COURSE: ACCA – TAXATION (TX)

Lecture Topic: Capital Allowances

1. Capital allowances in general

 When computing a business’ trading profit, note that depreciation is an expense that is not allowable for tax purposes,
and that capital allowances are given instead. This means that capital allowances are treated as a trading expense and
are deducted in arriving at tax adjusted trading profits.

 Capital allowances are available for qualifying expenditure on:

(i) Plant and Machinery

(ii) Certain Buildings (Structures)

 For sole traders, capital allowances are calculated for the business’ period of account.

2. Meaning of Plant and Machinery

 There is no statutory definition of plant. In determining whether an asset should be considered plant, a functional test is
carried out. This test asks whether the item is simply part of the setting or premises in which the trade is carried on or
is it something with which the trade is carried on?

If it is part of the setting or premises it is not plant, and thus no plant & machinery capital allowances are available,
but if it is actively used in the business it is plant.

There are various types of expenditure that would not be thought of as plant using the approach set out above, but
which are treated as plant by specific legislation. (Students should familiarize themselves with these – see Text).

3. Different Categories of Plant & Machinery

 For the purpose of calculating capital allowances, Plant and Machinery must be separated into the following
categories:

(a) Main Pool Assets

(b) Special rate pool assets
(c) New electric-powered zero emission cars
(d) Private use assets
(e) Short-life assets

4. ‘Types’ of capital allowances on Plant & Machinery

 The following are the different ‘types’ of capital allowances that are available on plant and machinery:

1. Writing Down Allowances (WDA)

2. Annual Investment Allowance (AIA)
3. First Year Allowance (FYA)
4. Balancing Allowances (BA) and Balancing Charges (BC)

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4.1 Writing Down Allowances on the Main Pool

 A writing down allowance (WDA) is given on the main pool at the rate of 18% a year on a reducing balance
basis.

 The approach is to identify the tax written down value (TWDV) brought forward at the beginning of the period, then
add the current period’s acquisitions and deduct the current period’s disposals. The WDA is then calculated on the
resulting balance.

 Note the following rules:

(i) When an asset is sold, its disposal proceeds or original cost (whichever is lower) is deducted.

(ii) WDAs are proportionately increased or reduced where the period of account is longer or shorter than 12
months.

(iii) Provided that the trade is still being carried on, the pool balance is written down in the future by WDAs, even
if there are no assets left.

(iv) If the unrelieved expenditure in the main pool is £1,000 or less, then the entire amount (i.e., 100%) can be
claimed as a WDA, instead of the normal 18%. The main pool will then have a nil balance carried forward.

4.2 Annual investment allowance

 An Annual Investment Allowance (AIA) is available to all businesses on the first £1,000,000 spent on plant and
machinery in a period of account.

This means that in the period in which the expenditure was incurred an allowance of 100% is available for the first
£1,000,000 of expenditure on plant and machinery.

 The annual investment allowance applies to all expenditure on plant and machinery with the exception of motor
cars.

 The balance of expenditure after the AIA is transferred to the main pool immediately and will be eligible for
writing down allowances in the same period.

 The £1,000,000 limit is proportionately reduced or increased where a period of account is shorter or longer than 12
months. For example, the AIA would be £250,000 (1,000,000 × 3/12) for a three-month period of account.

4.3 First year allowances/ Zero emission cars

 A First Year Allowance (FYA) of 100% is available on expenditure incurred on new electric-powered motor cars
with zero CO2 emissions.

 FYAs are never time apportioned.

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4.4 Balancing Allowances and Charges

Non-pooled assets

When a non-pooled asset is disposed of, the disposal proceeds (or cost, whichever is lower) are deducted from the tax
written down value (TWDV) brought forward. The difference (balance remaining) is given as a capital allowance called a
balancing allowance or balancing charge.

 If the tax written down value is greater than the disposal proceeds (or cost), then the difference is a balancing
allowance.

 If the tax written down value is less than the disposal proceeds (or cost), then the difference is a balancing charge.

This means that a balancing charge is effectively a negative capital allowance.

Pooled assets

 The only time a balancing allowance will arise in the main pool or special rate pool is when the trade permanently
ceases. The balancing allowance is equal to the remaining unrelieved expenditure after deducting the disposal value
of all the assets.

 Balancing charges occur in the pool(s) when the disposal proceeds deducted exceeds the balance(s) remaining in the
pool(s) at that time.

In other words, a balancing charge will arise in a pool when a negative balance remains after deducting the disposal
proceeds of the assets sold.

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5. Special rate pool
The special rate pool contains expenditure on the following items of plant & machinery:

i. Thermal insulation
ii. Long-life assets
iii. Features integral to a building
iv. Cars with CO2 emissions over 50 g/km.

5.1 Operation of the special rate pool

o The writing down allowance for the special rate pool is 6% per annum on a reducing balance basis.

o The Annual Investment Allowance can apply to expenditure on special rate pool assets (except cars). The taxpayer
can decide how to allocate the AIA, and it will be more tax efficient to set the AIA against special rate pool
expenditure in priority to main pool expenditure.

Expenditure in excess of the AIA is added to the special rate pool and will be eligible for writing down allowances
in the same period in which the expenditure is incurred.

o The WDA on the special rate pool is also time apportioned for short and long periods of account.

o Where the balance in the special rate pool is £1,000 or less, the entire balance is claimed as a WDA in that period.

5.2 Long life assets

Long life assets are assets with an expected working life of 25 years or more.

The long-life asset rules only apply to businesses whose total expenditure on such assets is more than £100,000 in a 12-
month period of account.

The £100,000 limit is reduced or increased proportionately for periods that are shorter or longer than 12 months.

The following assets are not treated as long life assets:

(a) Plant and machinery in dwelling houses, retail shops, showrooms, hotels and offices.
(b) Motor cars

5.3 Integral features

A number of items of plant and machinery are treated as being integral to a building, particularly:

(a) electrical and lighting systems

(b) cold water systems
(c) space or water heating systems
(d) powered systems of ventilation, cooling or air conditioning (air purification)
(e) lifts and escalators

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6. Cars

 Motor cars are categorized in accordance with their CO2 emissions:

1. Cars with CO2 emissions over 50 g/km are added to the special rate pool (i.e., written down at 6%).
2. Cars with CO2 emissions between 1 g/km and 50 g/km are added to the main pool (i.e., written down at 18%).
3. New electric-powered motor cars with zero CO2 emissions qualify for the FYA of 100%.

 Note that cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private use
adjustment can be calculated. The full WDAs or FYAs for such cars are computed based on the CO2 emissions (as
above), but only the business use proportion of the allowances is given as a deduction from trading profit.

7. Private use assets

 Where a sole trader or partner uses an asset for both business and private use, that asset is put into its own pool (a
single asset pool).

 For such assets, the capital allowances are calculated on the full cost (or TWDV), but only the business use
proportion of the allowances is actually given as a deduction from trading income.

 This restriction applies to the AIA, FYAs, WDAs, balancing allowances and balancing charges.

 The approach is to compute the allowance that applies to that type of asset, and then find the business use percentage
(i.e. what percentage of the asset is used for business purposes) of the allowance computed, which is the amount that
will then be given as a capital allowance.

 The restriction does not apply if the private use is by an employee.

8. Short-life assets

Where it is the intention to sell or scrap an asset within eight (8) years of the end of the period in which the asset is
acquired, an election (written application to HMRC) can be made to leave the asset out of the main pool. Any asset subject
to this election is known as a ‘short-life asset’.

o Each short life asset is the subject of a separate computation

o Short life assets are assets that would normally be in the main pool if no election was made; therefore, they also
qualify for WDAs at 18%.

o The Annual Investment Allowance (AIA) can be set against short-life assets. The taxpayer can decide how to
allocate the AIA. It will be more tax efficient to set the AIA against main pool expenditure in priority to short-life
asset expenditure.

o On disposal within eight years of the end of the period in which the asset was acquired a balancing allowance or
a balancing charge will arise.

o If no disposal has taken place within the specified eight year period, the tax written down value is transferred back
to the pool.

o Short life asset treatment cannot be claimed for any motor cars, or plant used partly for non-trade purposes.

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9. Miscellaneous

 Capital allowances are not only given on original cost, but also on all subsequent qualifying expenditure of a capital
nature, such as improvements.

Note that qualifying expenditure includes irrecoverable VAT. If the VAT is recoverable, only the expenditure net of
VAT (the VAT exclusive amount) will be qualifying expenditure.

 Expenditure on Plant & Machinery by a person about to begin a trade is treated as incurred on the first day of
trading.

 Assets previously owned by a trader and then brought into the trade are treated as bought for their market values at
the times when they are brought in.

 Any asset bought on hire purchase (HP) is treated as if purchased outright for the cash price.

10. The cessation of trade

When a company ceases to trade, no AIA, WDAs or FYAs are given in the final period of account. Instead, each asset is
deemed to be disposed of (at market value) on the date the trade ceased. A balancing allowance or charge is then computed.

11. Structures and Building Allowance

o The Structures and Building Allowance (SBA) is available on expenditure on certain buildings (or structures).

o The SBA is only available where a building (or structure) has been constructed on or after 29 October 2018.

o In addition, Capital Expenditure on qualifying buildings/structures will also qualify for the SBA.

o The SBA is given as an annual straight-line allowance of 3% over a 33⅓ year period (33 years and four months).

o The SBA can only be claimed from when the building (or structure) is brought into qualifying use. This means that the
SBA will be time apportioned for the period when first brought into use, unlike plant and machinery allowances
which are always given in full for the period of purchase.

o Offices, retail and wholesale premises, factories and warehouses can all qualify for the SBA (as can walls, bridges and
tunnels).

o The value of land is excluded, as is any part of a building used as a dwelling house.

o Expenditure which qualifies as plant and machinery cannot also qualify for the SBA. Similarly, expenditure which
qualifies for the SBA cannot also qualify for the plant and machinery annual investment allowance.

o Where an unused building is purchased from a builder or developer, then the qualifying expenditure will be the price
paid less the value of the land.

o The building (or structure) must be used for a qualifying activity such as a trade or property letting.

o A separate SBA is given for each building (or structure) qualifying for relief.

o Unlike plant and machinery, there is no balancing charge or balancing allowance when a building (or structure) that
has qualified for the SBA is sold. Instead, the purchaser simply continues to claim the 3% allowance for the remainder
of the 33⅓ year period based on original cost.
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o Exam Note: You should assume that for any question involving the purchase (as opposed to a new construction) of a
building, the SBA is not available unless stated otherwise.
Questions

1.
Mr. Aomi is a sole trader making up accounts to 5 April in each year. The tax written down value on his main pool of plant
and machinery on 6 April 2022 was £22,000.

In the year ended 5 April 2023 he had the following transactions in capital assets:

1 August 2022 Purchased a car (CO2 emissions of 40 g/km) for £6,000

9 June 2022 Sold plant for £8,000

Calculate the maximum capital allowances claim for the year ended 5 April 2023.

2.
Mr. Roland is a sole trader making up accounts to 5 April each year. At 6 April 2022, the tax written down value on his
main pool is £110,000.

In the year ended 5 April 2023, Mr. Roland had the following transactions in capital items:

1 June 2022 Purchased plant for £900,000

9 July 2022 Purchased plant for £180,000
1 August 2022 Purchased a car (CO2 emissions of 38 g/km) for £20,000

17 August 2022 Sold plant for £10,000

Compute the capital allowances for the year ended 5 April 2023.

3.
Donny Smith is a sole trader making up accounts to 5 April in each year. On the 6 April 2022 the tax written down value of
his main pool is £120,000.

During the year ended 5 April 2023 he bought the following assets:

4 July 2022 Plant £1,070,000

9 September 2022 Car (CO2 emissions of 32 g/km) £30,000

15 January 2023 Sold plant for £25,000 (original cost £20,000).

Calculate the capital allowances claim for the year ended 5 April 2023.

4.
Rhonda has been trading for many years, making up accounts to 5 April each year. The tax written down value of her main
pool at 6 April 2022 was £40,000.

In the year ended 5 April 2023, Rhonda incurred the following expenditure:

14 November 2022 Plant £160,000

15 December 2022 Electrical and Lighting £170,000
16 January 2023 Thermal insulation for shop £80,000
20 February 2023 Long-Life Assets £800,000

Calculate her capital allowances for the year ended 5 April 2023.

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5.
Pamela has been a sole trader for many years making up accounts to 5 April each year. In the year ended 5 April 2023, the
following assets were acquired:

14 August 2022 Vans £160,000

1 September 2022 Long-life assets £640,000
2 January 2023 Car (CO2 emissions of 114 g/km) £10,000
30 January 2023 Plant £260,000

The tax written down values at 6 April 2022 were:

Main Pool £40,000

Special Rate Pool £20,000

Compute the capital allowances for the year ended 5 April 2023.

6.
Min Patel is sole trader making up accounts to 5 April each year. In the year ended 5 April 2023, the following assets were
purchased:

15 September 2022 Car 1 (CO2 emissions of 125 g/km) £16,000

30 January 2023 Car 2 (CO2 emissions of 45 g/km) £12,000
14 February 2023 Car 3 (Electric-powered car with zero CO2 emissions) £14,000

The tax written down value of the main pool at 6 April 2022 was £38,000

Compute the capital allowances for the year ended 5 April 2023.

7.
Mr. Carling is a sole trader making up accounts to 5 April each year. The tax written down value of his main pool at 6
April 2022 is £20,000.

On 12 June 2022, Mr. Carling purchased a car for £10,000. This car has CO2 emissions of 50 g/km and there is 30%
private use of this car by Mr. Carling.

Compute the capital allowances for the year ended 5 April 2023.

8.
Fiona runs a small business and prepares accounts to 5 April. At 6 April 2022 the tax WDVs are as follows:
£
Main pool 25,000
Special rate pool 30,000

The following transactions took place during the year ended 5 April 2023:

25 June 2022 Purchased plant for £20,000.

16 September 2022 Purchased Car 1 (CO2 emissions of 114 g/km) for £10,000 (30% private use by Fiona).
12 December 2022 Purchased Car 2 (electric powered car with zero CO2 emissions) for £12,000 (20% private use
by Fiona).

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Compute the capital allowances for the year to 5 April 2023.

9.
Mr. Winchester has been trading for many years making up accounts to 5 April in each year. On 6 April 2022 his tax
written down values brought forward were as follows:

Main Pool £50,000

Short Life Asset (1) £10,000
Short Life Asset (2) £11,000
Short Life Asset (3) £20,000

In the year ended 5 April 2023, Mr. Winchester had the following transactions in capital assets:

14 May 2022 Sold plant £10,000

18 July 2022 Sold Short Life Asset (1) £7,500
20 August 2022 Sold Short Life Asset (2) £13,000

Compute the capital allowances for the year ended 5 April 2023.

10.
Freddy Flint has been trading for many years making up accounts to 5 April in each year. On 6 April 2022 his tax written
down values brought forward were as follows:

Main Pool £10,000

Car (30% private use by Freddy) £16,000

In the year ended 5 April 2023 he had the following transactions in capital assets:

14 August 2022 Sold plant £13,000

18 July 2022 Sold Car £14,000

Calculate the capital allowances for the year ended 5 April 2023.

11.
Mr. Thomas prepares accounts to 31 March. On 1 July 2022, he purchased a newly constructed factory from a builder for
£470,000 (including land of £110,000). The factory was brought into use on 1 September 2022.

(a) How much is the SBA for the year ended 31 March 2023?

(b) How much is the SBA for the year ended 31 March 2024?

12.
Mr. Blake prepares accounts to 31 March. He renovated a disused warehouse (originally purchased in 2012) at a cost of
£82,000, with the warehouse subsequently brought into use on 1 January 2023.

How much is the SBA for the year ended 31 March 2023?