Introduction
In the previous chapter, we saw how to adjust the accounting profit to find
taxable trade profits and how to allocate those profits to tax years. The
adjustments included adding back depreciation as a disallowable expenses and
deducting capital allowances instead. In this chapter, we look at capital
allowances on plant and machinery.
Our study of plant and machinery falls into three parts. First, we look at what
qualifies for allowances: many business assets get no allowances at all.
Second, we see how to compute the allowances and lastly, we look at special
rules for assets with short lives, for private use assets, for assets which the
taxpayer does not buy outright, and for transfers of whole businesses.
Study guide
| Intellectual level | ||
| 1 | Income and income tax liabilities in situations involving further overseas aspects and in relation to trusts, and the application of exemptions and reliefs | |
| (a) | The contents of the Paper F6 study guide for income tax and national insurance, under headings: | 2 |
| | B3 Income from self employment | |
| (d) | Income from self employment: | |
| (iv) | Advise on the allocation of the annual investment allowance between related businesses | 3 |
| (v) | Identify the enhanced capital allowances in respect of expenditure on green technologies | 2 |
Exam guide
If you are asked to consider the tax costs of business strategies, whether for a sole trader or a company, you should always take capital allowances into account. This could apply when considering a particular contract, or when comparing the costs of different assets, or it could be in a buy or lease context.
This chapter is mainly revision from Paper F6. The allocation of the annual investment allowance between related business and enhanced capital allowances are new.
There are no changes in 2015/16 from 2014/15 in the material you have studied at F6. In particular note that it is assumed that the annual investment allowance continues to be £500,000 (see further section 3.2.1).
1 Capital allowances in general
| Capital allowances are available on plant and machinery. |
One of the competencies you require to fulfil Performance Objective 15 Tax computations and assessments of the PER is to prepare or contribute to the computation or assessment of tax computations for individuals. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
Capital expenditure cannot be deducted in computing taxable trade profits when using the accruals method of accounting, but it may attract capital allowances. Capital allowances are treated as a trading expense and are deducted in arriving at taxable trade profits. Balancing charges, effectively negative allowances, are added in arriving at those profits.
Capital expenditure on plant and machinery qualifies for capital allowances.
Both unincorporated businesses and companies are entitled to capital allowances. For completeness, in this chapter we will look at the rules for companies alongside those for unincorporated businesses. We will look at companies in more detail later in this Text.
For unincorporated businesses, capital allowances are calculated for periods of account. These are simply the periods for which the trader chooses to make up accounts. For companies, capital allowances are calculated for accounting periods (see later in this Text).
For capital allowances purposes, expenditure is generally deemed to be incurred when the obligation to pay becomes unconditional. This will often be the date of delivery, even if payment is actually required later than this date. For example, the sales contract may require payment to be made within four weeks of delivery but the obligation to pay still becomes unconditional on the delivery date. However, amounts due more than four months after the obligation becomes unconditional are deemed to be incurred when they fall due.
2 Plant and machinery – qualifying expenditure
2.1 Introduction
Capital expenditure on plant and machinery qualifies for capital allowances if the plant or machinery is used for a qualifying activity, such as a trade. ‘Plant’ is not defined by the legislation, although some specific exclusions and inclusions are given. The word ‘machinery’ may be taken to have its normal everyday meaning.
2.2 The statutory exclusions
FAST FORWARD
Statutory rules generally exclude specified items from treatment as plant, rather than include specified items as plant.
2.2.1 Buildings
Expenditure on a building and on any asset which is incorporated in a building or is of a kind normally incorporated into buildings does not qualify as expenditure on plant. There are some exceptions to this rule (see section 2.2.3 below). Also, certain ‘integral features’ (see 2.2.5 below) are specifically treated as plant.
In addition to complete buildings, the following assets count as ‘buildings’, and are therefore not plant (except if they qualify as integral features).
- Walls, floors, ceilings, doors, gates, shutters, windows and stairs
- Mains services, and systems, of water, electricity and gas Waste disposal, sewerage and drainage systems Shafts or other structures for lifts etc.
2.2.2 Structures
Expenditure on structures and on works involving the alteration of land does not qualify as expenditure on plant, but see below for exceptions.
A ‘structure’ is a fixed structure of any kind, other than a building. An example is a bridge.
2.2.3 Exceptions
Over the years a large body of case law has been built up under which plant and machinery allowances have been given on certain types of expenditure which might be thought to be expenditure on a building or structure. Statute therefore gives a list of various assets which may still be plant. These include:
- Any machinery not within any other item in this list
- Gas and sewerage systems:
- Provided mainly to meet the particular requirements of the trade, or
- Provided mainly to serve particular machinery or plant used for the purposes of the trade
- Manufacturing or processing equipment, storage equipment, including cold rooms, display equipment, and counters, checkouts and similar equipment
- Cookers, washing machines, refrigeration or cooling equipment, sanitary ware and furniture and furnishings
- Hoists
- Sound insulation provided mainly to meet the particular requirements of the trade
- Computer, telecommunication and surveillance systems
- Refrigeration or cooling equipment
- Sprinkler equipment, fire alarm and burglar alarm systems
- Strong rooms in bank or building society premises, safes Partition walls, where movable and intended to be moved
- Decorative assets provided for the enjoyment of the public in the hotel, restaurant or similar trades, advertising hoardings
- Glasshouses which have, as an integral part of their structure, devices which control the plant growing environment automatically
- Swimming pools (including diving boards, slides) and structures for rides at amusement parks
- Caravans provided mainly for holiday lettings
- Movable buildings intended to be moved in the course of the trade
- Expenditure on altering land for the purpose only of installing machinery or plant
- Dry docks and jetties
- Pipelines, and also underground ducts or tunnels with a primary purpose of carrying utility conduits
- Silos provided for temporary storage and storage tanks, slurry pits and silage clamps
- Fish tanks, fish ponds and fixed zoo cages
- Rails, sleepers and ballast for a railway or tramway
Items falling within the above list of exceptions will only qualify as plant if they fall within the meaning of plant as established by case law. This is discussed below.
2.2.4 Land
Land or an interest in land does not qualify as plant and machinery. For this purpose ‘land’ excludes buildings, structures and assets which are installed or fixed to land in such a way as to become part of the land for general legal purposes.
2.2.5 Integral features
The following integral features of a building or structure qualify for capital allowances as plant (in the special rate pool, see later in this chapter):
- Electrical systems (including lighting systems)
- Cold water system
- Space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
- Lift, an escalator or a moving walkway
- External solar shading
When a building is sold, the vendor and purchaser can make a joint election to determine how the sale proceeds are apportioned between the building and its integral features.
2.3 The statutory inclusions
Certain expenditure is specifically deemed to be expenditure on plant.
The following are deemed to be plant.
- Expenditure incurred by a trader in complying with fire regulations for a building which they occupy
- Expenditure by a trader on thermal insulation of a building used for the trade
- Expenditure (by an individual or a partnership, not by a company) on security assets provided to meet a special threat to an individual’s security that arises wholly or mainly due to the particular trade concerned. Cars, ships, aircraft and dwellings are specifically excluded from the definition of a security asset
On disposal, the sale proceeds for the above are deemed to be zero, so no balancing charge (see below) can arise.
Capital expenditure on computer software (both programs and data) qualifies as expenditure on plant and machinery:
- Regardless of whether the software is supplied in a tangible form (such as a disk) or transmitted electronically, and
- Regardless of whether the purchaser acquires the software or only a licence to use it.
Disposal proceeds are brought into account in the normal way, except that if the fee for the grant of a licence is taxed as income of the licensor, no disposal proceeds are taken into account in computing the licensee’s capital allowances.
Where someone has incurred expenditure qualifying for capital allowances on computer software (or the right to use software), and receives a capital sum in exchange for allowing someone else to use the software, that sum is brought into account as disposal proceeds. However, the cumulative total of disposal proceeds is not allowed to exceed the original cost of the software, and any proceeds above this limit are ignored for capital allowances purposes (although they may lead to chargeable gains).
If software is expected to have a useful economic life of less than two years, its cost may be treated as revenue expenditure.
For companies the rules for computer software are overridden by the rules for intangible fixed assets unless the company elects otherwise.
2.4 Case law
FAST FORWARD
There are several cases on the definition of plant. To help you to absorb them, try to see the function/setting theme running through them.
The original case law definition of plant (applied in this case to a horse) is ‘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’ (Yarmouth v France 1887).
Subsequent cases have refined the original definition and have largely been concerned with the distinction between plant actively used in the business (qualifying) and the setting in which the business is carried on (non-qualifying). This is the ‘functional’ test. Some of the decisions have now been enacted as part of statute law, but they are still relevant as examples of the principles involved.
The whole cost of excavating and installing a swimming pool was allowed to the owners of a caravan park. CIR v Barclay Curle & Co 1969 was followed: the pool performed the function of giving ‘buoyancy and enjoyment’ to the persons using the pool (Cooke v Beach Station Caravans Ltd 1974) (actual item now covered by statute).
A barrister succeeded in his claim for his law library: ‘Plant includes a man’s tools of his trade. It extends to what he uses day by day in the course of his profession. It is not confined to physical things like the dentist’s chair or the architect’s table’ (Munby v Furlong 1977).
Office partitioning was allowed. Because it was movable it was not regarded as part of the setting in which the business was carried on (Jarrold v John Good and Sons Ltd 1963) (actual item now covered by statute).
A ship used as a floating restaurant was regarded as a ‘structure in which the business was carried on rather than apparatus employed … ‘ (Buckley LJ). No capital allowances could be obtained (Benson v Yard Arm Club 1978). The same decision was made in relation to a football club’s spectator stand. The stand performed no function in the actual carrying out of the club’s trade (Brown v Burnley Football and Athletic Co Ltd 1980).
At a motorway service station, false ceilings contained conduits, ducts and lighting apparatus. They did not qualify because they did not perform a function in the business. They were merely part of the setting in which the business was conducted (Hampton v Fortes Autogrill Ltd 1979).
Light fittings, decor and murals can be plant. A company carried on business as hoteliers and operators of licensed premises. The function of the items was the creation of an atmosphere conducive to the comfort and well being of its customers (CIR v Scottish and Newcastle Breweries Ltd 1982) (decorative assets used in hotels etc, now covered by statute).
On the other hand, it has been held that when an attractive floor is provided in a restaurant, the fact that the floor performs the function of making the restaurant attractive to customers is not enough to make it plant. It functions as premises, and the cost therefore does not qualify for capital allowances (Wimpy International Ltd v Warland 1988).
General lighting in a department store was held not to be plant, as it was merely setting. Special display lighting, however, could be plant (Cole Brothers Ltd v Phillips 1982). Note that changes in legislation mean that it is now possible to claim allowances on lighting as an integral feature (see earlier in this chapter), but the case is still a useful example of the distinction between setting and function.
Free-standing decorative screens installed in the windows of a branch of a building society qualified as plant. Their function was not to act a part of the setting in which the society’s business was carried on; it was to attract local custom, and accordingly the screens formed part of the apparatus with which the society carried on its business (Leeds Permanent Building Society v Proctor 1982).
In Bradley v London Electricity plc 1996 an electricity substation was held not to be plant because it functioned as premises in which London Electricity carried on a trading activity rather than apparatus with which the activity was carried out.
3 The main pool
FAST FORWARD
With capital allowances computations, the main thing is to get the layout right. Having done that, you will find that the figures tend to drop into place.
3.1 Main pool expenditure 6/12
Most expenditure on plant and machinery, including cars with CO2 emissions of 130g/km or less, is put into a pool of expenditure (the main pool) on which capital allowances may be claimed. An addition increases the pool whilst a disposal decreases it.
Exceptionally the following items are not put into the main pool:
- assets dealt with in the special rate pool
- assets with private use by the trader
- short life assets where an election has been made.
These exceptions are dealt with later in this chapter.
Expenditure on plant and 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 (at the start of trading or later) are treated as bought for their market values at the times when they are brought in.
3.2 Annual investment allowance
FAST FORWARD
Businesses are entitled to an annual investment allowance (AIA) of £500,000 for a 12 month period of account. Related businesses share one allowance between them.
3.2.1 Amount of annual investment allowance
Businesses can claim an annual investment allowance (AIA) on the first £500,000 spent each year on plant or machinery, including assets in the main pool, but not including motor cars. Expenditure on motorcycles does qualify for the AIA.
Where the period of account is more or less than a year, the maximum allowance is proportionately increased or reduced.
After claiming the AIA, the balance of expenditure on main pool assets after the AIA is transferred to the main pool immediately and is eligible for writing down allowances in the same period.
Exam focus The AIA limit changed from £500,000 to £200,000 on 1 January 2016. However, for the purposes of the point P6(UK) examinations in September 2016, December 2016 and March 2017, it will be assumed that the £500,000 limit continues to apply. This will be the case regardless of the period covered by an exam question so, for example, the AIA limit for a year ended 31 March 2016 will be assumed to be £500,000.
3.2.2 Allocation of annual investment allowance between related businesses
Related business are entitled to a single annual investment allowance between the businesses. The businesses may allocate the allowance between them as they think fit.
Business are related if they are carried on or controlled by the same individual or partnership and either:
the businesses are engaged in the same activity; or the businesses share the same premises.
A business is controlled by a person in a tax year if it is controlled by the person at the end of the chargeable period for that business ending in that tax year.
The nature of expenditure by one business may be relevant when deciding how to allocate the allowance between the businesses. For example, it is more tax efficient to set the annual investment allowance against special rate pool expenditure because of the lower rate of subsequent writing down allowances on the special rate pool (8% pa) as opposed to the main pool (18% pa).
There are similar (but separate) rules relating to companies under common control and companies in a group. We will deal with these rules when we look at companies later in this Text.
3.3 First year allowances and enhanced capital allowances
FAST FORWARD
A first year allowance (FYA) at the rate of 100% is available on new low emission cars. Enhanced capital allowances (ECAs) are available on green technologies. FYAs and ECAs are never pro-rated in short periods of account.
3.3.1 FYA on low emission cars
Key term A low emission car is one which has CO2 emissions of 75g/km or less.
A 100% first year allowance (FYA) is available for expenditure incurred on new low emission motor cars.
If the FYA is not claimed in full, the balance of expenditure is transferred to the main pool after any writing down allowance has been calculated on the main pool.
3.3.2 Enhanced capital allowances
Capital expenditure on new (ie not second hand) energy and water saving plant and machinery (“green technologies”) qualifies for 100% enhanced capital allowances (ECAs) .
Companies can surrender ECAs for a tax credit of 19%. This is dealt with in more detail when we look at companies later in this Text.
3.3.3 Short periods of account
FYAs and ECAs are not reduced pro-rata in a short period of account, unlike the AIA and writing down allowances.
3.4 Writing down allowances
FAST FORWARD
Most expenditure on plant and machinery qualifies for a WDA at 18% every 12 months.
Key term A writing down allowance (WDA) is given on main pool expenditure at the rate of 18% a year (on a
reducing balance basis). The WDA is calculated on the tax written down value (TWDV) of pooled plant, after adding the current period’s additions and taking out the current period’s disposals.
When plant is sold, proceeds, limited to a maximum of the original cost, are taken out of the pool. Provided that the trade is still being carried on, the pool balance remaining is written down in the future by WDAs, even if there are no assets left.
3.5 Example: writing down allowances
Elizabeth has a tax written down value on her main pool of plant and machinery of £16,000 on 6 April 2015. In the year to 5 April 2016 she bought a car with CO2 emissions of 110g/km for £8,000 (no nonbusiness use) and she disposed of plant (which originally cost £4,000) for £6,000.
Calculate the maximum capital allowances claim for the year.
Main pool Allowances
£ £
Twdv b/f 16,000
Addition (not qualifying for AIA or FYA) 8,000 Less disposal (proceeds limited to cost) (4,000)
20,000
WDA @ 18% (3,600) 3,600
TWDV c/f 16,400 Maximum capital allowances claim 3,600
Question Capital allowances
Julia is a sole trader making up accounts to 5 April each year. At 5 April 2015, the tax written down value on her main pool is £12,500.
In the year to 5 April 2016, Julia bought the following assets:
| 1 June 2015 | Machinery | £490,000 |
| 12 November 2015 | Van | £17,500 |
| 10 February 2016 | Car for salesman (CO2 emissions 120g/km) | £9,000 |
She disposed of plant on 15 December 2015 for £12,000 (original cost £16,000).
Calculate the maximum capital allowances claim that Julia can make for the year ended 5 April 2016.
| AIA | Main pool | Allowances | |
| £ | £ | £ | |
| y/e 5 April 2016 | |||
| TWDV b/f | 12,500 | ||
| Additions qualifying for AIA | |||
| 1.6.15 Machinery | 490,000 | ||
| 12.11.15 Van | 17,500 | ||
| 507,500 | |||
| AIA | (500,000) | 500,000 | |
| 7,500 | |||
| Transfer balance to pool | (7,500) | 7,500 | |
| Additions not qualifying for AIA | |||
| 10.2.16 Car | 9,000 | ||
| Disposal |
15.12.15 Plant )
| WDA @ 18% | (3,060) | 3,060 | |
| TWDV c/f | 13,940 | ||
| Maximum capital allowances | 503,060 |
3.6 Short and long periods of account
WDAs are 18% number of months/12:
- For unincorporated businesses where the period of account is longer or shorter than 12 months
- For companies where the accounting period is shorter than 12 months (a company’s accounting period for tax purposes is never longer than 12 months), or where the trade concerned started in the accounting period and was therefore carried on for fewer than 12 months. Remember that we will be studying companies in detail later in this Text.
Question Short period of account
Venus is a sole trader and has made up accounts to 30 April each year. At 30 April 2015, the tax written down value of her main pool was £66,667. She decides to make up her next set of accounts to 31 December 2014.
In the period to 31 December 2015, the following acquisitions were made:
1 May 2015 Plant £346,666
10 July 2015 Car (CO2 emissions 110 g/km) £9,000 3 August 2015 Car (CO2 emissions 65 g/km) £11,000
Venus disposed of plant on 1 November 2015 for £20,000 (original cost £28,000).
Calculate the maximum capital allowances that Venus can claim for the period ending 31 December 2015.
| AIA | FYA | Main pool | Allowances | |
| £ | £ | £ | £ | |
| p/e 31 December 2015 | ||||
| TWDV b/f | 66,667 | |||
| Additions qualifying for AIA | ||||
| 1.5.15 Plant | 346,666 | |||
| AIA £500,000 8/12 | (333,333) | 333,333 | ||
| 13,333 | ||||
| Transfer balance to pool | (13,333) | 13,333 | ||
| Additions qualifying for FYA | ||||
| 3.8.15 Car (low emission) | 11,000 | |||
| Less: 100% FYA | (11,000) | 11,000 | ||
| Additions not qualifying for AIA nor FYA | ||||
| 10.7.15 Car | 9,000 | |||
| Disposals |
1.11.15 Plant )
| WDA @ 18% 8/12 | (8,280) | 8,280 | ||
| TWDVs c/f | 60,720 | |||
| Maximum allowances claim | 352,613 |
Note that the annual investment allowance and the writing down allowance are reduced for the short period of account, but the first year allowance is given in full.
Oscar started trading on 1 July 2015 and made up his first set of accounts to 31 December 2016. He bought the following assets:
| 1 July 2015 | Plant | £700,000 |
| 10 October 2015 | Car for business use only | |
| (CO2 emissions 110g/km) | £11,000 | |
| 12 February 2016 | Plant | £115,000 |
Calculate the maximum capital allowances claim that Oscar can make for the period ended 31 December 2016. Assume the capital allowances rules in 2015/16 also apply in 2016/17.
| Answer | |||
| AIA | Main pool | Allowances | |
| £ | £ | £ | |
| p/e 31 December 2016 | |||
| Additions qualifying for AIA | |||
| 10.7.15 Plant | 700,000 | ||
| 12.2.16 Plant | 115,000 | ||
| 815,000 | |||
| AIA £500,000 18/12 | (750,000) | 750,000 | |
| 65,000 | |||
| Transfer balance to main pool | (65,000) | 65,000 | |
| Additions not qualifying for AIA | |||
| 1.10.15 Car | 11,000 | ||
| 76,0 76,00000 | |||
| WDA @ 18% 18/12 | (20,520) | 20,520 | |
| TWDV c/f | 55,480 | ||
| Maximum capital allowances | 770,520 |
Note that the AIA and the WDA are increased pro rata for the long period of account.
3.7 Small balance on main pool
A writing down allowance equal to unrelieved expenditure in the main pool can be claimed where this is £1,000 or less for a 12 month period of account (pro-rated for long or short period of account). If the maximum WDA is claimed, the main pool will then have a nil balance carried forward.
Alan has traded for many years, preparing accounts to 30 April each year. At 1 May 2015, the tax written down value of his main pool was £15,000.
On 1 October 2015, he sold some plant and machinery for £14,200 (original cost £16,000).
Calculate the maximum capital allowances claim that Alan can make for the year ending 30 April 2016. Assume the capital allowances rules in 2015/16 also apply in 2016/17.
| Main pool | Allowances | |
| £ | £ | |
| y/e 30 April 2016 | ||
| TWDV b/f | 15,000 | |
| Disposal | (14,200) | |
| 800 | ||
| WDA (small pool) | (800) | 800 |
| TWDV c/f | nil | |
| Maximum capital allowances | 800 |
| Note the tax planning opportunities available. It may be important to buy plant just before an accounting date, so that allowances become available as soon as possible. Alternatively, it may be desirable to claim less than the maximum allowances to even out annual taxable profits and avoid a higher rate of tax in later years. |
Exam focus point
3.8 Balancing charges and allowances
Balancing charges occur when the disposal value deducted exceeds the balance remaining in the pool. The charge equals the excess and is effectively a negative capital allowance, increasing profits. Most commonly this happens when the trade ceases and the remaining assets are sold. It may also occur, however, whilst the trade is still in progress.
Balancing allowances on the main and special pools of expenditure arise only when the trade ceases. The balancing allowance is equal to the remaining unrelieved expenditure after deducting the disposal value of all the assets. Balancing allowances may also arise on single pool items (see below) whenever those items are disposed of.
4 Special rate pool 6/13
FAST FORWARD The special rate pool contains expenditure on thermal insulation, long life assets, features integral to a building, solar panels, and cars with CO2 emissions over 130g/km. The AIA can be used against such expenditure except cars. The WDA is 8%.
4.1 Operation of the special rate pool
Expenditure on thermal insulation, long life assets, features integral to a building (see earlier in this chapter), solar panels, and cars with CO2 emissions over 130g/km, is not dealt with in the main pool but in a special rate pool.
The Annual Investment Allowance can apply to expenditure on such assets except on cars. The taxpayer can decide how to allocate the AIA. It will be more tax efficient to set the allowance against special rate pool expenditure in priority to main pool expenditure where there is expenditure on assets in both pools in the period.
The writing down allowance for the special rate pool is 8% for a twelve month period. As with the writing down allowance on the main pool, this is adjusted for short and long periods of account. Where the unrelieved expenditure in the special rate pool is £1,000 or less for a 12 month period, a writing down allowance can be claimed of up to £1,000. This amount is pro-rated for long and short periods. This is in addition to any similar claim in relation to the main pool (see earlier in this chapter).
4.2 Long life assets
Key term 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 assets with an expected working life of 25 years or more in a chargeable period is more than £100,000. If the expenditure exceeds £100,000, the whole of the expenditure enters the special rate pool. For this purpose all expenditure incurred under a contract is treated as incurred in the first chargeable period to which that contract relates.
The £100,000 limit is reduced or increased proportionately in the case of a chargeable period of less or more than 12 months.
The following are not treated as long life assets:
(a) Plant and machinery in dwelling houses, retail shops, showrooms, hotels and offices (b) Cars
4.3 Example: integral features
| 10 June 2015 General plant costing £45,000
12 December 2015 Lighting system in shop £120,000 15 January 2016 Car for business use only (CO2 emissions |
||||
| 175 g/km) £25,000
26 January 2016 Delivery van £15,000 4 March 2016 Lifts £382,500 The maximum capital allowances claim that Lucy can make for the year to 5 April 2016 is: |
||||
| AIA | Main pool | Special rate pool | Allowances | |
| £ | £ | £ | £ | |
| y/e 5 April 2016 | ||||
| TWDV b/f | 110,000 | |||
| Additions for AIA (best use) | ||||
| 12.12.15 Lighting | 120,000 | |||
| 4.3.16 Lifts | 382,500 | |||
| 502,500 | ||||
| AIA | (500,000) | 500,000 | ||
| 2,500 | ||||
| Transfer balance to special rate pool | (2,500) | 2,500 | ||
| Additions not given AIA | ||||
| 10.6.15 Plant | 45,000 | |||
| 26.1.16 Van | 15,000 | |||
| Additions not qualifying for AIA | ||||
| 15.1.16 Car | 25,000 | |||
| 170,000 | 27,500 | |||
| WDA @ 18% | (30,600) | 30,600 | ||
| WDA @ 8% | (2,200) | 2,200 | ||
| TWDVs c/f | 139,400 | 25,300 | ||
| Allowances 5 Private use assets |
532,800 | |||
Lucy has been trading for many years, making up accounts to 5 April each year. The tax written down value of her main pool at 5 April 2015 was £110,000. In the year to 5 April 2016, Lucy had the following expenditure:
FAST FORWARD
An asset which is used privately by a trader is dealt with in a single asset pool and the capital allowances are restricted.
An asset (for example, a car) which is used partly for private purposes by a sole trader or a partner is put into its own pool (single asset pool).
Capital allowances are calculated on the full cost. However, only the business use proportion of the allowances is allowed as a deduction from trading profits. This restriction applies to the AIA, FYAs, WDAs, balancing allowances and balancing charges.
An asset with some private use by an employee (not the owner of the business) suffers no such restriction. The employee may be taxed on an employment benefit (see earlier in this Text) so the business receives capital allowances on the full cost of the asset.
Exam focus Capital allowances on assets with some private use is a common exam topic. Check carefully whether the point private use is by the owner of the business or by an employee.
Jacinth has been in business as a sole trader for many years, making up accounts to 31 March. On 1 November 2015 she bought computer equipment for £2,700 which she uses 75% in her business and 25% privately. She has already used the AIA against other expenditure in the year to 31 March 2016.
Calculate the maximum capital allowance that Jacinth can claim in respect to the computer equipment in the year to 31 March 2016.
Computer Allowances
equipment @ 75%
£ £ y/e 31 March 2016 Acquisition 2,700
WDA @ 18% ) 365
TWDV c/f
| Maximum capital allowance on computer equipment | 365 |
6 Motor cars
FAST FORWARD
Motor cars are generally dealt with in the special rate pool (cars emitting over 130g/km) or the main pool, unless there is private use by the trader.
As we have already seen, motor cars are categorised in accordance with their CO2 emissions:
- Cars emitting over 130g/km: expenditure is added to the special rate pool,
- Cars emitting between 76 and 130 g/km: expenditure is added to the main pool,
- Cars emitting 75 g/km or less: expenditure eligible for 100% first year allowance, if allowance not claimed in full, excess added to main pool.
Cars with an element of private use are kept separate from the main and special pools and are dealt with in single asset pools. They are entitled to a WDA of 18% (car with CO2 emissions between 76 and 130 g/km) or 8% (car with CO2 emissions over 130 g/km).
Quodos started to trade on 1 July 2015, making up accounts to 31 December 2015 and each 31 December thereafter. On 1 August 2015 he bought a car for £17,000 with CO2 emissions of 110 g/km. The private use proportion is 10%. The car was sold in July 2018 for £4,000.
Calculate the capital allowances, assuming:
(a) The car was used by an employee, or (b) The car was used by Quodos and that the capital allowances rates in 2015/16 apply throughout.
| (a) | Main pool | Allowances | |
| £ | £ | ||
| 1.7.15 – 31.12.15 | |||
| Purchase price | 17,000 | ||
| WDA 18% × 6/12 × £17,000 | (1,530) | 1,530 | |
| 15,470 | |||
| 1.1.16 – 31.12.16 | |||
| WDA 18% × £15,470 | (2,785) | 2,785 | |
| 12,685 | |||
| 1.1.17– 31.12.17 | |||
| WDA 18% × £12,685 | (2,283) | 2,283 | |
| 10,402 | |||
| 1.1.18 – 31.12.18 | |||
| Proceeds | (4,000) | ||
| 6,402 | |||
| WDA 18% × £6,402 | (1,152) | 1,152 | |
| TWDV c/f | 5,250 |
| (b) | Car | Allowances | |
| 90% | |||
| £ | £ | ||
| 1.7.15 – 31.12.15 | |||
| Purchase price | 17,000 | ||
| WDA 18% 6/12 × £17,000 | (1,530) | 1,377 | |
| 15,470 | |||
| 1.1.16 – 31.12.16 | |||
| WDA 18% × £15,470 | (2,785) | 2,507 | |
| 12,685 | |||
| 1.1.17 – 31.12.17 | |||
| WDA 18% × £12,685 | (2,283) | 2,055 | |
| 10,402 | |||
| 1.1.18 – 31.12.18 | |||
| Proceeds | (4,000) | ||
| Balancing allowance | 6,402 | 5,762 |
As the private use is by the proprietor, Quodos, only 90% of the WDAs and balancing allowance are available.
The private use of the car by the employee has no effect on the capital allowances due to Quodos. The car will be placed in the main pool. No balancing allowance is available on the main pool until trade ceases even though the car has been sold.
7 Short-life assets
FAST FORWARD
Short life asset elections can bring forward the allowances due on an asset.
A trader can elect that specific items of plant, which are expected to have a short working life, be kept separately from the main pool.
Key term Any asset subject to this election is known as a ‘short life asset’, and the election is known as a ‘de-pooling election’.
The election is irrevocable. For an unincorporated business, the time limit for electing is the 31 January which is 22 months after the end of the tax year in which the period of account of the expenditure ends. (For a company, it is two years after the end of the accounting period of the expenditure). Short life asset treatment cannot be claimed for any motor cars, or plant used partly for non-trade purposes.
The short life asset is kept in a single asset pool. Provided that the short life asset is disposed of within eight years of the end of the accounting period in which it was bought, a balancing charge or allowance arises on its disposal.
If the asset is not disposed of within this time period, its tax written down value is added to the main pool at the beginning of the next period of account (accounting period for companies). This will be after allowances have been claimed nine times on the asset; once in the period of acquisition and then each year for the following eight years. The election should therefore be made for assets likely to be sold for less than their tax written down values within eight years. It should not usually be made for assets likely to be sold within eight years for more than their tax written down values. There is no requirement to show from the outset that the asset will actually have a ‘short life’, so it is a matter of judgment whether the election should be made.
The Annual Investment Allowance 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 allowance against main pool expenditure in priority to short-life asset expenditure.
Caithlin bought a machine for business use on 1 May 2015 for £9,000 and elected for de-pooling. She did not claim the AIA in respect of this asset. Her accounting year end is 30 April.
Calculate the capital allowances due if:
(a) The asset is scrapped for £300 in August 2023 (b) The asset is scrapped for £200 in August 2024 and assuming that the capital allowances rates in 2015/16 apply throughout.
(a) Year to 30.4.16 £
Cost 9,000
WDA 18% (1,620)
7,380
Year to 30.4.17
WDA 18% (1,328)
6,052
Year to 30.4.18
WDA 18% (1,089)
4,963
Year to 30.4.19
WDA 18% (893)
4,070
Year to 30.4.20
WDA 18% (733)
3,337
Year to 30.4.21
WDA 18% (601)
2,736
Year to 30.4.22
WDA 18% (492)
2,244
Year to 30.4.23
WDA 18% (404)
1,840
Year to 30.4.24
Disposal proceeds (300)
Balancing allowance 1,540
(b) If the asset is still in use at 30 April 2024, WDAs up to 30.4.23 will be as above. In the year to
30.4.24, a WDA can be claimed of 18% £1,840 = £331. The tax written down value of £1,840 – £331 = £1,509 will be added to the main pool at the beginning of the next period of account. The disposal proceeds of £200 will be deducted from the main pool in that period’s capital allowances computation. No balancing allowance will arise and the main pool will continue.
Short-life asset treatment cannot be claimed for motor cars or plant used partly for non-trade purposes.
8 Hire purchase and leasing
FAST FORWARD
Capital allowances are available on assets acquired by hire purchase or long lease.
8.1 Assets on hire purchase or long term leases
Any asset (including a car) bought on hire purchase (HP) is treated as if purchased outright for the cash price. Therefore:
(a) The buyer normally obtains capital allowances on the cash price when the agreement begins. (b) 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 5 or more years), are treated in a similar way to HP transactions.
8.2 Other leases
If assets are leased and the term of the lease is less than 5 years, the lessee merely hires the asset over that period. The hire charge can normally be deducted in computing trade profits. If a car with emissions over 130g/km is leased, the maximum allowable deduction from trading profits for lease rentals is limited by 15% as described earlier in this Text.
9 Cessation and succession
FAST FORWARD
Balancing adjustments usually apply when a business ceases.
9.1 Cessation of trade 12/12, 12/13, 6/14
Balancing adjustments arise on the cessation of a business. No AIAs, FYAs or WDAs are given in the final period of account (unincorporated businesses) or accounting period (companies – see later in this Text).
Each asset is deemed to be disposed of on the date the trade ceased (usually at the then market value). Additions (if any) in the relevant period are brought in and then the disposal proceeds (limited to cost) are deducted from the balance of qualifying expenditure. If the proceeds exceed the balance then a balancing charge arises. If the balance of qualifying expenditure exceeds the proceeds then a balancing allowance is given.
9.2 Succession
FAST FORWARD
If a business is transferred to a connected person, the written down value of plant and machinery can be transferred thus avoiding a balancing charge.
Balancing charges may be avoided where the trade passes from one connected person to another. If a succession occurs both parties must elect if the avoidance of the balancing adjustments is required. An election will result in the plant being transferred at its tax written down value for capital allowances purposes. Even where a succession election is made, there is a cessation of trade so no allowances are available to the transferor in the final period in which the transfer of trade occurs.
If no election is made on a transfer of business to a connected person, usually assets are deemed to be sold at their market values if no proceeds are paid.
As we saw earlier, an individual is connected with their spouse, their, or their spouse’s brothers, sisters, ancestors and lineal descendants, with their spouses, with business partners and their spouses and relatives, and with a company they control (either alone or in conjunction with persons connected with them). ‘Spouses’ includes civil partners.
Where a person succeeds to a business under a will or on intestacy, then even if they were not connected with the deceased they may elect to take over the assets at the lower of their market value and their tax written down value.
For both connected persons transfers and transfers on death, where the elections are made, the limit on proceeds to be brought into account on a later sale of an asset is the original cost of the asset, not the deemed transfer price.
Chapter roundup
| | Capital allowances are available on plant and machinery. | ||
| | Statutory rules generally exclude specified items from treatment as plant, rather than include specified items as plant. | ||
| | There are several cases on the definition of plant. To help you to absorb them, try to see the function/setting theme running through them. | ||
| | With capital allowances computations, the main thing is to get the layout right. Having done that, you will find that the figures tend to drop into place. | ||
| | Businesses are entitled to an annual investment allowance (AIA) of £500,000 for a 12 month period of account. Related businesses share one allowance between them. | ||
| | A first year allowance (FYA) at the rate of 100% is available on new low emission cars. Enhanced capital allowances (ECAs) are available on green technologies. FYAs and ECAs are never pro-rated in short periods of account. | ||
| | Most expenditure on plant and machinery qualifies for a WDA at 18% every 12 months. | ||
| | The special rate pool contains expenditure on thermal insulation, long life assets, features integral to a building, solar panels, and cars with CO2 emissions over 130g/km. The AIA can be used against such expenditure. The WDA is 8%. | ||
| | An asset which is used privately by a trader is dealt with in a single asset pool and the capital allowances are restricted. | ||
| | Motor cars are generally dealt with in the special rate pool (cars emitting over 130g/km) or the main pool, unless there is private use by the trader. | ||
| | Short life asset elections can bring forward the allowances due on an asset. | ||
| | Capital allowances are available on assets acquired by hire purchase or long lease. | ||
| | Balancing adjustments usually apply when a business ceases. | ||
| | If a business is transferred to a connected person, the written down value of plant and machinery can be transferred thus avoiding a balancing charge. | ||
| Quick quiz | |||
- For what periods are capital allowances for unincorporated businesses calculated?
- Are writing down allowances pro-rated in a six month period of account?
- Are first year allowances pro-rated in a six month period of account?
- When may balancing allowances arise?
- Within what period must an asset be disposed of if it is beneficial for it to be treated as a short life asset?
Answers to quick quiz
- Periods of account
- In a six month period, writing down allowance are pro-rated by multiplying by 6/12.
- First year allowances are given in full in a short period of account.
- Balancing allowances may arise in respect of pooled expenditure only when the trade ceases. Balancing allowances may arise on non-pooled items whenever those items are disposed of.
- Within eight years of the end of the period of account (or accounting period) in which it was bought.
| Number | Level | Marks | Time |
| Q8 | Introductory | 10 | 19 mins |
