CAT / FIA FTX Syllabus B. Adjusted Profit / Loss Computations - Capital allowances - Notes 1 / 2
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.
Rates of allowance | % |
---|---|
Main pool assets | 18 |
Special Rate Pool assets | 6 |
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
Computers, equipment, shelving, vans and lorries
Movable office partitioning
Alterations to building incidental to the installation of plant and machinery
Tables and chairs
Fire regulation expenditure
Special Rate Pool
The following asset acquisitions should be allocated to the special rate pool:
Integral features of a building
– these include all major systems in a building.
For example, electrical, thermal, cooling systems.
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 31/12/2025.
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 31/12/2025.
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.
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.
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.
Illustration:
Buzzy Ltd. in the year ended 05/04/2025 made the following transactions.
Date | Item | Price |
---|---|---|
01/05/2024 | Ventilation system and lift for his freehold office building | £1,278,000 |
26/06/2024 | Machinery purchased and alterations made to office building to install the machinery | £29,300 |
08/08/2024 | Computers | £22,900 |
What are Buzzy Ltd. capital allowances?
Solution
Particular | AIA | Main pool | Special rate pool | Capital allowances |
---|---|---|---|---|
TWDV b/f | £87,800 | |||
Additions | ||||
Ventilation system and freehold office building | £1,278,000 | |||
AIA | (£1,000,000) | £278,000 | £1,000,000 | |
Machinery purchased and alterations | £29,300 | |||
Computers | £22,900 | |||
Total | £140,000 | £278,000 | ||
WDA 18%/6% | (£25,200) | (£16,680) | £41,880 | |
TWDV c/f | £114,800 | £261,320 | £1,041,880 |
Notice how the AIA was first allocated to special rate pool assets.
The capital allowances are £1,041,880.
This is the total of:
WDA 18% on the main pool of £25,200
+
WDA 6% on the special pool of £16,680
+
AIA of £1,000,000
= £1,041,880
Illustration
Shivani commenced trading on 1 July 2024 and prepared accounts to 31 December 2024 thereafter.
Shivani made the following acquisitions of main pool assets:
Accounting Period to 31 December 2024
1 July 2024 | Plant | 70,000 |
---|---|---|
20 October 2024 | Computer equipment | 580,000 |
Accounting Year ended 31 December 2025 | ||
19 October 2025 | Machinery | 300,000 |
What capital allowances will be allowed for both periods?
Solution:
Capital Allowance Computations
6 month period to 31 December 2024 | Main Pool | Allowances | |
---|---|---|---|
Additions (AIA): | |||
1 July 2024 Plant | 70,000 | ||
20 October 2024 Computers | 580,000 | ||
650,000 | |||
AIA (max 6/12 x 1,000,000) | (500,000) | 150,000 | 500,000 |
WDA (max 6/12 x 18% x 150,000) | (13,500) | 13,500 | |
Total Allowances | 513,500 | ||
Tax Written Down Value (TWDV) c/f | 136,500 | ||
Year Ended 31 December 2025 | |||
TWDV b/f | 136,500 | ||
Additions (AIA) | |||
19 October 2025 | 300,000 | ||
AIA | (300,000) | 300,000 | |
WDA (18%) | (24,570) | 24,570 | |
Total Allowances | 324,570 | ||
TWDV c/f | 111,930 |
Compute capital allowances for motor cars
First year allowances
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):
Cow Ltd.: | |
---|---|
06/04/2024 | Tax written down value on main pool of £16,800 |
25/06/2024 | Purchase of car for £10,600. The car had CO2 emissions of 46g/km. |
16/02/2025 | Purchase of car for £18,000. The car had CO2 emissions of 142g/km. |
14/03/2025 | Purchase of car for £22,000. The car had zero CO2 emissions. |
What are Cow Ltd. capital allowances?
Particulars | F.Y.A. | Main Pool | Special rate pool | Capital allowances |
---|---|---|---|---|
Tax written down value brought forward | £16,800 | |||
Additions: | ||||
Zero CO2 car £22,000 | (£22,000) | £22,000 | ||
Car 46g/km £10,600 | £10,600 | |||
Car 142g/km £18,000 | £18,000 | |||
Total | (£22,000) | £27,400 | £18,000 | |
WDA (18%/6%) | (£4,932) | (£1,080) | £6,012 | |
Tax written down value carried forward | 22,468 | 16,920 |
Total capital allowances for the year £28,012 (£22,000 + £6,012)
Illustration (ANNA - a Soletrader)
06/04/2024 | Tax written down value on main pool of £16,800 |
25/06/2024 | Purchase of car for £10,600. The car had CO2 emissions of 46g/km. This car is 60% privately used by Anna’s husband who is an employee of the business. |
16/02/2025 | Purchase of car for £18,000. The car had CO2 emissions of 142g/km. This car is 30% used privately by Anna. |
14/03/2025 | Purchase of car for £22,000. The car had zero CO2 emissions. This car is 25% privately used by Anna’s assistant. |
What are Anna’s capital allowances?
Solution:
Particulars | F.Y.A. | Main Pool | Special rate pool | Capital allowances |
---|---|---|---|---|
Tax written down value brought forward | £16,800 | |||
Additions: | ||||
Zero CO2 car £22,000 | (£22,000) | £22,000 | ||
Car 46g/km £10,600 | £10,600 | |||
Car 142g/km £18,000 | £18,000 | |||
Total | (£22,000) | 27,400 | £18,000 | |
WDA (18%/6%) | (£4,932) | (£1,080) * 70% business use = Capital allowance | £5,688 (W1) | |
Tax written down value carried forward | 22,468 | £16,920 |
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)
Assets with private use
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.
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 tax year.
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.
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.
Disposal of the assets
Use LOWER OF
Proceeds
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
Particulars | Main pool | Capital allowances |
TWDV b/f | £11,000 | |
Additions | £4,000 | |
Total | £15,000 | |
Disposals | (£8,000) | |
Balancing allowance | £7,000 | £7,000 |
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 2024 (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.
Illustration
Aadi prepares accounts to 05/04 each year.
At 06/04/2024 the WDV of the main pool was £14,000.
On 01/07/2024 Aadi purchased machinery for £1,020,000.
On 01/09/2024 Aadi purchased a printer for £8,000 and made a short life asset election.
On 01/07/2025, the printer was sold for £4,000.
Calculate the capital allowances for the two years ending 05/04/2026
Particulars 05/04/25 | AIA | Main pool | Short life asset | Capital allowances |
TWDV b/f | £14,000 | |||
Additions: | ||||
Machinery | £1,020,000 | |||
AIA | (£1,000,000) | £20,000 | ||
Printer | £8,000 | |||
Total | £34,000 | £8,000 | £1,000,000 | |
WDA 18% | (£6,120) | (£1,440) | £7,560 | |
TWDV c/f | £27,880 | £6,560 | £1,007,560 |
Particulars 05/04/26 | Main pool | Short life asset | Capital allowances |
TWDV b/f | £27,880 | £6,560 | |
Disposal proceeds | (£4,000) | ||
Balancing allowance | £2,560 | £2,560 | |
WDA 18% | (£5,018) | £5,018 | |
TWDV c/f | £22,862 | NIL | £7,578 |
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.