CAPITAL ALLOWANCES

Allows taxpayers to get tax relief for their expenditure on
assets used in their trade such as Plant & Machinery. They take the place
of depreciation charged in the statutory accounts, which is not deductible for
tax. Allowances are designed to give tax relief over the useful life of the
asset. (KF Accounting Services. 2014)

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Capital allowances can be claimed by:

• Companies.

• Sole
traders and trading partnerships.

• Landlords.

• Employees, in some circumstances.

Annual Investment Allowance (AIA) covers the first £200,000 of qualifying
expenditure on new plant and machinery AIA does not cover expenditure on cars,
plant and machinery previously used for another purpose or items gifted to the
business. Only one AIA is available between groups, related companies and
related businesses. AIA cannot be claimed for the accounting period in which
the business ceases. Business can take the full advantage of AIA even when
making a loss as they can roll the loss forward into accounting years where
they are making a profit in order to reduce their profit and reduce their tax.
(Lymer, A. and Oats, L. (2016).

Writing down allowance (WDA) are claimed to reduce or ‘write
down’ any balance on the pool of capital expenditure that you have not already
claimed capital allowances for. Main pool rate of 18% per year on the pool
balance. Special Rate Pool Certain types of equipment qualify for a special
rate of WDA. Special pool rate of 8% per year. Qualifying items include
integral features (such as electrical systems), long-life assets (expected life
of over 25 years). Small Pools Allowance this can be claimed instead of the WDA
at either the main or special pool rate. Claim the whole pool balance where
this is under £1,000 at the end of a 12 month chargeable period. Does not apply
to single pool assets. (Work out your capital allowances: Rates and pools –
GOV.UK. 2017)

Type of car
purchase

Allocate

Allowance

New low emission car not exceeding 75g/km CO2

Main rate pool

100% WDA

Not exceeding
130 g/km
CO2 emissions

Main rate pool

18% WDA

Exceeding 130 g/km CO2 emissions

Special rate
pool

8% WDA

 

Enhanced capital allowances (ECA) qualifies
the business achieve their full 100% allowance which is minus from profits and
reduces tax this also benefits the business as ECA items are environmentally
friendly and making the business more green as it allows businesses to invest
in energy saving plant and machinery, low emission cars, water conservation
equipment, refuelling equipment, zero-emission goods vehicles, energy efficient
hand dryers, heat pump driven air curtains. (Energy Technology List (ETL) –
GOV.UK. 2017)