Sole Traders - Capital allowances Flashcards
Revenue and capital expenditure Plant and machinery Annual investment allowance (AIA) Writing down allowances (WDAs) The general pool Cars 100% First year allowance (FYA) Special rate pool Private use of assets Balancing charges/allowances Small pools allowance (Balance in pool < £1,000) Structures and buildings allowance
What is the difference between revenue and capital expenditure?
Revenue expenditure covers daily business costs (e.g., wages, rent). Capital expenditure is for long-term assets (e.g., machinery, vehicles).
How is revenue expenditure treated for tax purposes?
It is deducted from trading profits, reducing taxable income.
How is capital expenditure treated for tax purposes?
It is not deducted from profits but may qualify for capital allowances.
What types of assets qualify for capital allowances?
Plant and machinery, including computers, equipment, motor vehicles (except cars), and specified items like alarm systems.
What items are not classified as plant?
Items that form part of the business setting, such as fixed office partitions
What are the main types of capital allowances?
AIA (Annual Investment Allowance) – 100% deduction up to £1,000,000.
FYAs (First Year Allowances) – Full deduction for certain assets.
WDAs (Writing Down Allowances) – 18% reducing balance for general pool
What is the AIA and how does it work?
AIA allows 100% deduction on qualifying capital expenditure up to £1,000,000, excluding cars.
How is AIA adjusted for long or short accounting periods?
Short period (<12 months): AIA is prorated (e.g., 9 months → £750,000).
Long period (>12 months): AIA is scaled up (e.g., 18 months → £1,500,000).
How are WDAs applied?
WDAs (typically 18%) are applied to the remaining asset balance after AIA/FYAs.
How are capital allowances calculated for sole traders?
They match the accounting period. If shorter than 12 months, allowances are prorated.
Can a limited company have an accounting period longer than 12 months for tax?
No, it is capped at 12 months.
What allowances apply if AIA is fully used or not available?
WDAs apply at 18% on a reducing balance basis.
How does Andrew calculate WDAs with a £28,000 general pool balance for a 12-month period?
WDA @ 18% = £5,040 → New balance: £22,960.
How does Michael calculate WDAs with a £28,000 balance for a 6-month period?
WDA @ 18% × 6/12 = £2,520 → New balance: £25,480.
What is the first step in calculating capital allowances?
Identify which assets qualify as plant and machinery.
What columns are included in a capital allowance schedule?
AIA, general pool, and total allowances.
How is AIA applied?
Up to £1,000,000 can be deducted in full for qualifying assets in a 12-month period.
What happens if expenditure exceeds AIA?
The remaining balance is added to the general pool for WDA at 18%.
How is an asset removed from the general pool upon disposal?
Deduct the lower of its original cost or sale proceeds.
How are cars treated differently from other assets?
AIA is not available; instead, allowances depend on CO2 emissions.
What are the capital allowance rates for cars?
0 g/km: 100% First Year Allowance (FYA).
Up to 50 g/km: 18% WDA (general pool).
Over 50 g/km: 6% WDA (special rate pool).
How does FYA differ from AIA?
FYA applies only to zero-emission cars, has no expenditure limit, and is not time-apportioned.
Private Use of Assets
Only the business proportion of allowances can be claimed.
How are private-use assets recorded?
They are placed in a single asset pool with individual WDA calculations.
What is a balancing charge?
A tax adjustment when disposal proceeds exceed the remaining TWDV, increasing taxable profits.
What is a balancing allowance?
An extra allowance when disposal proceeds are lower than TWDV, reducing taxable profits.
When do balancing charges arise in the general or special rate pool?
When the pool balance becomes negative after a disposal.
When do balancing allowances arise in the general or special rate pool?
Only on cessation of trade.
What happens if the balance in the general or special rate pool is less than £1,000?
It can be fully written off as a WDA.
What conditions must be met for SBA?
Contract entered on/after 29 October 2018.
First use must be non-residential.
What is the SBA rate?
3% per year on a straight-line basis.
What costs qualify for SBA?
Construction, site preparation, design fees, and fitting-out works.
What costs are excluded from SBA?
Land acquisition, legal fees, planning permission, and landscaping.
When can SBA be claimed?
Only when the building first comes into use. If mid-period, it is time-apportioned.
