Capital
allowances
CHAPTER 6
Identify which assets qualify as plant and machinery
Calculate writing down allowances at the correct rate and deal with disposals of plant and
machinery
Identify which assets are eligible for first year allowances
Learning Correctly apply the annual investment allowance
Outcome
Correctly treat cars and other assets with private use by the sole trader or partner
Determine the amount of any balancing adjustment
Calculate capital allowances for periods shorter or longer than 12 months
Overview
CAPITAL ALLOWANCES
SINGLE ASSET
DEFINITION MAIN POOL
POOLS
1. Capital allowances
1.1. Steps to tax a sole trader
£
Step 1: Adjust profits for the accounting period X
Step 2: Deduct capital allowances for that accounting period (X)
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Tax adjusted trading profit for the accounting period X
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Step 3: Consider which tax year to tax this accounting period in = basis periods.
Depreciation is added back in step 1, and replaced with capital allowances in step 2, to calculate adjusted
profits.
Capital allowances are a form of depreciation for tax purposes. The allowances are calculated at standard
rates that apply to all businesses and are therefore less subjective than depreciation.
1. Capital allowances
1.2. Qualifying assets
Capital allowances are only available on plant and machinery. Expenditure on commercial
structures and buildings from 29 October 2018 qualifies for a type of capital allowance called a
structures and buildings allowance (SBA), but this is outside the scope of the Principles of Tax
syllabus.
Plant and machinery are assets with which the business operates (e.g. petrol pumps) rather
than in which the business operates (e.g. garage canopy).
Machinery includes all machines, motor vehicles and computers. Plant includes fixtures and
fittings, furniture and equipment.
From case law, building alterations incidental to the installation of plant and machinery, and
licences to use computer software, also qualify for capital allowances.
1. Capital allowances
1.3. Pools
Two categories (pools) of plant and machinery are examinable in Principles of Tax:
Private use asset pools: capital allowances are calculated separately for each asset that is
partly for the private use of the business owner. Only the business use proportion of the
allowance may be claimed.
Main/general pool: all other assets are pooled together to enable the calculation of a single
capital allowance. This includes cars with CO2emissions of not more than 110g/km purchased
on or after 6 April 2018 (1 April for companies). The limit was previously 130g/km for cars
purchased on or after 6 April 2013 (1 April for companies).
The balance on each pool (the tax equivalent of the carrying amount) is known as the tax
written down value (TWDV).
1. Capital allowances
1.4. Types of capital allowances
There are four types of capital allowance that you need to be aware of for your
Principles of Tax exam, explained in more detail below:
Writing down allowances (WDA): available annually.
Annual investment allowance (AIA): available on certain assets in the period of acquisition.
First year allowance (FYA): available on certain assets in the period of acquisition.
Balancing adjustments: a balancing allowance or charge may arise in the period of
disposal.
2. Calculation of capital allowances
2.1. Capital allowance computation
In the exam, you may not need to use the full computation, but it is very important that you
familiarise yourself with it before attempting to take any short cuts.
2. Calculation of capital allowances
2.2. Allowances
A writing down allowance (WDA) is given on the balance of the main pool at the end of the
period of account.
The WDA available each year is 18% × TWDV.
The WDA is claimed as a capital allowance and is deducted from the pool balance.
The remaining pool balance is then carried forward as the TWDV at the start of the next period
of account and continues to be written down on a reducing balance basis.
The annual investment allowance (AIA), offers tax relief at 100% on qualifying expenditure
in the year of purchase, up to a maximum.
2. Calculation of capital allowances
2.2. Allowances
You should assume the maximum annual AIA throughout the period in question is £1,000,000.
The AIA can be used against any assets purchased in the year that would be allocated to the
main pool, except assets qualifying for 100% FYA and cars.
Any unused AIA cannot be carried forward.
If expenditure exceeds the available AIA then the balance is eligible for the 18% WDA by
transferring the balance into the main pool before calculating the WDA for the period.
Worked example: Annual investment allowance
José has been trading for many years and makes up accounts to 31 December each year. His
capital allowances pool brought forward at 1 January 2024 is £6,560. He makes the following
acquisitions and disposals:
•1.6.24 – Sells for £480 plant which cost £900 two years earlier
•24.8.24 – Buys a printing press for £40,000
Requirement
What are the maximum capital allowances available to José for the year ended 31 December
2024?
Description Main pool (£) Allowances (£)
TWDV b/f 6,560
Acquisitions
24.8.24 Press 40,000
Less AIA (40,000) 40,000
Disposals
1.6.24 Plant (480)
6,080
WDA @ 18% (1,094) 1,094
TWDV c/f 4,986 41,094
2. Calculation of capital allowances
2.2. Allowances
First year allowances (FYAs) offer tax relief at 100% on certain assets in the year of purchase.
There is no limit on the amount of relief.
There is a 100% FYA for expenditure on new and unused zero emission goods vehicles where
expenditure is incurred before 5 April 2025 (31 March 2025 for companies).
There is a 100% FYA for expenditure on charging points for electric vehicles incurred before 5 April
2025 (31 March 2025 for companies).
In addition, a 100% FYA applies to expenditure on new qualifying low emission cars (until 31 March 2025). To
qualify as a low emission car it must be electrically propelled or emit not more than:
0 g/km of CO₂ for cars purchased on or after 1 April 2021
50 g/km of CO₂ for cars purchased between 1 April 2018 and 31 March 2021
75 g/km of CO₂ for cars purchased before 1 April 2018.
Wolfgang starts trading on 1 January 2024 and prepares accounts to 31 December each year.
During his first year to 31 December 2024, he incurs the following expenditure:
•6.4.24: Machinery – £1,012,000
•6.7.24: New car with emissions of 0 g/km – £8,000
•31.10.24: New car with emissions of 45 g/km – £10,500
Requirement
Using the standard format below, compute the maximum capital allowances available to Wolfgang
for the year ended 31 December 2024.
2. Calculation of capital allowances
2.3. Short or long periods of account
WDAs and the AIA are given for periods of account:
• Where there is a short or long period of account, the WDAs and AIA are time
apportioned accordingly.
• The WDAs and AIA are never restricted by reference to the length of ownership of an
asset in the period of account.
Never time apportion FYAs for the length of the period of account or the length of ownership
of an asset in the period of account.
2. Calculation of capital allowances
2.4. Disposals from the main pool
When an item from the main pool is sold, before giving writing down allowances for the
period, deduct the lower of:
• disposal proceeds, and
• original cost.
If the item is not sold the proceeds are assumed to be:
• the market value on the date of transfer if the asset is permanently removed from the
business by the owner (to only be used privately from now on),
• the scrap value/compensation received if the asset is scrapped/destroyed.
If the asset being disposed of qualified for AIA or FYA in the year of acquisition, the deduction
is made from the main pool or a single asset pool (see below).
2. Calculation of capital allowances
2.5. Balancing charges/allowances
Balance on pool Reason Balancing adjustment
Negative The disposal value A balancing charge will apply as too many
exceeds the TWDV allowances have been claimed in the past.
b/f The balancing charge will reduce the total
allowances claimed for the period.
Positive The TWDV b/f A balancing allowance is given as insufficient
exceeds the allowances have been claimed in the past.
disposal value
2. Calculation of capital allowances
2.6. Small pool WDA
If the balance in the main pool on which the WDA is to be calculated is £1,000 or less then the
whole amount can be claimed at once rather than having to write down at 18%.
The small pool WDA is not available to private use assets (see below).
The £1,000 limit is time apportioned for periods not equal to 12 months and is not given in the
tax tables.
3. Private use assets
3.1. Cars
Cars are not eligible for the annual investment allowance.
Cars in the main pool which are not low emission cars receive a WDA of 18% per annum:
Date of acquisition Main pool CO₂ emission threshold
6 April 2013 to 5 April 2018 (1 April 2013 to 31 March 2018
≤ 130 g/km
for companies)
6 April 2018 to 5 April 2021 (1 April 2018 to 31 March 2021
≤ 110 g/km
for companies)
On or after 6 April 2021 (1 April 2021 for companies) ≤ 50 g/km
New cars which are treated as low emission cars receive a FYA of 100% instead of a WDA of 18%:
Date of acquisition Low emission car CO₂ emission threshold
1 April 2015 to 31 March 2018 ≤ 75 g/km
1 April 2018 to 31 March 2021 ≤ 50 g/km
On or after 1 April 2021 0 g/km
3. Private use assets
3.2. Assets with private use by sole trader or partner
Any asset that is partly used privately by a sole trader or partner is kept in a separate pool. The
AIA or FYA, where applicable, or otherwise the WDA, is still calculated in full and deducted from
the single asset pool, but the trader can only claim the business element of the allowance.
Worked example: Assets with private use
Jasper has been in business for many years making up accounts to 30 April each year. The only asset he
owns for capital allowances purposes is computer equipment, which he uses 20% privately and which has a
tax written down value at 1 May 2023 of £2,000.
On 1 August 2023, he buys a car with CO₂ emissions of 42 g/km for £16,000, which he uses 30% privately.
Requirement
What are the maximum capital allowances that Jasper can claim for the year to 30 April 2024?
Item Computer (£) Car (£) Total (£)
Period ended 30.4.24
TWDV b/f 2,000 16,000
(2,880) × 70% =
WDA @ 18% (360) × 80% = 288 2,304
2,016
TWDV c/f 1,640 13,120
Total allowances 2,304
4. Cessation of trade
4.1. 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:
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 on each pool to nil.
THE END
