trader or a partnership calculated for each period of account and not for each tax year?

Answer 13

Yes

Question 14

What do you understand by assets in the main pool?

Answer 14

In most cases, capital allowances are not calculated for expenditure on a single asset, but on a pool of expenditure, ie, on a number of assets. For each period of account, the cost of assets acquired is added to the pool and the value of any disposals deducted from the pool.

Question 15

Which cars are eligible to be included in the main pool?

Answer 15

Cars with CO2 emissions of not more than 110 g/km purchased on or after 6 April 2018 (1 April for companies).

Question 16

What do you understand by writing down allowance?

Answer 16

A writing down allowance (WDA) is given on the balance of the main pool at the end of the period of account.

WDA is 18% reducing balance per annum pro-rata for a period of account.

Question 17

What do you understand by the tax written down value?

Answer 17

The WDA is claimed as a capital allowance and is deducted from the pool balance. The remainder of the value of the pool is then carried forward to the start of the next period of account. This amount is called the tax written down value (TWDV). It continues to be written down on a reducing balance basis.

Question 18

When is a first-year allowance given?

Answer 18

A first-year allowance (FYA) is given in the period of account in which the expenditure is incurred.

Question 19

How much FYA is available?

Answer 19

A FYA is always available in full, regardless of the length of the period of account. Where the full 100% FYA is claimed, there are no further WDAs on such expenditure.

Question 20

What are four types of expenditures qualifying for a 100% FYA?

Answer 20

1. expenditure on new and unused zero-emission goods vehicles where expenditure is incurred on or after 6 April 2010 (1 April for companies).
2. expenditure on designated energy-saving technologies, such as equipment that generates heat and power, where the expenditure is incurred on or before 5 April 2020 (31 March 2020 for companies).
3. expenditure on new qualifying low emission cars. To qualify as a low emission car it must be electrically-propelled or emit not more than:(a) 50 g/km of CO2 for cars purchased on or after 1
   April 2018
   (b) 75 g/km of CO2 for cars purchased before 1 April
   2018
4. expenditure on charging points for electric vehicles incurred between 23 November 2017 and 5 April 2023 (31 March 2023 for companies).

Question 21

What is the treatment for disposal of assets attracting first-year allowances?

Answer 21

In the year of disposal of an asset previously qualifying for first-year allowances, or in the accounting period of cessation, the disposal proceeds (limited to cost) must be deducted from the relevant pool.

Question 22

Is an AIA available for cars?

Answer 22

No

Question 23

What is the maximum AIA per year?

Answer 23

The maximum allowance is £1,000,000 per annum pro-rata for expenditure incurred between 1 January 2019 and 31 December 2020. It must be set against expenditure in the accounting period in which it is incurred.

Any balance of expenditure incurred within an
accounting period on which the AIA is not given, is eligible for a WDA.

Question 24

What do you understand by small plant and machinery pools?

Answer 24

Businesses may write off small balances remaining at the end of the accounting period in the main pool.

This applies where the tax written down value, after additions and disposals but before the WDA, is £1,000 (pro-rata) or less.

Question 25

Are there special rules for capital allowances on cars?

Answer 25

Yes

Question 26

What is the treatment for cars with private use?

Answer 26

If the car is one with private use by a sole trader or partner it goes into a single asset pool

Question 27

Are cars eligible for AIA?

Answer 27

No

Question 28

Which cars are eligible for a WDA of 18% per annum?

Answer 28

Cars in the main pool which are not low emission cars receive a WDA of 18% per annum:

6 April 2013 to 5 April 2018 (1 April 2013 onwards for companies): ≤ 130 g/km

On or after 6 April 2018 (1 April 2018 for companies): ≤ 110 g/km

Question 29

What is the treatment for assets with private use by sole trader or partner?

Answer 29

Any asset that is partly used privately by a sole trader or partner is kept in a separate pool. The AIA or FYA where applicable, or otherwise the WDA, is still calculated in full and deducted from the single asset pool, but the trader can only claim the business element of the allowance.

Question 30

What is the treatment of assets with private use by employees?

Answer 30

Private use by an employee does not restrict the allowances available.

Question 31

When does a balancing charge arise?

Answer 31

A balancing charge arises on disposal if too many capital allowances have been given.

This might happen if an asset is sold for an amount in excess of its tax written down value.

Question 32

When does a balancing allowance arise?

Answer 32

A balancing allowance arises on disposal if too few capital allowances have been given.

This might happen if an asset is sold for an amount less than its tax written down value.

Question 33

When can a balancing allowance arise?

Answer 33

A balancing allowance can only arise on the main pool if the business comes to an end.

Balancing allowances can arise on single asset pools when the asset is sold, even when the business has not ended.

Question 34

Which allowances are given when trading ceases?

Answer 34

Remember that in the period a trade ceases, no AIAs, FYAs or WDAs are given, only balancing adjustments.

Question 35

What happens when the balancing charge exceeds the allowances?

Answer 35

If the balancing charge had exceeded the allowances, the excess charge would have been added to the adjusted trade profit for the year.