Chapter 8

Capital allowances

Outcome

Upon completion of this Chapter you will be able to:

 define plant and machinery for capital allowances purposes

 compute writing down allowances, first year allowances and the annual
investment allowance

 compute capital allowances for motor cars

 compute balancing allowances and balancing charges

 compute structures and buildings allowances

 recognise the treatment of short life assets

 recognise the treatment of assets included in the special rate pool

and answer questions relating to these areas.

One of the PER performance objectives (PO15) is to prepare

computations of taxable amounts and tax liabilities according to
legal requirements. Working through this chapter should help you
understand how to demonstrate that objective.
PER

The underpinning detail for this Chapter in your Integrated Workbook can
be found in Chapter 8 of your Study Text.

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Overview

PLANT & MACHINERY

SPECIAL
DEFINITION ALLOWANCES
ASSETS

 Annual investment
allowance
CARS PRIVATE USE  First year
ASSETS allowances
 Writing down
allowances
 Small pools
allowance
SHORT LIFE INTEGRAL  Balancing
ASSETS FEATURES adjustments
AND LONG
LIFE ASSETS

STRUCTURES & BUILDINGS

STRAIGHT LINE
ALLOWANCE

 Qualifying cost
 Treatment on disposal

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Capital allowances – plant and

machinery
1.1 Capital allowances

Capital allowances are the tax version of depreciation on plant and

machinery. They are available to persons who buy qualifying assets
for use in a trade or business.

There are four types of capital allowance, explained in more detail below:

 Writing down allowance (WDA): available annually

 Annual investment allowance (AIA): available on most assets in the year of
acquisition
 First year allowance (FYA): available on certain assets in the year of acquisition
 Balancing adjustments: a balancing allowance or charge may arise in the year
of disposal.

1.2 Plant and machinery

Plant and machinery is the apparatus with which the business

operates rather than the setting in which the business operates.
 The distinction can be difficult and there is significant case law
defining “plant” (some of which is now enshrined in legislation).
For example:
– a canopy over a petrol forecourt was tantamount to a roof
and did not qualify for capital allowances.
– movable partitioning was held to be plant, while fixed
partitioning fulfils the same function as walls and therefore
was part of the setting.
 Therefore, buildings, land and structures do not usually qualify for
capital allowances (with the exception of those qualifying for the
structures and buildings allowance – see section 8).

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Summary of qualifying assets

Machinery includes all machines, motor vehicles, computers; plant includes fixtures
and fittings, movable partitioning, furniture, equipment.

From case law, the following also qualify for capital allowances:

 building alterations incidental to installation of P&M

 a license to use computer software.

1.3 The main pool (or general pool)

Subject to certain exceptions, rather than calculating capital allowances on an

individual asset by asset basis, most items of plant and machinery purchased by a
business are grouped together as part of a pool of expenditure on which capital
allowances are then claimed.

The key assets that do not go into the main pool are as follows:

 New or second-hand cars with CO2 emissions of greater than 50 g/km

 Assets that are partly used for private purposes by the sole trader/partners

 Assets that need to go into the special rate pool rather than the main pool

 Assets for which a short life asset election has been made to take them out of
the pool.
The balance on the pool – the equivalent of the net book value for tax purposes – is
referred to as the tax written down value (TWDV).

The allowance for the period – the equivalent of tax allowable depreciation – is
referred to as the writing down allowance (WDA).

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Calculation of capital allowances

2.1 Capital allowance computation

A capital allowances working is prepared for each period of account. Here is a pro
forma main pool working.
Main pool Allowances
£ £ £
TWDV b/f X
Additions with no AIA or FYA X
Additions with AIA X
AIA (X) X
––––
X X
Disposals (X)
––––
X
WDA at 18% (X) X
Additions qualifying for 100% FYA
Zero emission cars X
FYA at 100% (X) X
––––
0
––––
TWDV c/f X
–––– ––––
Total allowances X
––––

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2.2 Writing down allowances (WDA)

The WDA available each year (except the year of cessation)

= 18% p.a. × TWDV.

2.3 Annual investment allowance (AIA)

The rate of annual investment allowance for a 12 month period of

account
= £1,000,000 on new purchases of plant and machinery.

From 1 January 2022 the AIA limit will be £200,000 but this will not be
examined in TX. It should be assumed that the £1 million limit applies
even if the accounting period spans 1 January 2022.

Allocation of the AIA

 The AIA can be used on additions of assets in the main pool except cars.

 AIA does not have to be claimed in full, but any unused AIA cannot be carried
forward or back.

 If expenditure > available AIA then the balance is eligible for 18% WDA.

 AIA is not available in the period ending with cessation of trade.

2.4 First year allowances (FYAs)

FYA = 100% deduction in the period of acquisition on new zero

emission cars.

 Second-hand zero emission cars go into the main pool and are
treated in the same way as all other cars with CO2 emissions of
1 – 50 g/km.

 FYAs are given instead of the WDA.

 FYAs are not available in the period to cessation.

 Zero emission cars provided to employees as company cars also

have lower taxable benefits = lower income tax (employee) and
lower class 1A NICs (employer). They are therefore very beneficial
from a tax perspective.

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 Capital allowances

Example 1
Ava commenced trading on 1 January 2021. Her trading profits for the year
ended 31 December 2021, adjusted for tax purposes but before capital
allowances, are £125,500.

On 9 November 2021 she bought a new car with CO2 emissions of 45g/km for
£10,000 and another new car with zero CO2 emissions for £22,700; on
1 December 2021 she purchased a milling machine for £42,000.

Calculate Ava’s tax adjusted trading profits for the year ended
31 December 2021.

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2.5 Short or long periods of account

WDAs and AIA are given for periods of account:

 Where there is a short or long period of account, the WDA and AIA are time
apportioned accordingly.

 The WDA and AIA are never restricted by reference to the length of ownership
of an asset within the period of account.

 The FYA is never time apportioned.

Example 2
Paula commenced trading on 1 July 2021 and prepared her first set of
accounts to 31 December 2021. Her tax adjusted trading profits before capital
allowances for the 6 months ended 31 December 2021 was £141,000.

She bought machinery on 28 September 2021 for £112,000. On 30 November

2021, she bought a new car with CO2 emissions of 49g/km for £14,000 and on
10 December 2021 she bought a new car with zero CO2 emissions for
£21,000.

Calculate Paula’s tax adjusted trading profits for the period ended
31 December 2021.

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2.6 Small pool WDA

If the balance in the main pool (before calculating the current period’s WDA) ≤ £1,000
the whole balance can be claimed at once rather than having to write down at 18%.

The £1,000 is time apportioned for periods not equal to 12 months.

2.7 Disposals from the main pool

When an item from the main pool is sold, deduct the lower of:

 proceeds, and

 original cost.

before giving writing down allowances for the period.

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Example 3
John draws up accounts to 31 December. On 1 July 2021, he purchased an
item of plant and machinery costing £67,000 for his business.

The tax written down value brought forward on the main pool at 1 January
2021 was £228,000. On 1 August 2021, he sold an item of plant for £15,200
(original cost £18,000).
Calculate the maximum capital allowances available for the year ended
31 December 2021.

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2.8 Balancing charges

For as long as there is a positive balance on the main pool, it keeps being written
down at 18% (subject to the small pool WDA – see above).

However, if the disposal of an asset from the main pool makes the pool balance
negative, then too many allowances have been claimed in the past.

These excess allowances will be recovered and charged to tax by means of a

balancing charge (BC), which reduces the capital allowances claim for the period.

If there is an overall net BC it is added to the tax adjusted trading profit.

Example 4
Odysseus has traded for many years. During the year ended 31 December
2021 he had the following transactions:
11 June 2021 Purchased some computer equipment for £93,500
19 July 2021 Sold some machinery for £117,200 which originally cost
£145,000
30 August 2021 Purchased a new car with zero CO2 emissions for £17,800
30 October 2021 Purchased some office furniture for £30,000
The tax written down value at 1 January 2021 was £103,000.

Compute the capital allowances for the year ended 31 December 2021.

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Special rate pool

3.1 Special rate pool

Special rate pool: the WDA for 2021/22 is TWDV × 6% p.a. The
special rate pool operates in the same way as the main pool but
includes the following assets:

 Long life assets

 Integral features of a building

 High emission cars (emitting > 50 g/km).

3.2 Integral features

The following items are classified as integral features:

 Electrical systems (including lighting systems)

 Cold water systems

 Space or water heating systems, powered systems of ventilation, air cooling or

purification

 Lifts/escalators/moving walkways

 External solar shading.

Additionally, thermal insulation in all business buildings is included in the special rate
pool.

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3.3 Long life assets

Long life assets are plant and machinery with an expected working life of at least
25 years and total cost in a 12-month period of account of ≥ £100,000 (time apportion
for length of period of account).

The following cannot be classified as long life assets:

 cars

 plant and machinery used in retail shops, showrooms, offices, hotels or houses.

3.4 Use of annual investment allowance (AIA)

The AIA is available on the acquisition of any asset except cars.

To be tax efficient, first allocate the AIA against assets with the lowest
rate of allowances (SRP then main pool).

Expenditure in excess of the AIA qualifies for the normal WDA.

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Example 5
Adam makes up accounts to 30 September each year. The TWDV of his plant
and machinery at 1 October 2020 were as follows:
£
Main pool 32,300
Special rate pool 103,000
During the year ended 30 September 2021 Adam made the following
acquisitions:
£
10 April 2021 New car (zero CO2 emissions) 18,000
10 May 2021 Machinery 107,000
1 August 2021 Crane (expected working life of 30 years) 138,000
1 September 2021 Car (CO2 emissions 67/km) 17,400
18 September 2021 Air conditioning system 87,000
Calculate Adam’s capital allowances for the year ended 30 September
2021.

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 Capital allowances

Private use assets

4.1 Private use assets

Special rules apply to the calculation of capital allowances where the owner of the
business (not an employee) has some private use of the asset.

 In the pro forma set up a separate column for each private use asset.

 Calculate allowances as normal but only claim the business proportion as a

deductible allowance.

 On the disposal of a private use asset a balancing adjustment is computed by

comparing the sales proceeds to the tax written down value

– If the sales proceeds > TWDV, there is a balancing charge

– If the sales proceeds < TWDV, there is a balancing allowance.

 Only the relevant business proportion of the balancing charge or allowance is

then available to the business.

 AIA is available against private use assets that are not cars, but should first be
set against other assets; otherwise it will be restricted to the business use.
However, most private use assets are cars, therefore the AIA is unavailable.

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Example 6
Gary started in business on 1 April 2021 and decided to prepare his accounts
to 30 June each year.

In April 2021 he bought a car for £15,000 with CO2 emissions of 44g/km. He
sold the car in September 2023 for £4,000.

Gary used his car for both business and private purposes and estimated a
70% business use proportion.

Show the capital allowances and balancing adjustment for the 15 month
period ending 30 June 2022, and the years ended 30 June 2023 and
2024. Assume FA21 rates apply throughout.

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Example 7
Angela is in business as a sole trader. In the year ended 31 December 2021
she has the following transactions:

15 May 2021 Purchased new office furniture for £24,800

1 June 2021 Sold Ford car for £9,400 (used by Angela 30% for private
purposes)

2 June 2021 Purchased a new Toyota car (CO2 emissions 48g/km) for
£10,000 which Angela will use 20% of the time for private
purposes

10 June 2021 Bought new plant for £9,000

1 July 2021 Sold office equipment for £10,000 (original cost £18,000)

As at 1 January 2021 the tax written down value on the main pool was
£10,800 and on the Ford car was £14,500.

Calculate Angela’s capital allowances for the year ended 31 December

2021.

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Short life assets

5.1 Short life assets

Short life assets = main pool assets (except cars) which are expected
to be sold or scrapped within eight years of the end of the accounting
period of purchase.

A depooling election may be made to put a short life asset into a

separate column to enable the calculation of a balancing allowance on
disposal.

If the short life asset is not disposed of within eight years of the end of the period of
account in which it was acquired:

 transfer the TWDV to the main pool at the start of the next period.

The time limit for the depooling election is:

First anniversary of 31 January following end of tax year in which period

of account of expenditure ends.

AIA can be used against short life assets but it would be preferable to
offset it against other additions first, since they will take longer to write
off for tax purposes. Also, it is probable that a balancing charge would
arise on the disposal of the short life asset if the AIA had been offset
against it in the period of acquisition.

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Illustration 1 – short life asset election

Kendra has traded for many years, making accounts up to 31 December. On
1 January 2021 she had a TWDV brought forward on the main pool of £25,000.
On 1 May 2021 she bought integral features for £980,000 and a machine for
£100,000. The machine lasted for less time than expected and she sold it on
30 June 2022 for £12,500.

Calculate the capital allowances for the years ended 31 December 2021
and 31 December 2022 showing if the depooling election would be
beneficial.

Without depooling
Main SRP CAs
pool
£ £ £ £
y/e 31 December 2021 25,000
Additions: AIA (SRP) 980,000
AIA (980,000) 980,000
–––––––
0
Additions: AIA (Main pool) 100,000
AIA (£1,000,000 – (20,000) 20,000
£980,000)
–––––––
80,000
–––––––
105,000
WDA at 18% (18,900) 18,900
––––––
TWDV c/f 86,100 ––––––––
Total allowances 1,018,900
––––––––
y/e 31 December 2022
Disposal (12,500)
–––––––
73,600
WDA at 18% (13,248) 13,248
–––––––
TWDV c/f 60,352
––––––– –––––––
Total allowances 13,248
–––––––

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With depooling
Main SRP SLA CAs
pool
£ £ £ £
y/e 31 December 2021 25,000
Additions: AIA (SRP) 980,000
AIA (980,000) 980,000
–––––––
0
Additions: AIA (SLA) 100,000
AIA (20,000) 20,000
Transfer –––––––
80,000
–––––– ––––––
25,000 80,000
WDA at 18% (4,500) (14,400) 18,900
–––––– ––––––
TWDV c/f 20,500 65,600 ––––––––
Total allowances 1,018,900
––––––––
y/e 31 December 2022
Disposal (12,500)
–––––– ––––––
20,500 53,100
BA (53,100) 53,100
WDA at 18% (3,690) 3,690
–––––– ––––––
TWDV c/f 16,810 0
–––––– –––––– ––––––
Total allowances 56,790
––––––
Conclusion: The election is beneficial because it maximises the allowances in
the year ended 31 December 2022. This is a timing issue only but it is
advantageous from a cash flow perspective.

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 Capital allowances

Cessation of trade

6.1 Cessation of trade

When a business is permanently discontinued, no AIA, WDA or FYA is available in

the final period of account.

Instead of the normal capital allowance computation being prepared, the following
steps should be followed:

 Add in any additions made in the final period.

 Deduct any disposals made in the final period.

 Calculate a balancing adjustment on each pool to bring the TWDV c/f to nil.

This is the only occasion on which a balancing allowance can arise on the main or
special rate pool.

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Example 8
Dermot makes up accounts to 31 December each year. He ceased to trade
on 30 June 2022.

The tax written down values as at 1 January 2021 were:

Main pool £28,000
Car – CO2 emissions 45g/km (60% private use) £18,000
During the year ended 31 December 2021 the following transactions took
place:
31 July 2021 Bought plant for £22,800
During the final period the following transactions took place:
1 January 2022 Bought plant for £11,400
30 June 2022 Sold all main pool items (each for less than cost) for a total
of £37,600
30 June 2022 Took the car for his personal use. The market value at that
date was £11,000.
Calculate Dermot's capital allowances for the year ended 31 December
2021 and the 6 months ended 30 June 2022. Assume FA21 rates apply
throughout.

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 Capital allowances

Value added tax (VAT)

7.1 Capital allowances and VAT

In an exam question on capital allowances the figures may be provided inclusive of

VAT at 20% (see Chapter 24 for further information on VAT).

If the business is registered for VAT:

 All additions and disposals should be exclusive of VAT (which is recoverable for
the business), except cars.

 Cars should be inclusive of VAT, since the VAT is not recoverable. The only
exception is cars used 100% for business (e.g. a driving school).

If the business is not registered for VAT:

 Include all figures inclusive of any VAT.

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The capital allowance pro forma

Year ended Main SRP PU SLA Business Allowances

pool asset use
£ £ £ £ £ £
TWDV b/f X X X X
Additions: No AIA X
Additions: AIA
SRP additions X
AIA (X)
––––
0
MP additions X
AIA (X) X
––––
X
Disposals (X) (X)
–––– ––––
X X
BA/BC (X) X
Small pool WDA
WDA @ 18% (X) X
WDA @ 6% (X) X
WDA @ 18%/6% (X) × BU% X
Additions: FYA X
FYA @ 100% (X) X
––––
0
–––– ––– ––––
TWDV c/f X X X
–––– ––– –––– ––––
Total allowances X
––––

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Example 9
David commenced trading as a manufacturer of industrial valves on
1 September 2021. He prepared his first set of accounts for the 4 month
period to 31 December 2021 and made the following acquisitions during this
period.

1 September 2021 Bought machinery for £98,400

15 September 2021 Installed air conditioning system into the office at a cost
of £250,000

2 October 2021 Bought a car with emissions of 49g/km (used by David’s

production manager – 35% private use) for £11,780

11 November 2021 Bought a visual imaging machine for £46,000 – this

machine is expected to have an expected useful
economic life of 3 years, after which time it will be
scrapped

1 December 2021 Bought a car with emissions of 148g/km (used by David

– 20% private use) for £14,600

Calculate David's capital allowances for the 4 months ended 31

December 2021.

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Structures and buildings allowances

9.1 Structures and buildings allowance

Structures and buildings allowances (SBAs) are a type of capital

allowance for commercial structures and buildings only. The building
must have been constructed or renovated on or after 29 October 2018
to qualify for SBAs. However, a question will only be set where
construction/renovation is on or after 6 April 2020 in the TX exam.

These buildings are not included in the main capital allowances computation. If the
trader has more than one qualifying building or structure, each must have its own
separate SBAs.

SBAs are calculated on a straight-line basis at 3% per annum on qualifying cost.

They are therefore spread over 33⅓ years.

 Qualifying buildings include offices, factories, warehouses, retail and wholesale

premises. Qualifying structures include walls, bridges and tunnels.

 The building or structure must be used for a trade or property letting business,
but residential property (dwelling houses) does not qualify.

 Costs of converting, renovating or improving the property also qualify for the
allowance. These costs qualify for a separate allowance from the original
purchase price (if that also qualified).

 The cost of land, legal and professional fees and planning permission do not
qualify for SBAs.

 Plant and machinery expenditure that qualifies for capital allowances cannot
also qualify for the SBA.

 When an unused building is purchased from a builder or developer:

Qualifying cost = price paid – value of land

 SBAs can only be claimed from the first day the building or structure comes into
qualifying use. The allowance will be time apportioned in the period of first use.

 SBAs are time apportioned for a short or long periods.

 Any asset eligible for SBAs will not be eligible for the AIA.

For any questions involving the purchase (rather than construction) of a

building, which do not state the construction date, you should assume
that SBAs are not available unless stated otherwise.

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9.2 Disposals

On disposal of the building or structure no balancing adjustment arises.

 The purchaser takes over the remainder of the original life and allowances.

 The SBA is apportioned between the parties in the period of disposal.

The SBAs claimed to the date of disposal are added to sales proceeds to calculate
the chargeable gain or allowable loss arising for the vendor.

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Example 10
Katrin purchased a building for £270,000 from a property developer to use in
her trade. She purchased the building on 1 June 2021 but the property was
not used in the trade until 1 September 2021.

On 1 November 2023 Katrin sold the building to Erna for £375,000. Erna
immediately started to use the building for trading purposes.

Both Katrin and Erna have a December year end.

Calculate Katrin and Erna’s capital allowances for the year ended
31 December 2021 to 31 December 2023.

There is no balancing adjustment on disposal. The price paid by Erna for the
building does not affect the SBA available which are always based original
cost.

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You should now be able to answer TYU questions 1 to 14 from the Study Text
Chapter 8 as well as the question ‘Austin’ from Chapter 28.

For further reading, visit Chapter 8 of the Study Text.

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