Lecture 5- Capital allowances

Capital allowances- Relief from [blank_start]income tax[blank_end] & [blank_start]corporation tax[blank_end] on capital expenditure on eligible [blank_start]assets[blank_end]. Similar to [blank_start]depreciation[blank_end] for accounting purposes

Capital allowances are available on categories of [blank_start]expenditure[blank_end] such as [blank_start]plant & machinery[blank_end] & [blank_start]integral features[blank_end]

Calculation of capital allowances is for particular [blank_start]accounting period[blank_end] unless it is longer than [blank_start]18 months[blank_end] (chargeable periods). Capital allowances are treated as an [blank_start]accounting expense[blank_end]

Plant & machinery- [blank_start]Apparatus[blank_end] used by business [blank_start]person[blank_end] for carrying on business not their own [blank_start]stock-in-trade[blank_end] which they buy or make for [blank_start]resale[blank_end]. Capital expenditure on plant & machinery may qualify for [blank_start]capital allowances[blank_end]

Two items that are statutorily deemed as plant are [blank_start]thermal insulation[blank_end] for an [blank_start]industrial[blank_end] building & [blank_start]equipment[blank_end] to comply with [blank_start]fire[blank_end] regulations

Another two items that are statutorily deemed as plant are [blank_start]safety[blank_end] regulations at [blank_start]sports[blank_end] grounds & [blank_start]assets[blank_end] necessary to safeguard [blank_start]personal security[blank_end]

Another three items that are statutorily deemed as plant are [blank_start]computer software[blank_end], [blank_start]building[blank_end] alterations incidental to installing [blank_start]plant & machinery[blank_end] & expenditure on [blank_start]integral features[blank_end] of building or structure

If VAT cannot be reclaimed, then [blank_start]cost[blank_end] for capital allowances is [blank_start]VAT inclusive price[blank_end]. There are certain items which you cannot reclaim [blank_start]VAT[blank_end] & if you are not registered for [blank_start]VAT[blank_end], you cannot reclaim it

Although legally an asset purchased on [blank_start]hire purchase[blank_end] does not pass to purchaser until [blank_start]final[blank_end] instalment is paid, [blank_start]capital Allowances[blank_end] (on capital cost) can be claimed when contract is [blank_start]started[blank_end]. Items bought under finance leases – bought under term of more than [blank_start]5[blank_end] years are treated as for [blank_start]hire purchase[blank_end]

Items that were previously owned privately by [blank_start]proprietor[blank_end] will be treated as bought at [blank_start]market[blank_end] value on date that they are brought into [blank_start]business[blank_end]

For businesses that have very [blank_start]large[blank_end] quantities of plant & machinery it would be impossible to keep [blank_start]record[blank_end] & [blank_start]calculate[blank_end] capital allowances separately on each item. Therefore, items are [blank_start]grouped[blank_end] together & an allowance is calculated for all [blank_start]items[blank_end] included in that “[blank_start]pool[blank_end]”

There are two different pools. One is [blank_start]main pool[blank_end] & another is [blank_start]special rate pool[blank_end]

Main pool includes most items of [blank_start]plant & machinery[blank_end] i.e. furniture & office equipment. Also, it includes cars acquired with emission factor <[blank_start]110g/km[blank_end] ([blank_start]130g/km[blank_end] before 6.4.18)

Special rate pool includes [blank_start]integral[blank_end] features of building, thermal [blank_start]insulation[blank_end] of building & [blank_start]solar[blank_end] panels, items with working life of > [blank_start]25[blank_end] years (if [blank_start]£100k/year[blank_end] spent) & cars with emission factor > [blank_start]110g/km[blank_end] (130g/km before 6.4.18, & is planned to be reduced to [blank_start]50g/km[blank_end] from 6.4.2021)

Relief for allowances is given on [blank_start]reducing balance[blank_end] basis. Allowance must be [blank_start]claimed[blank_end] but trader can [blank_start]restrict[blank_end] amount [blank_start]claimed[blank_end]

Procedure is to [blank_start]bring forward[blank_end] balance from previous period. Then add any [blank_start]additions[blank_end] & calculate [blank_start]annual investment[blank_end] allowance & [blank_start]first year[blank_end] allowance. After that deduct [blank_start]proceeds[blank_end] of sale (restricted to original [blank_start]cost[blank_end]). Then calculate [blank_start]writing down[blank_end] allowance & deduct from [blank_start]pool[blank_end] balance. Finally, [blank_start]carry forward[blank_end] balance to next chargeable period

One accelerated capital allowances is [blank_start]annual investment[blank_end] allowance. This allowance allows [blank_start]traders[blank_end] to claim full cost (100% of first tranche of [blank_start]expenditure[blank_end] made by [blank_start]business[blank_end] during accounting period but exclude [blank_start]motor cars[blank_end])

Limit for annual investment allowances is [blank_start]12[blank_end] month [blank_start]chargeable[blank_end] period – will be [blank_start]increased[blank_end] or [blank_start]decreased[blank_end] accordingly

For periods spanning [blank_start]change[blank_end] in rate, calculation of [blank_start]limit[blank_end] for annual investment allowances will be calculated [blank_start]proportionately[blank_end]

For annual investment allowances you have to make [blank_start]claim[blank_end] but anything that is not [blank_start]claimed[blank_end] will be added to appropriate [blank_start]pool[blank_end] as normal, & [blank_start]writing down[blank_end] allowances may be [blank_start]claimed[blank_end]

Restrictions exist for persons who control more than [blank_start]1[blank_end] business. There are rules to prevent [blank_start]splitting[blank_end] of business to [blank_start]claim[blank_end] more than [blank_start]1[blank_end] annual investment allowance

Another accelerated capital allowances [blank_start]first year (enhanced)[blank_end] allowance. This allowance is for encouraging [blank_start]expenditure[blank_end] on [blank_start]energy efficient[blank_end] items (100% allowance in year of purchase). It is given instead of [blank_start]writing down[blank_end] allowance in period of acquisition. If asset is bought & sold in same accounting period, it can get [blank_start]first year[blank_end] allowance & [blank_start]writing down[blank_end] allowance. If it is not claimed, [blank_start]writing down[blank_end] allowance is available in period it was acquired

If [blank_start]proceeds[blank_end] > [blank_start]pool value[blank_end] (may arise during [blank_start]trading[blank_end] but more common when trade [blank_start]ceases[blank_end] or is [blank_start]sold[blank_end]), there will be [blank_start]negative[blank_end] figure. This is [blank_start]negative[blank_end] allowance which is added to accounting [blank_start]profit[blank_end] to compute [blank_start]taxable[blank_end] profit (balancing charge). Balancing charge is always given when an [blank_start]asset[blank_end] that is not included in “[blank_start]pool[blank_end]” is sold

Non pooled assets- These cannot go into one of [blank_start]pools[blank_end] & have to be kept [blank_start]separate[blank_end]. These are assets with some [blank_start]private[blank_end] use by [blank_start]owner[blank_end] of business, have [blank_start]short[blank_end] life but depreciate quite [blank_start]quickly[blank_end] & may be [blank_start]leased[blank_end] assets

Assets for private use by owner of business should be kept [blank_start]separate[blank_end]. However, you add [blank_start]full[blank_end] cost of that asset into its column, deduct [blank_start]full[blank_end] amount of [blank_start]writing down[blank_end] allowance but then [blank_start]disallow[blank_end] part of allowance (only claim proportion of allowance). There are no [blank_start]restrictions[blank_end] on any asset with [blank_start]private[blank_end] use by an employee– [blank_start]private[blank_end] use is dealt with via benefits in kind legislation

An [blank_start]election[blank_end] needs to be made for assets to be treated as [blank_start]short life[blank_end] asset. It can stay in its [blank_start]separate[blank_end] pool as long as it disposed of within [blank_start]8[blank_end] years of end of [blank_start]accounting[blank_end] period of purchase. As it is not within [blank_start]main[blank_end] pool, balancing allowance/charge would be given on [blank_start]sale[blank_end]. However, if still owned by end of [blank_start]8[blank_end] years, transfer to [blank_start]main[blank_end] pool. Motor cars are excluded from [blank_start]de-pooling[blank_end]

Cessation of trade- [blank_start]Year[blank_end] in which trade ceases. There is no [blank_start]annual investment[blank_end] allowances, no [blank_start]first year[blank_end] allowances & no [blank_start]writing down[blank_end] allowances. You [blank_start]bring forward[blank_end] balance on pool at [blank_start]start[blank_end] of year, add any [blank_start]additions[blank_end], deduct [blank_start]disposal proceeds[blank_end] & balance on each pool will be [blank_start]balancing allowance[blank_end]/[blank_start]charge[blank_end]

If there is any transfers between [blank_start]connected[blank_end] persons, it's treated as [blank_start]market[blank_end] value or elect for asset to be transferred at tax [blank_start]written down[blank_end] value. However, on disposal, [blank_start]proceeds[blank_end] will be limited to original cost