1. MS 3255 BUSINESS TAXATION Capital Allowances: Plant and Machinery

2. 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

3. 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.

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

5. 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.

6. 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

7. 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

8. 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

9. 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.”

10. 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)

11. 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

12. 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.

13. 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

14. 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.

15. 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

16. 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.

17. Annual Investment Allowance (AIA)
Expenditure above £50,000
Qualify for further allowance:
Plant and machinery falling above 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

18. 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

19. 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.

20. 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 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.

21. 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.

22. 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

23. 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.

24. 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.

25. Example:
Grace commenced trading on 1 Aug Her trading profits, adjusted for tax purposes but before capital allowances, are as follows:
Year ended 31 July ,500
Year ended 31 July ,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.

26. Working:

27. Answer:

28. 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.

29. 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’

30. Car (CO₂ between 111-160g/km)

31. Car (CO₂ >160g/km)

32. Car (CO₂ ≤110/km)

33. 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

34. 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.

35. 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.

36. Example:

37. 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.

38. 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.

40. 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.

41. 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

42. 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.

43. Without Election:

44. Election:

45. 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

46. 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.

47. 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.

48. 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

49. 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.

50. Example:

51. Reference:
“Capital allowances: Plant and machinery” in ACCA: Paper F6 The Complete Text (2009) (pp ) Kaplan Publishing.
HMRC, Help Sheet 250: Capital allowances and balancing charges in a property rental business (2009). Extracted from:

52. Group members: Jestina Tan anak Fauzi 08B1912
Carmen Chang Chaw Mann 08B1927
Andrew Sung Chee Hau 08B1907
Low Choon Ein 08B1905
Goh Kwang Lian 08B1911
Tan Ai Woon 08B1918