ACCA TX ^UK Syllabus E. Corporation Tax Liabilities - Capital allowances - Notes ^{3 / 14}

Plant and machinery(P&M) for capital allowances purposes

Capital Allowances (Tax depreciation) are deducted from Operating profits

• CA are given for P&M used in the business only

  CA are given for a period of account eg for a year ended 31/12/24, and are deducted in the adjustment of profits calculation to reach the Trading Profits figure

  Plant is defined as assets that perform an active function in the business 

  e.g.  office furniture and equipment including movable office partitioning. 

  Machinery will include motor vehicles and computers, including building alterations necessary for the installation of plant and machinery.

Capital allowances are now also available on integral features of a building including lifts and escalators, electrical systems, heating and air cooling system.

Main pool

1. Computers, equipment, shelving, vans and lorries

2. Movable office partitioning

3. Alterations to building incidental to the installation of plant and machinery

4. Tables and chairs

5. Fire regulation expenditure

Special Rate Pool

The following asset acquisitions should be allocated to the special rate pool:

1. Integral features of a building

   – these include all major systems in a building. 

   For example, electrical, thermal, cooling systems.

2. Long life assets

   These are assets, when new, with an expected economic working life of 25 years or more when total expenditure based on a 12-month accounting period exceeds £100,000

Writing down allowances

W.D.A.’s are given on main pool assets and special rate pool assets.

For main pool assets, the W.D.A. is 18% for a 12 month period

For example Assets in the main pool had a brought forward value of £100,000 at 01/01/2024

The writing down allowance on these assets will be £18,000 (£100,000*18%) in the year ending 31/12/2024.

Note if the above period was for 6 months, then the WDA for the main pool would be £9,000 (£100,000*18%*6/12) in the period ending 31/12/2024.

For special rate pool assets, the W.D.A. is 6% for a 12 month period.

For example Assets in the special rate pool had a brought forward value of £100,000 at 06/04/2024

The writing down allowance on these assets will be £6,000 (£100,000*6%) in the year ending 05/04/2025.

Note if the above period was for 6 months, then the WDA would be £3,000 (£100,000*6%*6/12) in the period ending 05/04/2025.

Annual investment allowance

From 1 January 2019, the annual investment allowance is £1,000,000.

This is given to an individual for a 12 month period and is time apportioned if the period is below 12 months.

Ideally, this A.I.A should be allocated to special rate pool assets purchased first because the allowances on these assets are only 6% per year, therefore tax relief on these assets is received over a longer period.

Once allocated to special rate pool assets purchased in the tax year, then if any of the allowance is remaining, it can be allocated to main pool assets purchased in the year.

The A.I.A cannot be given to motor cars purchased in the tax year.

For example a business purchased equipment worth £1,300,000 in their year ending 31/03/2025.
The annual investment allowance is £1,000,000 (maximum available).

For the remaining £300,000 (£1,300,000- £1,000,000), a writing down allowance will be available.

As equipment is a main pool asset, the writing down allowance will be £54,000 (£300,000*18%).

The total capital allowances available will be AIA + WDA = £1,054,000 (£1,000,000 +  £54,000)

Note if the above purchase was made in a 6 months period, then the AIA would be (£1,000,000*6/12) = £500,000 + WDA ((£1,300,000 - 500,000)*18%*6/12) = £72,000. This would total to £572,000 of capital allowances for the 6 month period.

Enhanced capital allowances for companies only

Companies get enhanced capital allowances when they purchase NEW plant and machinery (not available on cars): 

For expenditure which would fall into the main pool, there is a 100% first year allowance (FYA)(full expensing).

For expenditure which would fall into the special rate pool, there is a 50% FYA.

The disposal of these assets is treated differently from other assets:

The proceeds on sale of those assets on which the 100% FYA had been claimed will result in a balancing charge (instead of going into the main pool).

For those assets where the 50% FYA had been claimed the proceeds are split proportionately according to the amounts originally claimed as 50% FYA and AIA. 

As regards capital allowances planning for companies:

The 100% annual investment allowance should initially be claimed against second-hand assets – those otherwise qualifying for 6% WDA, and then those otherwise qualifying for 18% WDA. 

The 100% annual investment allowance should then be claimed on new assets falling into the special rate pool in preference to the 50% first year allowance.  

Finally, any remaining annual investment allowance should be claimed against new assets falling into the main pool. 

Although the amount of relief is initially exactly the same, the treatment of subsequent disposal proceeds will normally be preferable when the annual investment allowance has been claimed (proceeds deducted from the main pool) rather than when the 100% first year allowance is claimed (proceeds result in a balancing charge). 

However, the 50% and 100% first year allowances have no upper limit, so they will come into play after a company has exhausted the annual investment allowance.

Illustration:

Cow Ltd has an accounting reference date of 31 March. 

On 1 April 2024, the tax written down value of plant and machinery in the company’s main pool and special rate pool is £0. 

During the year ended 31 March 2025, Cow Ltd purchased the following equipment:

Cow Ltd’s capital allowance claim for the year ended 31 March 2025 is:

Assets on which super deduction was claimed

Super deduction of 130% on MP assets and 50% on SRP assets is no longer available. 

In the exam, a question involving disposal of an asset on which super deduction was claimed may be asked. The disposal gives rise to a balancing charge.

It the asset being disposed off is a MP asset on which 130% super deduction was claimed

Balancing charge = Sale proceeds

It the asset being disposed off is a SRP asset on which 50% super deduction was claimed

Balancing charge = Sale proceeds x (cost on which super deduction was claimed/total cost) x 50%

The remainder of the  sale proceeds are deducted from the SRP.

Illustration:

For the year ended 31/3/25, a company sold a MP asset for 60,000. 

Original cost of the asset was 80,000. Super deduction of 130% was claimed on the original cost.

This will give rise to a balancing charge equal to the sale proceeds of 60,000.

The company also sold a SRP asset sold for 650,000. Original cost of the asset was 1,100,000. 

AIA was claimed for 1,000,000 and 50% super deduction on the remaining 100,000.

Balancing charge = 650,000 x (100,000/1,100,000) x 50% = 29,545

The remaining sale proceeds of  620,455 will be deducted from the SRP.

Assets with private use

1. A company

   Companies do not have assets used privately. 

   This is because all of the people who work in the company are considered to be employees of the company. 

   Therefore, the capital allowances given are not reduced by the % of private usage by an employee of a company.

2. A Sole trader

   If an asset is used privately by the owner of the business, the capital allowance given must be reduced by the % of private usage. 

   If an asset is used privately by an employee of the business, the capital allowance given is not reduced by the % of private usage.

Illustration (a sole trader)

Mia has been in a business as a sole trader.

She bought computer for £3,000 which she uses 70% in her business and 30% privately.

She has already used the AIA in this year.

Required:
Calculate the capital allowances.

• Solution:

  WDA = £3,000 x 18% = £540

  Capital Allowances (business use only) £540 x 70% = £378

Illustration (a company)

Cow Ltd. is a trading company.

The company bought computer for £3,000 which is used by the sales manager  30% privately.

Cow Ltd. has already used the AIA in this year.

Required:
Calculate the capital allowances.

• Solution:

  WDA = £3,000 x 18% = £540

• Note: The private use of the computer by the employee is not relevant for capital allowance purposes. 

  No adjustment is ever made to a company's capital allowances to reflect the private use of an asset.

Compute capital allowances for motor cars

First year allowances:

These are given for new motor cars with zero CO2 emissions. 

This is a 100% allowance on the cost of the car and it is given in the period of acquisition. 

The F.Y.A. is not time apportioned for a period of less than 12 months.

For example, a car was purchased on 01/05/2024 for £100,000.

It had zero CO2 emissions.

The first year allowance for this car will be £100,000 ( £100,000*100%).

Note if the above period was for 6 months, then the FYA would still be £100,000 - it is not reduced for a period of less than 12 months.

The F.Y.A is given to new motor cars purchased that have zero CO2 emissions.

For cars with a CO2 emission less than or equal to 50g, an 18% W.D.A. is given, therefore these are considered to be main pool assets.

For cars with a CO2 emission of more than 50g, an 6% W.D.A. is given, therefore these are considered to be special rate pool assets.

Illustration (a Company)

What are Cow Ltd. capital allowances?

Solution

Total capital allowances for the year £28,012 (£22,000 + £6,012)

Illustration (Anna - a sole trader):

What are Anna’s capital allowances?

Solution

W1:

The capital allowance is reduced by % of private usage

• £4,932 + (£1,080 * 70%) = £5,688

  W1:
  The capital allowance is reduced by % of private usage
  £4,932 + (£1,080 * 70%) = £5,688

W2:

The tax written down value carried forward is calculated using the entire W.D.A.

• £18,000 - £1,080 = £16,920

  Total capital allowances for the year £27,688 (£22,000 + £5,688)

Disposal of the assets

Use LOWER OF

1. Proceeds

2. Original cost

When an item of plant or machinery is sold - the lower of the sale proceeds received or the original cost of the asset is deducted from the written down value of the relevant pool.

For example, if the written down value is 100 and sale proceeds received are 120 but the original cost of the asset is 110, then 110 will be deducted from the pool to give a balancing charge of 10. The difference between proceeds and original cost will be treated as a capital gain.

Compute balancing allowances and balancing charges

In the final year of trading, the A.I.A., W.D.A., F.Y.A. are not given. 

Instead, balancing allowances and balancing charges are computed on each pool. 

Balancing adjustments on the pools can only occur on cessation of trade. 

A balancing allowance will be deducted from trading profit to find tax adjusted trading profit and a balancing charge will be added to trading profit to find tax adjusted trading profit.

Illustration

Karen Ltd. prepares accounts to 05/04.

The company ceased to trade on 05/04/2025 on which all of its plant and machinery was sold for £8,000.

The written down value on its main pool at 06/04/2024 was £11,000.

The company purchased machinery for £4,000 during the year.

Solution

Karen Ltd.’s balancing allowance in her final year of trading is £7,000.

Structural and Buildings Allowance

The SBA is a new type of capital allowance available when a building (or a structure) has been constructed / purchased for use in the trade on or after 29 October 2018. For example, offices, retail and wholesale premises, factories and warehouses all qualify for the SBA. 

This allowance is also available if an unused building/structure has been renovated for use in the trade. 
The rate of the allowance is 3% per annum and is given for a period of 33 years and 4 months

To note about the SBA:

• The value of land does not qualify for the SBA

• Expenditure which qualifies as plant and machinery (and therefore will get the AIA) cannot also qualify for the SBA and vice versa.

• The SBA can only be claimed from when the building / structure is brought into use in the trade. This means that the SBA will be time apportioned for the period when it is first brought into use, this is unlike capital allowances for plant and machinery which are given the full allowance in the period of purchase.

• A separate SBA is given for each building / structure

• When the building / structure is sold, this will not result in a balancing allowance or balancing charge. For the seller,  he allowances already given at the date of sale will be added to the sale proceeds when calculating the chargeable gain / capital loss for capital gains tax. For the buyer, the 3% p.a. will continue to be given for the period remaining out of the 33 years and 4 months.

Illustration 1

Anaya Ltd prepares accounts to 31/3/2025. 

On 1/7/2024 a newly constructed factory was purchased from a builder for £500,000 (including land cost of £130,000). 

The factory was brought into use on 1/9/2024.

What is the SBA available on this factory?

Solution

Purchase price £500,000

Less land cost (£130,000)

Qualifying expenditure for SBA £370,000 

SBA £370,000 x 3% x 7/12 = £6,475 

The allowance will be given from September 2023 (date it was brought into use).

Illustration 2

Anaya Ltd sold the factory above on 31/3/2025 for £600,000.

What will the SBA be for the year ended 31/3/2026 for the buyer?

What will the capital gain be on the sale for Anaya Ltd?

Solution

The SBA will be given normally for the year ended 31/3/2026 to the buyer:

£370,000 x 3% = £11,100

The capital gain on the sale for Anaya Ltd:

Sale proceeds £600,000 + SBA £6,475

= £606,475

Less cost (£500,000)

Capital gain £106,475

Recognise the treatment of short life assets

Short life assets are main pool assets that have an expected life of 8 years or less. 

A de-pooling election can be made so that the asset gets its own W.D.A.’s and on sale of the asset, a balancing allowance or balancing charge can arise.

The benefit of this election is that a balancing adjustment will arise within 8 years, which would not have arisen, if this de-pooling did not take place. 

If the asset is not sold within the 8 years of acquiring the asset, then the written down value is added back to the main pool. 

This happens on the 8th anniversary of the end of the accounting period in which the asset was acquired.

Assets on hire purchase or lease

Any asset (including a car) bought on hire purchase (HP) is treated as if purchased outright for the cash price. Therefore:

• The buyer normally obtains capital allowances on the cash price when the agreement begins

• He may write off the finance charge as a trade expense over the term of the HP contract

Long-term leases (those with a term of five or more years) are treated in the same way as HP.