LECTURE 3: Capital Allowances on Plant and Machinery

Question 1

What capital expenditures are allowable for tax relief through capital allowances?

Answer 1

1. Plant and machinery
2. Patent rights
3. Know-how
4. R&D
5. Renovation of business premises

Question 2

What are chargeable periods?

Answer 2

Capital allowances are calculated in respect of chargeable periods. For income tax purposes, each period of account generally ranks as a chargeable period and so there is usually on capital allowances computation per period.

Question 3

How are capital allowances for a period of account treated?

Answer 3

Treated as trading expenses and are deducted when computing adjusted trading profit for that period. The basis period rules are applied to the trading profit after deduction of capital allowances.

Question 4

PLANT

Answer 4

Capital allowances Act (2001) does not provide a definition of “plant and machinery”. Left to case law to decide whether or not any given item should qualify as P&M.
Plant is actively used in the business i.e. performs a function or is specific to a trade e.g. furniture, counters, checkouts, advertising signs.

Distinction betweee:

a) assets which perform active function in the carrying on of the business (qualify as P&M)
b) assets which perform a passive function in the carrying on of the business (i.e. the setting).

Question 5

Setting

Answer 5

e.g. walls, floors, ceilings

Question 6

What is classed as a plant (based on case law)?

Answer 6

• Moveable office partitions - Jarrold v John Good and Sons Ltd (1963).
• Excavation and construction of swimming pool - Cooke and Beach Station Caravans Lts (1974)
• Light fittings, decor and murals (moveable) - CIR v Scottish and Newcastle breweries Ltd.

Question 7

What is not classed as a plant (based on case law)?

Answer 7

• Floor in a restaurant - floor is part of setting - Wimpy International v Warland (1988)
• Ship used as a floating restaurant - Benson v Yard Arm Club
• False ceilings in a restaurant - visible pipework so put in false ceiling - part of setting - Hampton v Fortes Autogrill (1978)
• A petrol station forecourt canopy - Dixton v Fitch’s Garage LTd (1975)

Question 8

What expenditure is statutorily deemed to be P&M?

Answer 8

1. Expenditure on the thermal insulation of a building.
2. Expenditure on assets neccessary to safeguard personal security.
3. Expenditure on integral feature of a building or structure.
4. Expenditure on computer software.
5. Expenditure on building alterations, incidental to installation of P&M

Question 9

Are capital allowances calculated individually on each item of P&M?

Answer 9

No, instead, expenditure on P&M is pooled together and capital allowances are calculated with reference to the value of the pool.

Question 10

MAIN POOL

Answer 10

The pool to which most general P&M is allocated (e.g. machines, office equipment, vans, motor cycles, etc.)

Question 11

How are motor cars allocated to pools?

Answer 11

1. In general, cars with emissions which do not exceed 130g/km are allocated to the main pool. Cars with higher emissions are allocated to the special rate pool.
2. Low emission cars (>75g/km) are eligible for 100% first year allowance and do not join any pool.

Question 12

SPECIAL POOL

Answer 12

This is a pool of assets arising from any or all of the following:

1. the acquisition of motor cars
2. the acquisition or replacement of certain “integral features” of a building; listed in CAA 2001 as electrical systems, water systems, heating and cooling systems, lifts, escalators/moving walkways and external solar shading.
3. Expenditure on thermal insulation of a building and on solar panels.
4. Expenditure on assets with a working life of 25 years or more (long life) but only if the business spends more than £100,000 a year on such assets.

Question 13

What does the rate of capital allowance depend on?

Answer 13

The pool to which an item is allocated.

Question 14

Tax writing down allowances (WDA)

Answer 14

Main pool (18% reducing balance allowance) most P&M except:
Special pool (8% reducing balance allowance)

Assets not wholly used for business purposes (18% or 8% depending on type of asset)
Own heading, adjustment for private use.

Question 15

What is the procedure for computing the amount of the writing down allowance for each pool?

Answer 15

1. The written down value (WDV) of the pool at the end of the previous chargeable period is brought forward.
2. The cost of any P&M which has been acquired during the chargeable period but which is not subject of a claim for either first year allowance is added to the pool.
3. If any pool items have been disposed of during the chargeable period a disposal value is subtracted from the pool, equal to:
   a. sales proceeds, if asset is sold on open market
   b. market value on the date of disposal, if the asset is given away or sold for less than market value.
   c. scrap value or compensation received, if the asset is scrapped on destroyed,
   If the disposal value exceeds the original cost of the item, only the original cost is subtracted from the pool. The profit on the disposal may give rise to a capital gains tax liability.
4. The available WDA is then calculated as a percentage of the pool balance. The applicable percentages are as followed:
   Main pool: 18% per annum
   Special rate pool: 8% per annum
   WDA is scaled up or down accordingly if length of the period is not 12 months.
5. The WDA claimed for the chargeable period is subtracted from the pool, leaving WDV which is carried forward to the next period. This WDV will attract WDAs in future chargeable periods (even if all P&M have now been sold.

Question 16

ANNUAL INVESTMENT ALLOWANCE

Answer 16

The first £200,000 p.a. of expenditure on P&M by a business qualifies for a 100% AIA instead of the normal WDA.

The AIA is increased or reduced proportionately if accounts are prepared for more or less than 12 months.

NOT AVAILABLE ON MOTOR CARS

Question 17

FIRST YEAR ALLOWANCE (FYA)

Answer 17

A 100% FYA is available for expenditure on:
Electrically propelled cars, or cars emitting less than 75g/km of CO2
Energy saving plant and machinery meeting strict energy saving criteria.

Question 18

What balancing adjustments are required for the sale of assets?

Answer 18

If the disposal of the P&M disposed of during the chargeable period exceeds the balance of expenditure in the relevant pool before disposals are deducted, this indicates that the capital allowances given to date exceed the depreciation which has actually occurred. In these circumstances, the written down value of the pool is set to zero and a balancing charge is made, equal to the amount of the excess. A balancing charge is a negative capital allowance which is added to trading profits for tax purposes.

On the sale of an asset, deduct from WDV b/f the lower of
Disposal proceeds and
original cost

WHere assets are pooled there is no further adjustment.

However, if the balance in the main pool or in the special rate pool is £1,000 or less, the business can claim a WDA of any amount up to that balance.

Question 19

Single heading assets (assets with private use): Disposal proceeds< WDV b/f

Answer 19

Further allowances can be claimed, i.e. a balancing allowance arises (adjusted for private use)

e.g.
WDV b/f 100
Disposal  90
                 10
Allowance (10) * PU
                   NIL

Question 20

Single heading assets (assets with private use): Disposal proceeds>WDV b/f

Answer 20

Excessive allowances have been given i.e. a balancing charge arises (adjusted for private use)

WDV b/f      100
Disposal      (120)
                     (20)
Balancing Charge 20
NIL