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Table of content
i. Definition of Capital Allowances and Plant & Machinery
ii. Annual Investment Allowance (AIA)iii. First Year Allowance (FYA)iv. Writing down Allowance (WDA)v. Capital Allowance for Motorcarsvi. Sales of Plant and Machineryvii. Impact of private use of asset on capital
allowanceviii. Recognize treatments of short-life assetsix. Treatments of assets included in the special
pool rate
Capital Allowances In General Purpose?
To provide a business tax relief for capital expenditure
Deducted as a trading expense in calculating the tax-adjusted trading income.
Calculated for a trader’s period of account.
Definition Of Plant and Machinery
Machinery has a commonly understood meaning
Plant is not so clearly defined. Thus, HMRC codified some rules to specifically deem certain types of expenditure as plant and machinery.
However…
Certain types of expenditure not thought to be plant BUT are TREATED as plant by specific legislation. For example,
1. Capital expenditure incurred in complying with fire regulations
2. The cost of alterations to buildings needed for the installation of plant
3. Expenditure on acquiring computer software
Common Examples of Plant
Computers and software Machinery Cars and lorries Office furniture Moveable partitions Air-conditioning Alterations of buildings needed to
install plant and machinery
Other Definition of Plant and Machinery
Yarmouth v France (1987)
Plant includes “whatever apparatus is used by a businessman for carrying on his business; not his stock-in-trade that he buys or makes for sale – but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.”
Other Assets Deemed NOT To Plant…
Land Buildings and items that are part of the
building (walls, floors, ceilings, doors, windows, stairs, water systems, electricity systems and gas systems)
Structures
Items within the definition of a building but can still qualify as plant
Electrical, cold water and gas systems provided to meet the particular requirements of the trade.
Water heating systems, systems of water ventilation and air cooling, and any ceiling and floor comprised in such systems.
Manufacturing/processing equipment, storage equipment, display equipment, counters, checkouts.
Items within the definition of a building but can still qualify as plant
Cookers, washing machines, dishwashers, refrigerators
Wash basins, sinks, baths, showers, sanitary ware Furniture and furnishings Lifts, escalators, moving walkways Sprinkler equipment and fire alarm systems Movable partition walls Decorative assets provided in a hotel, restaurant
or similar trade Advertising hoardings, signs and similar displays
What is Annual Investment Allowance?
Annual Investment Allowance (AIA) is a 100% allowance for the first £50,000 of expenditure incurred by a business on plant and machinery (Taxation FA09, ACCA).
AIA is an amount you can write off against taxable profits for purchases of qualifying plant and equipment.
Annual Investment Allowance Rule
Available Prohibited1. All business size 1. Cars
2. Acquisitions of general plant and machinery and acquisitions of “special rate pool” items
2. Trade cessation
3. Air condition and electrical systems
Annual Investment Allowance Rule
In each accounting period of 12 months, it is limited to a maximum of £50,000 expenditure incurred.
The £50,000 allowance is prorated for
long and short accounting periods.
Annual Investment Allowance (AIA)
Expenditure above
£50,000
Qualify for further allowance: Plant and machinery falling above 50000 qualify for either:
a. FYA (between 6 April 2009 to 5 April 2010)
b. WDA(pre 6 April 2009 and w.e.f 6 April 2010)
Taxpayer Does not have to claim all or any AIA if he or she does not want
Unused AIA1. Unable to carried forward and
carried back2. Is lost
Annual Investment Allowance (AIA)
Business choose expenditure where AIA is matched.
Most beneficial AIA to be allocated against expenditure:
1. Expenditure eligible for WDA2. Expenditure eligible for the
temporary 40% FYA
First Year Allowance (FYA)
Available for expenditure not covered by AIA.
Cannot be pro-rated for accounting periods greater or less than 12 months.
When FYA is used, WDA cannot be used again in the year of purchase.
2 types of FYA:-
Temporary FYA on plant and machinery
FYA on low emission cars
Writing Down Allowance (WDA)
Provided base on a reducing balance basis.
It is given on:- tax written down value (TWDV) brought
forward at the beginning of financial period. any additions on which the AIA is not
available. any additions on before 6 April 2009 and after
6 April 2010, not covered by the AIA. after taking account of disposals.
The TWDV brought forward includes all prior expenditure, less allowances already
claimed.
Writing Down Allowance (WDA)
Rate for allowance
Items
10% Special rate pool items
20%
General pool items which are not qualifying for AIA or FYA (except expensive car)
20% or £3000 (maximum)
Only applies for expensive car
£1000 (maximum) Balance of general/’special pool’ items ≤ £1000 before WDA
Writing Down Allowance (WDA)
Short or long period of account The $50,000 AIA and 20% is based on a period
of account of 12 months. It will result allowances being pro-rated if 12
months < or > 12 months. If the period of account exceeds 18 months, it
must be split into 2 periods:-1. A 12 month period2. Second period of account to deal with the
remaining months.
Writing Down Allowance (WDA) Length of ownership in the period of
account Never restricted by reference to the length of
ownership of an asset in the period of account. Example:-
If a business prepares accounts for the year ended 31 March 2010, the same WDA is given whether an asset is purchased on 10 April 2009 or on 31 March 2010.
Example:
Grace commenced trading on 1 Aug 2009. Her trading profits, adjusted for tax purposes but before capital allowances, are as follows:
£ Year ended 31 July 2010 59,500 Year ended 31 July 2011 31,200
On 9 Nov 2009, she bought plant and machinery for £60,000 and a motor car with CO2 emissions of 131 g/km for £6,500.
Calculate Grace’s tax-adjusted trading profit for both years.
Capital Allowances For Motor Car
CO₂ emissio
ns
Description
Treatment in capital allowances
computation≤ 110 g/km
Low emission 100% FYA is allowed
111 – 160
g/km
Standard emission
Included in general pool as addition not qualifying for AIA or FYA
˃ 160 g/km
High emission
Included in the ‘special rate pool’
Sale Of Plant And Machinery
Upon the sale of plant and machinery, the following steps are taken before calculating the capital allowances.
The disposal proceeds is deducted from the total of: TWDV brought forward on the pool plus
additions brought into the general pool
Sale Of Plant And Machinery
The WDA for the year is then calculated on the remaining figure, and the temporary FYA is calculated after the WDA is deducted.
However…
o If sale proceeds exceed the original cost of the asset, the sale proceeds deducted from the pool are restricted to the original cost of the asset. An excess of sale proceeds over original cost may then be taxed as a chargeable gain.
o This chargeable gain is known as balancing charge and it will be added to the taxable trading profit.
On the other hand…
o If sale proceeds happens to be lower than the TWDV, a business can claim a relief for the unrelieved balance by way of a balancing allowance.
o Balancing allowance will mostly arise when a business decided to discontinue its business.
o In addition to that, NO AIA, FYAs or WDAs are available in the final period of account.
Private Use Of Asset
In here, private use of asset means that asset of the business is used for non-business purposes.
In calculating the allowance for privately use asset, the proportion of allowance for private use has to be reduced from the allowance claim.
Recognize treatment on short life asset (Assets disposal w/in 4yrs) De-pooling – Election (written application to
HMRC) to enable assets treated separately.
A separate column, SLA will be made for capital allowances computation.
A separate balancing allowance or balancing charged is calculated.
IF no disposal taken place, the unrelieved balance will be transferred to general pool.
SLA is eligible for AIA.
Example:
Gina has traded for many years preparing accounts to 31 March each year. The TWDV on the general pool was £15,000 on April 2009.
In May 2009, she acquired a new machine costing £10,000. She anticipated that the machine would last two years and she eventually sold it on 30 June 2011, for £1,750.
In August 2009, she acquired general plant and machinery for £52,000.
Calculate the allowances available for each year, illustrating whether or not an election to treat the new machine as a short life asset would be beneficial.
Election Beneficial Or Not
Total Allowances
w/o Election£57,800+£3,840+£2,722=£64,362
Election£57,800+£3,840+£5,162=£66,802
Beneficial Or Not
From the result, the total allowance of election available will be much faster than those without election.
If the amount is not covered by AIA, short life treatment is recommended to take place, only if balancing allowance can be accelerated.
Not advantageous to accelerate a balancing charge.
Special Rate Pool
WDA is 10% for a 12 month period (rather than 20%).
The temporary FYA of 40% is not available.
AIA is also available against this expenditure (except on high emission cars).
The business can choose the expenditure against which the AIA is matched.
It will be most beneficial for AIA to be allocated against expenditure in the following order:
The ‘special rate pool’
The general pool
Short life assets
Private use assets
Reference:
“Capital allowances: Plant and machinery” in ACCA: Paper F6 The Complete Text (2009) (pp.161-211) Kaplan Publishing.
HMRC, Help Sheet 250: Capital allowances and balancing charges in a property rental business (2009). Extracted from: http://www.hmrc.gov.uk/helpsheets/hs250.pdf