Capital Allowances

• Capital expenditure is generally not deductible when

computing trading income but certain types of capital
expenditure attract tax relief in the form of
standardised depreciation allowances known as
capital allowances
• Allowances given on original cost of asset
• Subsequent qualifying expenditure of a capital
nature, such as improvements also allowed
• Available to persons who buy qualifying assets for
use in a trade or profession
• Deducted as a trading expense in calculating the
taxable trading profits
 Plant &Machinery
• Machinery: all machines, computers, office
equipment, etc
• Plant: not clearly defined in tax legislation. Therefore,
HMRC set some rules based on decided cases
• Use the following principles to decide:

Does asset perform: That is, is asset: P&M

Active function An apparatus with which the Yes
business is carried on

Passive function The setting in which the No

business is carried on
 P&M
• Statute: land, building and structures cannot
be plant
• By buildings, we mean: walls, floors, ceilings,
doors, windows, stairs, mains services, systems
of water, electricity and gas, waste disposal,
sewerage and drainage systems, shafts or other
structures for lifts
• Structures:
– Expenditure on structures and on works involving the
alteration of land does not qualify as expenditure on
plant.
– A structure is a fixed structure of any kind, other than
a building. An example is a bridge.
 P&M
• Over the years, case law has built up a list on
which plant and machinery allowances have
been given although they might be thought to be
expenditure on a building or a structure.
• Statute therefore gives a list of various assets
which may still be plant.
• These include:
– Capital expenditure incurred on complying
with fire regulations
– Cost of alterations to buildings needed for
installation of plant
– Expenditure on acquiring computer software
– Refrigeration or cooling equipment
 Main pool
• Common e.g’s of P&M to be encountered in exams:
computers and software, machinery, cars and lorries,
office furniture, moveable partitions, air-conditioning and
alterations of buildings needed to install P&M
• Main pool: expenditure on P&M becomes part of a pool
of expenditure upon which capital allowances are
claimed
• Most items of P&M purchased are included within the
main pool
• Any addition: purchase price increases the value of the
pool
• Any disposal: pool value is reduced by sales proceeds
 Main pool exceptions

All items of P&M are included in the general pool

unless they are:

– Short life assets

– Assets with private use by the trader
– Assets dealt with in the special rate pool
 Allowances
• Types of capital allowances available are:
– Annual investment allowance (AIA) available
in the AP in which an asset is purchased
– Writing down allowances (WDA) available
every AP
– First year allowances (FYA)
– Balancing allowances and charges (BA and
BC): only applicable on the eventual disposal
of an asset
 Computation of capital allowances
• Steps to follows:
1. Review additions to non-current assets in the AP: If
purchased asset is P&M, then allocate it to the
appropriate category of asset. If the asset does not
qualify for AIA or FYA, add the cost of the asset to the
tax written down value b/f from the previous period
(TWDV b/f) in the appropriate column
2. Bring in additions that qualify for the AIA and calculate
the AIA available: cost of assets qualifying for AIA
should be entered as an addition in the appropriate
column and the AIA entered as a deduction
 Computation of capital allowances
3. Deal with disposals of P&M in the AP: CA are given on
the net cost of an asset. When an asset has been
disposed of, the sale proceeds are deducted from the
TWDV. This deduction should be entered in the
appropriate column of the proforma. There are 2
exceptions to this rule:
• If the asset was sold for more than its original cost, deduct the
original cost instead of the sales proceeds (never take out of a
column more than the amount that was originally put in)
• If the asset was given away (gifted) or sold for less than it was
worth, the amount of the deduction is the lower of:
• The full MV on the disposal date and
• The original cost
 Computation of capital allowances
4. Calculate BAs and BCs
5. Calculate WDAs available
6. Bring in additions that qualify for FYAs
and calculate the FYAs available
7. Calculate the total CA for the period
 AIA
• AIA gives 100% relief for the first £1,000,000 of capital
expenditure on P&M, excluding motor cars.
• Expenditure on motorcycles does not qualify for AIA
• AIA is given in the AP in which asset is purchased
• AIA is proportionally reduced/increased where a period
of account is > or < than 12 months.
• Any expenditure in excess of the £1,000,000 limit will
qualify immediately for WDA
• If full AIA is not used, balance is lost; cannot be carried
forward or back
 FYA and WDA
• FYA
• FYA of 100% is available on new low emission cars (CO2 less than
50 g/km)
• FYA are never pro-rated in short or long periods of account
• WDA
• WDAs are given in each AP: they are calculated after bringing in
additions and after taking account of asset disposals
• WDAs is given on a reducing balance basis at the rate of 18% a
year
• WDAs available on all main pool assets except those additions in
the period on which FYAs were claimed
• No WDA is available in the period of disposal
• WDA is time-apportioned according to length of AP; however, length
of ownership of asset in AP is irrelevant
 Examples
• E.g 1: Elizabeth has TWDV on her main
pool of P&M of £16,000 on 6 April 2019. In
the year to 5 April 2020, she bought a car
with CO2 emissions of 90 g/km for £8,000
(no non-business use) and she disposed
of plant which originally cost £4,000 for
£6,000. Calculate the maximum CA claim
for the year
 BAs and BCs
• BA is the tax equivalent of a loss on disposal in
the financial a/cts. It will increase the CA
available in the AP.
• BC is the tax equivalent of a profit on disposal. It
is additional taxable trading profit and is usually
recognised by reducing the CA available in the
AP.
• Remember: when a main pool asset is disposed
of, the disposal value is taken to be the lower of
sales proceeds (or mv if gifted) and original cost
 Examples
• E.g: William ceased trading on 31 Dec
2019 and produced a 3-month final set of
a/cts. On 1 Oct 2019, the TWDV b/f on
William’s main pool was £64,000. There
were no additions in the final 3 months of
trading. On cessation, William sold his
P&M for scrap, and realised proceeds of
£20,000. Calculate CA available for the 3
month AP to 31 Dec 2019.
 Examples
• Julia is a sole trader making up accounts to 5
April each year. At 5 April 2019, the TWDV on
her main pool is £12,500. In the year to 5 April
2020, Julia bought the following assets:
– 1 Jun 2019 Machinery £990,000
– 12 Nov 2019 Van £17,500
– 10 Feb 2020 Car for salesman (CO2 emissions 100
g/km) £9,000
She disposed of plant on 15 Dec 2019 for £12,000
(original cost £16,000). Calculate the maximum CA
claim that Julia can make for the year ended 5 April
2020
 Capital Allowances
• Venus is a sole trader and has made up accounts to 30
April each year. At 30 Apr 2019, the TWDV of her main
pool was £66,667. She decides to make up her next set
of accounts to 31 Dec 2019.
• In the period to 31 Dec 2019, the following acquisitions
were made:
• 1 May 2019 Plant £680,000
• 10 July 2019 Car (CO2 emissions 90 g/km) £9,000
• 3 Aug 2019 Car (CO2 emissions 45 g/km)-new £11,000
• Venus disposed of plant on 1 Nov 2019 for £20,000
(original cost £28,000). Calculate the max CA that Venus
can claim for the period ending 31 Dec 2019.
 Special rate pool
• The special rate pool contains the following assets:
– Features that are integral to a building
– Long life assets
– Thermal insulation of a building used for a qualifying activity e.g. a trade
– Cars with CO2 emissions of more than 110g/km
• Integral features: electrical and lighting systems, cold water
systems, space for water heating systems, powered systems of
ventilation, cooling or air purification, lifts, escalators or moving
walkways, solar panels
• Long life assets: plant (other than cars, ships, and P&M used in
shops, showrooms, offices and hotels) with:
– An expected working life of at least 25 years
– A total purchase cost of more than £100,000 in a 12-month period
Expected working life relates to the capability of the P&M (not just the
expected useful life for the current owner). The £100,000 to be
time-apportioned in a short AP
 Special rate pool
• AIA is available (except for motor cars)
• FYA not available
• WDA is at rate of 6% for a 12-month period (not 18%) and is to be
time-apportioned for shorter APs
• If business has incurred capital expenditure in excess of £200,000, the AIA
should first be allocated to assets within the special rate pool as the rate of
WDA for these assets is lower than that available for main pool items.
• E.g: Lucy has been trading for many years, making up accounts to 5 April
each year. The TWDV of her main pool at 5 April 2019 was £110,000. In the
year to 5 April 2020, she had the following expenditure:
10 Jun 2019 General plant costing £45,000
12 Dec 2019 Lighting system in shop £250,000
15 Jan 2020 Car for business use only (CO2 emissions 125 g/km)
£25,000
26 Jan 2020 Delivery van £15,000
4 Mar 2020 Lifts £752,500
Calculate the maximum CA Lucy can claim for the year to 5 April 2020
 Capital Allowances
Assets with private use
• Asset used by owner of business partly for business and partly for private
purposes
• Business proportion of the available capital allowances available as a tax
deduction
• In exams, assets most commonly used for private purposes are cars
• Separate computation
• AIA, WDA on asset is based on full cost but only the business proportion of
any allowance is deductible when computing the taxable trading profit
• On disposal of asset, a balancing charge or allowance calculated by
comparing sales proceeds with TWDV. Amount assessed or allowed is then
reduced to the business proportion.
• Private use by an employee of an asset owned by the business has no
effect on business’s entitlement to capital allowances.
 Capital Allowances
• Cars:
The CA system for cars depends on the car’s CO2
emissions:
– Cars with CO2 emissions of no more than 50 g/km are treated
as main pool items, but qualify for a 100% FYA. The FYA is
never time-apportioned
– Cars with CO2 emissions of 51 to 110 g/km qualify for an 18%
WDA and should therefore be allocated to the main pool
– Cars with CO2 emissions of more than 110 g/km qualify for a 8%
WDA and should therefore be allocated to the special rate pool
Note: the term ‘cars’ does not include lorries, vans, taxis and
motorcycles. These will be treated as main pool items unless
there’s an element of private use. They will also qualify for AIA
 Capital Allowances
Car with private use

• Quodos started to trade on 1 Jul 2019, making up acts to

31 Dec 2019 and each 31 Dec thereafter. On 1 Aug
2019 he bought a car for £17,000 with CO2 emissions of
90 g/km. The private use proportion is 10%. The car
was sold in Jul 2022 for £4,000. Quodos has no other
assets which qualify for CA.
• Calculate the CA, assuming
• (a) the car was used by an employee, or
• (b) the car was used by Quodos
• And that the capital allowances rates in 2019/20 apply
throughout.
 Capital Allowances
• Short Life Assets:
• Short life election exists to enable businessmen to accelerate capital
allowances on certain qualifying expenditure
• Qualifying expenditure: All P&M (except motor cars) where it is the
intention to sell or scrap the item within 8 years of the end of the AP
in which the asset is acquired
• Election (written application to HMRC ) must be made to de-pool the
asset (separate column)
• If no disposal has taken place within the 8 years mentioned above,
the unrelieved balance is transferred to the general pool
• It will be advantageous to make short life election if it is expected
that a balancing allowance will arise within the 8 following
accounting periods
• If not covered by the AIA, it is recommended that the short life
treatment is taken if it is expected that a balancing allowance can be
accelerated.