Topic 8- Capital Allowances Flashcards
What is the purpose of capital allowances?
▪ Depreciation charged in the accounts is not allowable in computing taxable trading profits due to subjectivity; capital allowances are given instead.
▪ Capital allowances are provided to give a business tax relief for capital expenditure on qualifying assets over the life of those assets.
What is the definition of plant?
Plant is an item WITH which the trade is carried on I(active function) and NOT the setting IN which it is carried on i.e. land and buildings (passive function).
What are the most common examples of PAM and what are NOT?
▪ computers and software
▪ machinery
▪ cars (have their own rules) and lorries
▪ office furniture
▪ moveable partitions (these are PAM not buildings)
▪ air-conditioning “integral feature”
▪ alterations of buildings needed to install plant and machinery
NOT
- False Ceilings (part of the building)
- Fixed partitions
What is included in the general pool?
what happens when an addition is made?
what happens when the asset is disposed of?
▪ Most items of plant and machinery purchases are including within the general pool
▪ Cars purchases with CO₂ emissions between 51g/km and 110 g/km
▪ When an addition is made, the purchase price increases the value of the pool
▪ When an asset is disposed of, the pool value is reduced by the lower of cost or sale proceeds (Selling price)
What is not included in the general pool?
▪ Assets that are used partly for private purposes by the owner of the business- personal use adjustment made
▪ Expenditure incurred on short life assets where an election to de-pool is made
▪ Expenditure incurred on items that form part of the ‘special rate pool’ @ WRD of 6%
e.g. - Car with C02 > 110g,
What is the AIA limit , who is it available to & in what order is it applied?
▪ £1,000,000
▪ Available to all businesses regardless of size
▪ Available on acquisitions of ‘general pool’ plant and machinery and acquisitions of ‘special rate pool’ items
First to SRP then to GP, Short life asset, private use
What are some of the conditions on AIA?
NOT available on any cars
▪ For long and short accounting periods the allowance is pro-rated- MAX 18Months
▪ Not available in the accounting period in which the trade ceases. You don’t want a carried forward balance obviously
What is FYA and the conditions tied to it?
A 100% first year allowance is available on low emission cars, (50 or less grams per kilometre of CO₂). They allow you to reduce your profit by the purchase of the asset in the first year
▪ FYA is never pro-rated for accounting periods of greater or less than 12 months
▪ FYAs are not given in the final period of trading
What is WDA and the conditions tied to it?
▪ An annual WDA of 18% is given on a reducing balance basis
✓ The amount of assets in the pool brought forward (which have not been claimed) at the beginning of the period of account (i.e. tax written down value) (TWDV), plus
o any additions on which the AIA or FYA is not available, plus
o any additions not covered by the AIA (i.e. exceeding the £1,000,000 limit)
o less disposals.
▪ Needs to be pro rated
▪ We do not calculate WDS in final year of Trade
WDA Length of ownership conditions?
▪ The WDA is never restricted by reference to the length of ownership of an asset in the period of account. This is irrelevant. When we buy it in the accounting period doesn’t matter.
▪ The WDA is available for the accounting period, provided the asset is owned on the last day.
▪ If a business prepares accounts for the year ended 31 March 2020, the same WDA is given whether an asset is purchased on 1st April 2019 or 31st March 2020
The WDA is only pro-rated if you have a short of long accounting period, NOT the length of time you’ve owned the asset within the year
What is the formula for the disposal of plant and machinery
On a disposal, always deduct from the pool the lower of the sale proceeds (SP) and the original cost.
What is a balancing charge?
These arise when disposal proceeds exceed the pool balance brought forward (you’ve claimed too much WDA relief)- the balancing charge will occur and be added to the taxable trading profit.
What is the working for when cessation of trade occurs?
In the last period of trading, a normal capital allowance computation is NOT calculated. The working would be as follows:
1) Add in any additions made in the final period.
2) Do not calculate any AIAs, WDAs or FYAs.
3) Deduct any disposals made in the final period
4) Calculate a balancing charge or balancing allowance (see below) as appropriate.
5) Going forward there should be a NIL balance
At cessation, if the tax written down value is higher than the disposals a business can claim relief for the unrelieved balance by way of a balancing allowance.
(This is the only time a balancing allowance will arise the general pool.)
What are the rules for private use of an asset?
▪ Only applies to the owner using the asset privately. Employee doesn’t matter as this is calculated in their BIK
▪ Separate the column for the private use for each asset
▪ The AIA, FYA and WDS is based on the full cost of the asset but only the business proportion of the allowance is deductible when computing the taxable trading profit
What belongs in the SRP (special rate pool)?
and what are the exceptions when it is not allowed?
▪ The WDA is 6%
The ‘special rate pool’ groups together expenditure incurred on the following type of assets:
▪ long-life assets (>25 years) and expenditure incurred >£100k
▪ Cars with CO2 emissions in excess of 110g/km- bad for environment so doesnt’ get AIA
▪ ‘integral features’ of a building or structure fittings within the building are things that cannot easily be removed- lift, heating, ventilation, air conditioning- Still gets AIA
▪ thermal insulation of a building- still gets AIA.
*for business buildings if you have a property residential business e.g. if working from home, sole trader, retail shop, showroom, hotel or office- LLA are NOT allowed
Same with thermal- Residential buildings in a property business is not allowed such as sole trader working from home
