Capital Allowances

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By Sir Shahnawaz Ahmed

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 Capital Allowances

Capital allowances are available to give tax relief for certain

capital expenditures
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Capital allowances are not available on all capital expenditure

but on certain qualifying plant & machinery

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 Types Of Allowance

Annual Investment
Allowance (AIA)
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Writing Down
Allowance (WDA)

First Year
Allowance (FYA)
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 Annual Investment Allowance (AIA)

• The AIA gives an allowance of 100% for the first £1000,000 of

qualifying expenditure incurred in a 12 month accounting period.
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• If the accounting period of the business is other than 12 months

then the AIA will be time apportioned accordingly, for example a
business that has prepared its accounts for a 9 month period would
be entitled to AIA of £750,000 (9/12 x 1000,000).
• AIA is available on the purchase of all plant and machinery except
motor cars.
• Any expenditure in excess of the AIA limit or on the majority of motor
cars will qualify instead for a writing down allowance (WDA)

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 Writing Down Allowance (WDA)
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General Pool

The rate is 18% for 12 month period

Special pool

The rate is 6% for 12 month period

The WDA will be time apportioned where the accounting period is other than 12 months

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 First Year Allowance (FYA)

New cars with Zero CO2 emissions attract a 100%

FYA.
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The FYA is never time apportioned

If available for private use of car the only business

portion will be available
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 Capital Allowance Rates
Rates of Allowance %
Plant and machinery

Main Pool (General Pool) 18%

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Special Rate Pool 6%

Motor car
New cars with Zero CO2 emissions 100% (FYA)

CO2 emissions between 1 and50 grams per Km 18%

CO2 emissions over 50 grams per Km 6%

Annual Investment Allowance (AIA)

Rate of allowance 100%

Expenditure Limit £1000,000

 Special Rate Pool

Integral features of a building

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Long life assets

Thermal insulation of a building

High emission car (Motor cars with CO2 emissions over 50 grams
per km)
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 Special Rate Pool

Integral • Lifts and escalators

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• Electrical and general lighting

features systems
• Cold water systems
of a • Space or water heating systems

building • Systems of ventilation, air cooling

or purification

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 Special Rate Pool
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Assets, when new, with an

expected economic working
life of 25 years or more when
Long life assets total expenditure, based on a
12 month accounting period,
exceeds £100,000

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 Sale of plant and machinery

When plant and machinery is sold in

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the accounting period the sale

proceeds, up to a maximum of the
original cost of the asset, is deducted
from the balance of the unrelieved
expenditure of the relevant pool.
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 The Small Pools WDA

Where the tax wdv of either the main pool

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or special rate pool prior to calculating the

WDA is less than £1,000, the entire
balance may be taken as a WDA in that
period. The £1,000 is prorated if the
accounting period is other than 12 months.

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 Non Pool Assets

In the following
circumstances
• Assets with private use
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assets will not go to

either the main or by the business owner, or
special rate pools
but will instead have • Short life assets on which
their own separate the taxpayer has made a
column on the
capital allowance de-pooling election.
computation:

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 Private use

Where an asset is used by the owner of the

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business (this can be either a sole trader or a

partner in a partnership) partly for business
and partly for private purposes (typically a
motor car), only the business proportion of the
available capital allowances is given

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 Private use
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The cost is not brought The WDA (or AIA or FYA)

into the main or special
rate pool, but must be
the subject of a separate
column on the
computation
of the asset is calculated
on its full cost but only
the business proportion
of any allowance is
actually given.

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 Private use

On disposal of the asset, a balancing adjustment is computed by deducting

sale proceeds from the tax wdv (there is a balancing charge if sale
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proceeds exceed tax wdv, and a balancing allowance if sale proceeds are
less than tax wdv). Having computed the balancing adjustment, the
amount assessed or allowed is then reduced to the business proportion.

Private use by an employee of an asset owned by the business has no

effect on the business’s entitlement to capital allowances.

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 Short-life assets

An election can be made to omit short life assets from the main
pool and include them in their own individual column. This is
known as a “de-pooling” election.
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This allows the acceleration of capital allowances on short-life

plant and machinery where they are sold at a low residual value
or scrapped within 8 years following the end of the accounting
period in which it was acquired.
Any plant and machinery that would normally go to the main pool,
except cars, can be treated as a short-life asset.
Capital allowances on each short-life asset are calculated
separately
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 Short-life assets

On disposal within 8 years of the end of the accounting period in

which the acquisition took place a balancing allowance or charge
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arises, which would not occur if the item was pooled. Clearly the
election would only be worthwhile if a balancing allowance was
anticipated
If no disposal takes place within 8 years of the end of the
accounting period in which the acquisition took place the
unrelieved balance is transferred to the pool.

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 Short-life assets

The AIA is available against

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expenditure on short life assets.

If expenditure is outside this limit
then expenditure on main items
will qualify for a WDA of 18%.
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 Short-life assets

The AIA could be matched with short life assets.

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However if total expenditure on plant and machinery

is above £1000,000 the AIA would be allocated to
the main pool additions first, as no balancing
allowance occurs on sale. If the AIA is allocated to
main pool items first then a short life asset election
could be made on any short-life assets, with
balancing allowances crystalising on disposal.

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 Balancing charge / Allowance

Main pool / Special pool

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• A balancing charge can arise at any time on the main pool or special
rate pool if disposal proceeds exceed the balance on the pool. If a net
balancing charge arises on the capital allowances computation this
would be added to the adjusted trading profit of the accounting period.
• A Balancing allowance can only occur on the main pool and special rate
pool on cessation of the trade

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 Balancing charge / Allowance
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On disposal of asset
Claim only business
a balancing
portion of Balancing
Private use asset allowance or
allowance /
balancing charge
Balancing charge
arises

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 Cessation of Business

No AIA, WDA or FYA are available in the

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final accounting period of the business

Balancing allowance or balancing charge

can be claimed

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 Structure and Building allowance (SBA)

• Annual straight line allowance of 3% over a 33 1/3 period (33

years and 4 month)
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• It is only available where a building has been constructed on or

after 29 October 2018. (Question will be set after 6 April 2020)

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 Structure and Building allowance (SBA)

Offices, retail and wholesale premises, factories and warehouses

can all qualify for SBA (as can walls, bridges and tunnels)
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The value of land is excluded, as is any part of a building used as

a dwelling house
Expenditure which qualify for plant & machinery cannot be
qualified as SBA similarly expenditure qualify for SBA cannot be
qualified for plant and machinery
Where an unused building is purchased from a builder or
developer, then the qualifying expenditure will be the price paid
less the value of land
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 Structure and Building allowance (SBA)

The building (or structure) must be used for a qualifying activity such
as a trade or property letting
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The SBA can only be claimed from when the building (or structure) is
brought into qualifying use
A separate SBA is given for each building(or structure) qualifying for
relief
Relief is also given for the cost of subsequent improvement, or where
a building is renovated or converted
You should assume that for any question involving the purchase (as
opposed to new construction) of a building, the SBA is not available
unless otherwise stated

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 Disposal of Building (Structure)

There is no balancing allowance or balancing charge when a

building qualify for SBA is sold instead the purchaser simply
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continues to claim the 3% allowance for the remaining period

However, on disposal, the allowances that have been claimed
are effectively clawed back by adding them to the sale proceeds
in order to determine the chargeable gain or loss

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