Taxation Elective

5. Capital allowances
Chapter 7
 General
Capital expenditure is not an allowable
expense in calculating trading profit but that
capital expenditure MAY attract capital
allowances. Capital allowances are treated
as allowable deductions in arriving at
taxable trade profits. CAs are given on:

• Plant and machinery

• Industrial buildings
Capital allowances are a deductible in
arriving at trading profits. Balancing
charges are added to profit.

Capital expenditure on plant and machinery

is used for a qualifies for capital allowances
if the plant or machinery is used for a
qualifying activity, such as a trade.
If capital allowances exceed income this
constitutes a loss.

Capital allowances are always calculated for

periods of account. Companies calculate
capital allowances for accounting periods.
 The statutory exclusions (2.2)
Statutory rules generally exclude specified
items from treatment as plant, rather than
include specified items as plant:

• Buildings (mains services & water systems)

• Structures (see exceptions)
• Land

You should know the exceptions – lifts,

water heaters etc. etc, the list is long p135.
 Statutory inclusions expenditure
deemed to be P&M (2.3)
• to comply with fire regulations
• to install thermal insulation
• to comply with safety regulations at designated
sports grounds
• to comply with safety regulations on regulated
stands at undesignated sports grounds
• expenditure on security assets
Proceeds on disposal = nil so no balancing charge
 Capital expenditure on computer
software qualifies as expenditure
on plant and machinery:
a) Regardless of whether the software is
supplied in a tangible form (such as a disc)
or transmitted electronically, and
b) Regardless of whether the purchaser
acquires the software or only a licence to
use it
Note rules on disposal proceeds.
 Plant and machinery
Machinery is taken to have its normal
everyday meaning however there is no
statutory definition of plant. There are
some statutory exclusions (buildings and
structures) and inclusions. Case law
assumes a high degree of importance.

Yarmouth v France 1887

 Plant and machinery
‘whatever apparatus is used by a
businessman for carrying on his business:
not his stock in trade which he buys or
makes for sale; but all goods and chattels,
fixed or movable, live or dead, which he
keeps for permanent employment in the
business’
 Plant and machinery (contd)
• The original definition has been refined by
subsequent cases, which have for the most
part been concerned with the distinction
between plant actively used in the business
(qualifying) and the setting in which the
business was carried on (non-qualifying),
this is known as ‘The Function verses
Setting Test’.
 Plant and machinery (contd)
• CIR v Barclay Curle & Co 1969
• Schofield v R&H Hall 1975
• Cooke v Beach Stattion Caravans Ltd 1974
• J Lyons & Co v A-G 1944
• Mumby v Furlong 1977
• Jarrold v John Good & Son Ltd 1963
• St Johns School v Ward 1974
• Dixon v Fitch’s Garages Ltd 1975
• Benson v Yardarm Club 1978
• Brown v Burnley Football & Athletic Club 1980
• Hampton v Fortes Autogrill Ltd 1979
• CIR v Scottish & Newcastle Breweries Ltd 1982
 Plant and machinery (contd)
• Wimpey International Ltd v Warland 1988
• Cole Brothers v Phillips 1982
• Leeds Permanent Building Society v Proctor
1982
• Bradley v London Electricity plc 1996
• Attwood v Anduff Car Wash Limited 1995
• Carr v Sayer 1992
• Grey v Seymours Garden Centre (Horticulture)
Ltd 1993
The allowances – note importance
of computation layout
• Are claimed on the tax return
• Most expenditure is pooled including low
emission cars– the main pool additions
increase the pool disposals decrease it
• Items not put into the main pool
• Special rate pool (eg High emission cars)
• Assets with private use by the trader
• Short life assets where an election has been made
 Annual investment allowance
• Businesses are entitled to an annual investment
allowance (AIA) of £200,000 (15/16 £500,000)
for a 12 month period of account.
• Cars are excluded from the allowance motor
cycles are not excluded!
• Expenditure in excess of AIA is pooled in the
same period of account.
• For shorter or longer periods the allowance is
apportioned 9 months AIA= £200k x9/12 = £150k
• AIA is divided between related companies
• Related businesses get one AIA (3.2.2)
 First Year Allowances
• 100% First year allowances are available on low
emission cars 50g/km or less.
• Unclaimed allowances transfer to main pool
• Enhanced Capital Allowances are available on
green technologies – capital expenditure on NEW
energy and water saving plant and machinery
(green technologies) qualifies for 100% ECAs.
Cos can swap ECAs for 12.67% tax cr.
• FYAs are given when expenditure is incurred no
apportionment is made for short or long periods of
account.
 Writing Down Allowances
• 18% pa reducing balance (on wdv) examples p140
• calculated on a pool basis (not expensive or high C02 cars)
• 18% is after taking account of additions and disposal
• allowances can be disclaimed and claimed in a later period
• WDAs can not be claimed in a final period
• on disposal proceeds (limited to cost) are deducted from
the pool - note rules re small balance on pool Q143.
• Allowances are given as long as the trade continues even if
there are no assets left
• WDAs are restricted to the number of months being
assessed – note rules for companies – see all Questions.
• Expenditure by an individual about to commence trading is
treated as incurred on the first day of trading
 Example: Venus p141
Accounts to 30/4 each year. Pool at
30/04/18 is £66,667. Next accounts to
31/12/18. acquisitions made:
£
• 01/5/18 General plant 146,666
• 10/7/18 Car (not low em) 9,000
• 03/8/18 Car (low emis) 11,000
• 1/11/18 Sold plant cost £28,000 for
£20,000
Disposal value of assets
Usually proceeds but there are others.
Market price could be used if sold at an
under value
Balancing charges and allowances

• negative CA
• it occurs when disposal value exceeds the
pool value, usually when trading ceases
• balancing allowance can only occur when
trading ceases
 Motor cars
• Cars over 110g/km special rate pool 8%
WDA
• Cars 51g/km – 110g/km pool 18% WDA
• Low emission cars – 100% FYA
• Note AIA is not available on cars
• Cars with a private use element are kept in a
single asset pool.
 Example: Quodos p146
• On 1 July 2018 Quodos starts to trade. On 1
August 2018 he buys a car for £17,000 the C02
emissions were 90g/km. The private use portion
has been agreed at 10%. The car was
subsequently sold in July 2020 for £4,000. He
makes his accounts up to 31 December.
• Allowances if car is used by an employee
• Allowances if car is used by Quodos
NB Use 2018/19 allowances throughout
• Cessation of a trade – No CAs but assets
will be disposed and a Balancing charge or
Balancing allowance will arise.
• Short life assets – a trader can elect for
special items to be kept in a separate pool
(see question Caithlin)
• Special rate pool – the special rate pool
contains expenditure on long life assets (life
of 25 years) and integral features (integral
to a building). AIA can be used and WDA
is 8%.
• HP and Leasing – CAs are available on
assets purchased by HP. Leasing gives the
lessor the CA – note Cars.

• Balancing charges and succession –

Balancing charges are calculated when a
business ceases. If the business is
transferred to a connected person the
written value can be transferred instead.
 Next sessions

• Tax test two 17.00 Wednesday 13th

December room KHBS2039 – test covers
material up to and including IHT.
• Next topic trading losses Friday 16th
November.