MS 3255 BUSINESS TAXATION Capital Allowances: Plant and Machinery

Table of content Definition of Capital Allowances and Plant & Machinery Annual Investment Allowance (AIA) First Year Allowance (FYA) Writing down Allowance (WDA) Capital Allowance for Motorcars Sales of Plant and Machinery Impact of private use of asset on capital allowance Recognize treatments of short-life assets 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.

Industrial Buildings & Qualifying Hotels Capital Allowances CAPITAL ALLOWANCES Plant & Machinery Industrial Buildings & Qualifying Hotels

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.

How to determine if the capital purchase is plant and machinery? Does the asset perform: An active function A passive function This means that the asset is: Apparatus with which the business is carried on The setting in which the business is carried on Plant and machinery? YES NO

However… Certain types of expenditure not thought to be plant BUT are TREATED as plant by specific legislation. For example, Capital expenditure incurred in complying with fire regulations The cost of alterations to buildings needed for the installation of plant 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.”

The Courts’ Interpretation Of Plant & Machinery Is it a plant and machinery? YES Swimming pools at a caravan park NO A canopy covering petrol pumps at a petrol station (it did not assist in serving petrol to customers) False ceilings in a restaurant (the only purpose of it was to cover unsightly pipes)

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 Prohibited All business size Cars 2. Acquisitions of general plant and machinery and acquisitions of “special rate pool” items 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: FYA (between 6 April 2009 to 5 April 2010) 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 AIA Unable to carried forward and carried back Is lost

Annual Investment Allowance (AIA) Business choose expenditure where AIA is matched. Most beneficial AIA to be allocated against expenditure: Expenditure eligible for WDA 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 FYA is known as a type of allowance available for expenditure on main pool items which are not covered by the AIA. It cannot be prorated for accounting periods greater or less than 12 months. When FYA is used, WDA cannot be used again in the year of purchase. There are two types of FYA which are Temporary FYA on plant and machinery and FYA on low emission cars.

First year allowance (FYA) A) Temporary FYA On Plant and Machinery 40% Only applies to expenditure between 6 Apr 09 and 5 Apr 10 Main pool items only Not available for cars B) Low Emission car Rate : 100% CO2 emission is less than 110g/km For Temporary FYA on Plant and Machinery, it is charged by 40% and is only applies to expenditure between 6 April 2009 to 5 April 2010. It applies to main pool items only and is not available for cars except low emission car. For low emission car, the allowance rate is 100% and it’s valid for cars emission less than 110g/km of Carbon Dioxide.

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:- A 12 month period Second period of account to deal with the remaining months. The most common occasion for a business having a non 12-month period of account is at the start of trading.

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.

Working:

Answer:

Capital Allowances For Motor Car Inexpensive car ≤ £12,000 Low emission car (CO₂ ≤ 110g/km) Expensive car > £12,000 Cost will be allocated into a separate pool. Capital allowances on each ‘expensive’ car is separately computed.

Capital Allowances For Motor Car CO₂ emissions 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’

Car (CO₂ between 111-160g/km)

Car (CO₂ >160g/km)

Car (CO₂ ≤110/km)

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… 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. This chargeable gain is known as balancing charge and it will be added to the taxable trading profit.

Example:

On the other hand… 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. Balancing allowance will mostly arise when a business decided to discontinue its business. 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.

Business can choose AIA to be used against either: Short Life Asset No expenditure will be left to be de-pooled (Expenditure ≤£50,000) No election to be made Excess expenditure(after deduct AIA) is eligible for FYA 40% and WDA in subsequent years Advantageous only if balancing allowances will arise w/in 4 accounting periods General Pool It’s more advantageous if expenditure exceed £50,000 and Short life election to be made

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.

Without Election:

Election:

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. *only mention bout Long life assets and high emission cars/purchased on or after 6th April 2009 as the other two are for chap 7, not chap 6.

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

Integral features of a building or structure Special Rate Pool Long Life Assets Integral features of a building or structure High emission cars/purchased on/after 6th April 2009 Thermal insulation of a building *only mention bout Long life assets and high emission cars/purchased on or after 6th April 2009 as the other two are for chap 7, not chap 6.

Example:

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

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