Capital Allowances

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1 Capital allowances

In an adjustment to profits calculation, depreciation is disallowed and capital allowances may be claimed instead. Capital Allowances are the tax version of depreciation and are given in respect of expenditure incurred on the cost of qualifying plant and machinery.

Machinery will include motor vehicles and computers, including building alterations necessary for the installation of plant and machinery.

Plant is generally defined as assets that perform an active function in the business – something with which the trade is carried on and will include office furniture and equipment including moveable office partitioning.

Under the CASH BASIS, most plant and machinery will not get capital allowances as the cost of the asset will be an allowable expense when incurred, and when sold, the proceeds of sale are taxed as a trading receipt. The only exception to this is where the asset is a car, where either capital allowances (and running costs) can be claimed as trading expenses, or the fixed rate mileage allowance.(see chapter 4),

2 Capital allowance computations for plant & machinery (P&M)

Capital allowances are calculated for the accounting period of the business not the tax year and are deducted from the adjusted trading profit of that accounting period.

2.1 There are 3 types of capital allowance available on the qualifying cost of qualifying plant and machinery. They will be given to you in the tax tables.

1. Annual Investment Allowance (AIA)

The AIA provides an allowance of 100% for the first £1,000,000 of expenditure on plant and machinery in a 12 month period.

Any expenditure in excess of the £1,000,000 limit qualifies for writing down allowances (WDA). The AIA applies to all expenditure on plant and machinery except cars.

The £1,000,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, for the three month period ended 31 December 2026, the AIA limit would be £250,000 (£1,000,000 x 3/12).

1. Writing Down Allowance (WDA)

The cost of most plant and machinery that has not qualified for AIA will be allocated to a pool of expenditure that will then be eligible for an annual WDA of either 18% if expenditure qualifies for the main pool, or 6% per annum if allocated to the special rate pool.

WDA is available on a reducing balance basis.

Note that the WDA is never time apportioned according to the length of time the asset has been owned; i.e. a full WDA is given in the year of acquisition.

The WDA will be time apportioned where the accounting period is shorter or longer than 12 months.

  Motor Cars

Motor cars will be allocated to either the main pool or the special rate pool depending on the CO₂ emissions:

Remember: Cars NEVER qualify for the AIA.

1. First Year Allowance (FYA)

New electric cars with zero CO₂ emissions attract a 100% FYA.

The FYA is never time apportioned.

Richard can therefore deduct capital allowances of £252,250 against his adjusted trading profit in the period ended 31 March 2025 and £38,595 in the year ended 31 March 2026.

Note that if Richard had not made the election for the ACCRUALS BASIS to apply, the CASH BASIS would apply by default.

In the period ended 31 March 2025, he would have been able to deduct the full cost of the plant and the computer equipment (£300,000) and in the year ended 31 March 2026 he would have been able to deduct the full cost of the machinery (£30,000)

3 Special Rate Pool

The following assets must be allocated to the special rate pool:

(1)   Integral features of a building:

• Lifts and escalators

• Electrical and general lighting systems

• Cold water systems

• Space or water heating systems

• Systems of ventilation, air cooling or purification

(2)   Long life assets:

Assets, when new, with an expected economic working life of 25 years or more when total expenditure, based on a 12 month accounting period, exceeds £100,000.

(3)   Motor cars with CO₂ emissions over 50 grams per km.

4 Sale of plant and machinery

When plant and machinery is sold in the accounting period the 'disposal value', which is the lower of the sale proceeds and original cost of the asset, is deducted from the relevant pool before computing the WDA of the accounting period in the normal way.

If the disposal of an asset from the main pool and/or special rate pool makes the pool balance negative then too many allowances have been claimed. 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 accounting period.

A balancing allowance can only occur on the main pool and special rate pool on the cessation of the trade.

If a balancing charge exceeds the allowances available (i.e. the total allowances column is negative) then the net balancing charge is added to the adjusted trading profit of the period.

The Small Pools WDA

Where the TWDV of either the main pool 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 time apportioned if the accounting period is shorter or longer than 12 months.

5 Non-pool assets

In the following circumstances, assets will not go to either the main or special rate pools but will instead have their own separate column in the capital allowances computation:

(1) Assets with private use by the business owner, or

(2) Short life assets on which the taxpayer has made a de-pooling election.

5.1 Private use of an asset by the owner of the business

Where an asset is used by the owner of the 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 claimed.

The following rules must be followed when computing capital allowances:

1. The cost is not brought into the main or special rate pool, but must be put into a separate, private use column on the computation. A separate column is needed for each private use asset.

2. The WDA (or AIA or FYA) of the asset is calculated on its full cost as normal, but only the business proportion of any allowance is actually given; i.e. taken to the total allowances column.

3. On disposal of the asset, a balancing adjustment is computed by deducting the disposal value from the TWDV (there is a balancing charge if the disposal value exceeds TWDV, and a balancing allowance if the disposal value is less than TWDV). Having computed the balancing adjustment, again only the business proportion of any allowance is taken to the total allowances column. A balancing allowance is then added in to the capital allowances of the period whereas a balancing charge will reduce the total capital allowances claimed.

4. Private use by an employee of an asset owned by the business (again typically a car) has no effect on the business’s entitlement to capital allowances. as there will be an employment income assessment as a benefit charge on the employee.

5.2 Short life assets

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1. An election can be made to exclude short life assets from the main pool and include them in their own individual column. This is known as a “de-pooling” election.

2. 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.

3. Any plant and machinery that would normally go to the main pool, except cars, can be treated as a short life asset.

4. Capital allowances on each short life asset are calculated as normal (AIA and/or WDA at 18%).

5. On disposal within 8 years of the end of the accounting period in which the acquisition took place a balancing allowance or charge arises, which would not occur if the item was pooled. Clearly the election would only be worthwhile if a balancing allowance was anticipated.

6. 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.

The transfer is immediately after the 8th anniversary of the end of the accounting period in which it was acquired.

1. AIA is available against expenditure on short life assets.

2. Given the amount of AIA available at £1,000,000 pa, it is very unlikely that the de-pooling election would now be worthwhile for most unincorporated traders. An exam question may still be set for an unincorporated trader selling a short life asset where the election had been made when AIA was previously at a much lower level. Example 4 below, however shows both the election being made and the resultant effect on the disposal of the asset.

5.3 Cessation

When a business ceases to trade, instead of the normal capital allowances computation, the following steps should be undertaken:

• Add any additions of plant and machinery in the final period

• Deduct any disposals in the final period

• Calculate any balancing allowances and balancing charges on each pool/asset to bring the WDV c/fwd to Nil

There are no WDA/FYA or AIA in the final period.

6 Preparing the capital allowances on P&M computation

It is essential to follow a set format in dealing with the additions and disposals of assets in the accounting period in the preparation of the capital allowances computation for plant and machinery:

1. Insert any tax written down values brought forward on the pools and any non-pool assets at the start of the accounting period as given within the question.

2. Deal with expenditure qualifying for AIA.

3. Claim the maximum AIA for the period, allocating firstly to special rate pool expenditure and then main pool.

4. Add to relevant pool (main or special rate) the cost of any cars qualifying for WDA; i.e. cars with CO₂ emissions.

5. Deduct the disposal value (lower of sale proceeds and original cost), of assets sold during the accounting period from the relevant pool balance.

6. Deduct the disposal value from the TWDV of any non-pool assets (e.g. private use assets) and compute the relevant balancing adjustment.

7. Compute available WDAs on the TWDVs and take any claimed to the total allowances column.

8. List any new electric zero emission cars purchased during the accounting period and claim the available 100% FYA.

7 Full pro forma capital allowances computation

Note

In order to maximise capital allowances, the AIA is allocated to assets included in the special rate pool in priority to those included in the main pool, though it is very unlikely that in an income tax question (dealing with an unincorporated trader) that the total expenditure qualifying for AIA will exceed the £1M annual limit.

8 Structures & Buildings Allowance

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A Structures and Buildings capital allowance (SBA) has been introduced which will give tax relief for certain qualifying buildings and structures.

The computation of SBAs is completely separate from that of plant and machinery.

An annual WDA will be available on the qualifying cost of a qualifying building at a rate of 3% pa on a straight line basis with total relief being given over a 33.3 (33 years and 4 months) year period.

Qualifying buildings will include factories, warehouses and offices along with both wholesale and retail properties and will further include the cost of walls, tunnels and bridges.

SBA is not available on the following:

• Any part of a building used as a dwelling house

• The cost of any land (but the preparation of the land prior to construction is allowable)

• Professional/legal fees (with the exception of architect fees)

• Planning permission

• Expenditure which qualifies as plant and machinery

Where an unused building is bought from a developer the price paid – excluding the value of the land - will be eligible for the SBA from the time that the property is brought into a qualifying use, such as principally its use within a trade or letting, hence if a building is only brought into such use part way through an accounting period then the WDA must be time apportioned.

If a question states you are dealing with the purchase of a building, rather than the construction of a building then no SBA will be available unless the question explicitly states that it is able to be claimed.

On disposal, there is no balancing allowance or balancing charge.

Instead, the allowances that have been claimed are effectively clawed back by adding them to the sales proceeds in order to determine the chargeable gain/allowable loss arising.

For the purchaser, the price paid is irrelevant for SBAs. Instead the purchaser simply continues to claim the 3% allowance for the remainder of the 33.3 year period based on the original qualifying cost.

Or as part of a main SectionB/C question where you will have to prepare a full computation. The same proforma is used for a sole trader/partnership (with perhaps private use assets) and for a Ltd Company.

There are NEVER any private use assets in a company's capital allowances computation as everyone who works for the company (including directors) are employees.

Once you have done the calculation you will probably have to use your answer in another part of the question - such as a deduction from adjusted profits.

So learn the proforma, use the tax tables rates and never guess, use a thoughtful and logical approach and make sure everything is well labelled and easily understood by the examiner/marker.

Always be aware of dates - the date an asset was bought or sold, and the dates of the accounting period.