lecture 3 - capital allowances

Question 1

what is a capital allowance and what does it achieve?

Answer 1

Capital allowance = tax relief for capital expenditure. Ensures consistent treatment of assets for tax purposes rather than multiple treatments that would occur if acc dep policies were used in tax computations. CAs allowed as deduction each year are fixed % of value of capital asset to pool in question. Available on date payment is made for qualifying assets and ownership is transferred. CAs treated like trading expense, i.e. deduct to arrive at TATP.

Question 2

what expenditure are capital allowances available for?

Answer 2

plant and machinery (almost all will fall into this)

integral features

agricultural buildings and works (not covered further)

new structures and buildings allowance from apr 2019.

Question 3

what falls under ‘plant and machinery’?

Answer 3

whatever is used in business in carrying on the business

‘whatever apparatus is used by a businessman for carrying on his business: not his stock in trade which he buys or makes for resale; but all goods and chattels, fixed and movable, live or dead, which he keeps for permanent employment in the business’ (Yarmouth v France 1887)

essentially excludes inventory from capex.

also includes:
safety, fire regulations, thermal insulation, computer software, personal security equipment, integral features

Question 4

what are integral features?

Answer 4

electrical and cold water systems, space or water heatings systems, lifes/escalators, solar shading, powered systems of ventilation, air cooling or purification, any floor/ceiling part of this system. Replacements of these items where whole or majority is replaced within 12 month feature also classed as integral feature. Eligible costs for this = demolition for prep of building and all construction costs, but not eligible = planning permission costs, costs for obtaining land or right to use land. Can claim allowances once the building is brought to use. Can be anywhere as long as used by person claiming relief and profits chargeable to tax in UK.

Question 5

what features are excluded from plant and machinery?

Answer 5

land and buildings (other than qualifying SBA expenditures
assets not used for purposes of trade/carrying on business
assets with useful life of less than 2 yrs
assets which form part of setting in which business is carried on.

Question 6

what test is used for whether expenditure is capital? how does it work?

Answer 6

function vs setting test - capital has to be used in business, can’t be part of setting of business. Seems to be up to discretion of courts rather than set in stone, big reliance on case law

Question 7

Leeds Permanent Building Society v Proctor (HMIT) 1982

Answer 7

building society plastic screens deemed a capital expenditure, didnt perform a function of the business

Question 8

Benson v Yard Arm Ltd, 1978

Answer 8

floating restaurant - A restaurant business purchased an old ship and barge to be used as a restaurant. It was argued, the ship was an apparatus that would move with the tides and waves, thus creating a unique atmosphere. It was decided that this was not plant and not an apparatus used to carry out the business.

Question 9

Brown v Burnley Football & Athletic Club, 1980

Answer 9

football stand - wasn’t okay at time bc formed setting not function, but may be now because of increased safety measures due to hillsborough

Question 10

Cooke v Beach Station Caravans Ltd, 1974

Answer 10

A caravan park operator and owner constructed a swimming pool. The costs included, excavation, pool construction, plumbing, terracing and systems of filtering, chlorination and heating. It was decided that the whole cost was to be treated as plant. The pool was used in the trade and performed the function of providing safe swimming facilities to visitors.

Question 11

Cheshire Cavity Storage, 2019

Answer 11

wanted underground gas storage chambers to be capital so the associated costs would also be capital, but didn’t meet definition of plant and weren’t allowed capital allowances

Question 12

May vs HMRC (2019)

Answer 12

may argued farm silo for temporary storage = capital, HMRC argued it was a building. eventually ruled can have it classed as capital, but only 20% allowance given.

Question 13

what items are automatically deemed plant and machinery by statute?

Answer 13

Equipment to comply with fire regs for building occupied by trader

Thermal insulation (excl dwelling houses)

Expenditure at Sports grounds for compliance with statutory safety requirements

Computer software

Alterations to buildings connected to installing P&M

Personal security equipment

NB - person carrying on trade must incur capex on p&m at least partly for purposes of trade, and machinery must belong to them rather than lease/hire.

Question 14

what is the SBA and how does it work?

Answer 14

Structures and Buildings allowances: non-residential buildings, only new building and conversion costs (construction and demolition costs), can be located anywhere in world as long as related to UK taxpayer. deducted as 3% straight-line (effectively amortised over 33 1/3 yrs). be aware, but may disappear soon.

Question 15

what are the 3 possible allowances?

Answer 15

ECAs and FYAs - enhanced capital allowances/first year allowances

AIA - annual investment allowance

WDV - written down value

Question 16

what is the AIA and how does it work?

Answer 16

annual investment allowance (AIA)
Businesses of any size can claim, amount of expenditure for a full tax year on plant and machinery or integral features that is fully deductible.
claim 100% as an expense through this, can turn a capital expenditure into something deductible.
at the minute, up to 1mil per year, but amount changes fairly frequently based on state of economy. increasing AIA reduces tax base, decreasing AIA increases tax base. use it or lose it, not cumulative through years but get a fresh 1mil every year.
cars not eligible. excess capex goes to relevant pool for WDA calculation. in statements you put capex on trading profits to get TATP, then take it off again as AIA.
Good example of gov policy that is flexible, but does create uncertainty because constantly changing.

Question 17

what is WDA and how does it work?

Answer 17

applied to excess of expenditure over AIA and to balance of expenditure brought forward from previous years like depreciation. Must add to balance brought forward value of new items acquired and subtract those disposed before calculating CAs!

main pool rate - 18% of expenditure written off for tax, applied on reducing balance basis.
special pool rate - 6% written off

not necessary to claim full allowances - can carry forward in pool and claim in future years. AIA only on new expenditure, WDA can be used on old expenditure. WDA allowed for whole period or not at all, no prorating. New items qualify for whole year if not owned for whole year, disposals not at all even if owned for part of year.
If taxpayer’s business has accounting period not 12 months in length, relevant rate needs to be reduced or expanded prorate to length of accounting period

Question 18

how does WDA for integral features work?

Answer 18

integral features include:

high emission cars - more than 50g/km of CO2

thermal insulation

for long life assets - more than 25yrs use when new, and business’ total expenditure on these assets must be over 100K. Can’t include dwelling houses, retail shops, showrooms, hotels or offices, cars and taxis, seagoing ships and railway assets bought before end of 2010.

Question 19

what happens when assets are disposed of?

Answer 19

when assets sold, proceeds are taken out of pool. at most, proceeds are original cost. the lesser of costs and proceeds is removed from the pool, before calculating WDA for year. if it’s scrapped use scrap costs.

cannot remove from the pool more than you put into it for the asset now sold. the most you can remove is therefore original value. however, if proceeds for selling asset is lower than this you have to use that as the amount removed.
NB no WDA in year trade ceases - get balancing chage/allowance instead
small pools of unrelieved capital expenditure can be written off as balancing allowance, less than 1k. Applies to main and special rate pools but not SLAs. not required to write them off, and taxpayer chooses amount written off each year.

Question 20

how do balancing charges/allowances work when assets are disposed of?

Answer 20

balancing charge when disposal value deducted > balance remaining in pool. Like negative capital allowance in that it is charged to trading profit.
balancing allowance occurs when trade ceases and balance remaining leaves unrelieved allowances. Allowance equal to whole of excess can be claimed to reflect allowable deductions not previously claimed. For pooled assets, balancing allowance not allowed until qualifying activity ends (e.g. when trade ceases to operate).

Question 21

what items require special treatments?

Answer 21

short life assets

assets with elements of private usage

high emissions cars

leased assets

Question 22

how are short life assets treated?

Answer 22

SLAs have useful lives of less than 8 yrs. can elect to keep specific items separate from main rate pool (de-pooling election). can’t be something that would go into the special rate pool. each asset gets its own pool. Election to treat purchased capital must be made not more than 2yrs after end of chargeable period in which expenditure occurred, and once made is irrevocable.

balancing allowances given when sold rather than continuing to write down tax WDV to infinity. balancing allowance = allowance equivalent to remaining tax WDV. means you don’t add anything back.

if not disposed within 8yrs of end of period in which was bought, transfer tax WDV to general pool at start of next chargeable period and treat normally.

make election for assets know will sell within 8 yrs for less than tax WDV, so can advance claiming of allowances rather than claiming 18% of WDV for ages (TAX PLANNING woo).

good example is laptops, not gonna last for 8 yrs and you’re very likely to sell it as a loss so better to de-pool and get allowance immediately.

can’t claim for: cars, ships, p&m provided for leasing; items that would otherwise be in special rate pool.

Question 23

how are assets with elements of private usage treated?

Answer 23

tax WDV reduced by WDA rate but only business proportion is deductible. sole traders and partners only (unincorporated businesses). if p&m only partly used for the purpose of trade, CAs and charges multiplied by (time asset used for trade)/(total period of ownership). Because this fraction is different for every asset, separate capital allowances computation must be carried out for each (separate columns).

treat each item of plant separately, de-pool. claim only the business proportion of allowances.

for company - claim full amount of capital allowances in computing taxable profit. private use if dealt with through payroll taxes as a benefit in kind, taxable on individual. company can still get tax writeoff.

Question 24

how are leased assets treated?

Answer 24

they are aggregated into a separate pool, same WDA applies * element of business use.

Question 25

how do ECAs and FYAs work?

Answer 25

first year allowances (FYA)
In 2000 budget gov introduced EVAs for certain green capital items where allowance = 100%. Low emission cars qualify for FYA, but have to be new not secondhand.

enhanced capital allowances (ECA)
Cars:
=0 g/km = 100% FYA
1 - 50 g/km = 18% main pool
= 51 g/km = 6% special rate pool
cannot count towards AIA or short life asset. separate computation for private use cars if sole trader/partner

vans are not cars!!! can qualify for AIA.

Question 26

what is the ideal order of claim for capital allowances?

Answer 26

identify ECA and FYA as 100%

AIA prioritising asets that would only have 6% WDA

identify short life assets whose future sale is likely to trigger balancing allowance

remainder in main or special rate pool

Question 27

how do chargeable periods affect CAs?

Answer 27

get 100% of CAs irrespective of when asset purchased within accounting period.

if have accounting period other than 12 months, ensure alter WDA amounts e.g. 18%*(number of months/12).

Question 28

what is the main tax planning point with CAs?

Answer 28

Waiving rights to capital allowances

All of part of CA entitlement can be waived other than SBAs. any amount waived increases balance of qualifying expenditure eligible for capital allowances in future years so not lost just delayed. Useful if business makes a tax loss, may decide to carry forward so value of pool remains same and claim carried forward to offset against profit in later years. Also useful if: taxable profits reduced to lower than personal allowance (i.e. you’re saving tax on something you’re not paying tax on, may as well defer), or taxpayer believed marginal rate of tax would increase significantly in future years, making deduction more valuable later.

can make use but only if its the case that you were going to incur expenditure anyway. don’t spend to save a % on taxes, still overalll an expenditure.