TXF6 UK
Syllabus B. Income Tax And Nic Liabilities B3. Income from self-employment

B3h. Capital allowances 9 / 11

Syllabus B3h)

Capital allowances:
i) Define plant and machinery for capital allowances purposes.[1]
ii) Compute writing down allowances, first- year allowances and the annual investment allowance.[2]
iii) Compute capital allowances for motor cars.[2]
iv) Compute balancing allowances and balancing charges.[2]
v) Recognise the treatment of short life assets.
vi) Recognise the treatment of assets included in the special rate pool.

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 31/12/20, 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

  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 01/01/2020

The writing down allowance on these assets will be £18,000 (£100,000*18%) in the year ending 31/12/2020.

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 31/12/2020.

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 06/04/2020

The writing down allowance on these assets will be £6,000 (£100,000*6%) in the year ending 05/04/2021.

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 05/04/2021.

First year allowances

These are given for motor cars which have an emission of less than or equal to 50g per km. 

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 01/05/2020 for £100,000.

It had a CO2 emission of 48g/km.

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

The annual investment allowance for the tax year 20/21 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 31/03/2021.

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 period was for 6 months, then the AIA would be (£1,000,000*6/12) = £500,000 + WDA (18%*£800,000*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 05/04/2021 made the following transactions.

Date Item Price
01/05/2020 Ventilation system and lift for his freehold office building £1,278,000
26/06/2020 Machinery purchased and alterations made to office building to install the machinery £29,300
08/08/2020 Movable partition walls £22,900
11/03/2021 New decorative wall constructed £41,200

The tax written down value on the main pool was £87,800 on 06/04/2020.

What are Buzzy Ltd. capital allowances?

Solution

Particular AIA Main pool Special rate pool Capital allowances
Tax written down value brought forward £87,800
Additions:
Ventilation system and lift £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
Tax written down value carried foward £114,800 £261,320
Total allowances £1,041,880

Notice how the AIA was first allocated to special rate pool assets.

The capital allowances are £1,029,880.

This is the total of:
WDA 18% on the main pool of £25,200
+
WDA 6% on the special pool of £4,680
+
AIA of £1,000,000
=£1,029,880

Illustration:

Shivani commenced trading on 1 July 2020 and prepared accounts to 31 December 2021 thereafter. 

Shivani made the following acquisitions of main pool assets:

Accounting Period to 31 December 2020 £
1 July 2020 Plant 70,000
20 October 2020 Computer equipment 580,000
Accounting Year ended 31 December 2021
19 October 2021 Machinery 300,000
What capital allowances will be allowed for both periods?

Solution:

Capital Allowance Computations

6 month period to 31 December 2020 Main Pool Allowances
Additions (AIA)
1 July 2020 Plant 70,000
20 October 2020 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 2021
TWDV b/f 136,500
Additions (AIA)
19 October 2021 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

The F.Y.A is given to motor cars purchased that have a CO2 emission of less than 50g/km. 

For cars with a CO2 emission of between 50-110, 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 110g, a 6% W.D.A. is given, therefore these are considered to be special rate pool assets.

Illustration (a Company)

Cow Ltd.:
06/04/2020 Tax written down value on main pool of £16,800
25/06/2020 Purchase of car for £10,600. The car had CO2 emissions of 96g/km..
16/02/2021 Purchase of car for £18,000. The car had CO2 emissions of 142g/km.
14/03/2021 Purchase of car for £22,000. The car had CO2 emissions of 40g/km.

What are Cow Ltd. capital allowances?

Solution

Particulars F.Y.A. Main Pool Special rate pool Capital allowances
Tax written down value brought forward £16,800
Additions:
Car 40g/km £22,000 (£22,000) £22,000
Car 96g/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 sole trader):

06/04/2020 Tax written down value on main pool of £16,800
25/06/2020 Purchase of car for £10,600. The car had CO2 emissions of 96g/km. This car is 60% privately used by Anna’s husband who is an employee of the business.
16/02/2021 Purchase of car for £18,000. The car had CO2 emissions of 142g/km. This car is 30% used privately by Anna.
14/03/2021 Purchase of car for £22,000. The car had CO2 emissions of 40g/km. 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:
Car 40g/km £22,000 (£22,000) £22,000
Car 96g/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 (W2)

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

  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.

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 05/04/2021 on which all of its plant and machinery was sold for £8,000.

The written down value on its main pool at 06/04/2020 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. 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, the 3% p.a. will continue to be given for the period remaining out of the 33 years and 4 months. However, the 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.

Illustration 1

Anaya Ltd prepares accounts to 31/3/2021. 

On 1/7/2020 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 1/9/2020.

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 2020 (date it was brought into use).

Illustration 2

Anaya Ltd sold the factory above on 31/3/2021 for £600,000.

What will the SBA be for the year ended 31/3/2022?

What will the capital gain be on the sale?

Solution

The SBA will be given normally for the year ended 31/3/2022:

£370,000 x 3% = £11,100

The capital gain on the sale:

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 06/04/2020 the WDV of the main pool was £14,000.

On 01/07/2020 Aadi purchased machinery for £1,020,000.

On 01/09/2020 Aadi purchased a printer for £8,000 and made a short life asset election.

On 01/07/2021, the printer was sold for £4,000.

Calculate the capital allowances for the two years ending 05/04/2022.

Solution

Year ended 05/04/2021
Particulars AIA Main pool Short life asset Capital allowances
Tax written down value brought forward £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
Tax written down value carried forward £27,880 £6,560
Total allowances £1,007,560
Year ended 05/04/2022
Particulars Main pool Short life asset Capital allowances
Tax written down value brought forward £27,880 £6,560
Disposal proceeds (£4,000)
Balancing allowance £2,560 £2,560
WDA 18% (£5,018) £5,018
Tax written down value carried forward  £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.