How to Pass the ACA Principles of Taxation Module: Mastering Capital Allowances

Understanding capital allowances is essential for success in the ACA Principles of Taxation module. This guide covers the key concepts, types of allowances, and how to handle capital assets in your calculations.

Introduction to Capital Allowances

Definition

• Capital Allowances: Tax relief provided for certain types of capital expenditure. While depreciation on assets isn’t tax-deductible, capital allowances offer tax relief by permitting part of the asset cost to be claimed each year.
• Must be claimed by the taxpayer and can be adjusted if trading profits are insufficient.
• Only allowances related to plant and machinery are within the syllabus.

Types of Qualifying Assets

• Machinery: Includes machines, vehicles, computers.
• Plant: Office furniture and equipment (active-function assets qualify; passive assets do not).
• Specific qualifying expenditures:
  • Alterations related to plant/machinery installation.
  • Licenses for using computer software.

Who Can Claim Capital Allowances?

• Available to any taxable person incurring capital expenditure for trade use.
• Taxable persons include sole traders, partners in a partnership, and companies.
• Allowances are calculated per period of account (never more than 12 months).

Key Elements of Capital Allowances

Acquisition Cost

• Typically the cost of the asset; market value applies for personally owned assets introduced into the business.

Disposal Value

• Generally, the disposal value is the sale proceeds (capped at original cost).
• Market value applies if given away or sold below market value.
• Scrap value or compensation received is used if the asset is destroyed.
• For business cessation, use proceeds or scrap value; no further allowances are given in the cessation period.

Overview of Capital Allowances on Plant and Machinery

Period of Account Components

• TWDV b/f (Tax Written Down Value brought forward)
• Acquisitions with FYA eligibility: e.g., low-emission cars (100% FYA).
• Annual Investment Allowance (AIA): 100% allowance for qualifying purchases.
• Writing Down Allowance (WDA): Applied at 18% annually to the main pool.

Columns in Calculations

• FYA, Main Pool, Private Use Asset Pools.
• Only the business portion of WDA on private use assets is taken to the capital allowances column.

Writing Down Allowances (WDA)

Definition

• Claimed on the main pool balance at 18% per annum.
• TWDV: Value carried forward after deducting WDA.
• Periods not 12 months require scaled WDA calculations.

First Year Allowances (FYA)

Definition

• 100% tax relief on qualifying expenditure in the year of purchase.
• Full relief in the purchase period, regardless of account length.
• Examples include zero-emission vehicles and electric vehicle charging points.

Annual Investment Allowance (AIA)

Definition

• 100% tax relief on qualifying expenditure (excluding cars) up to £1,000,000 annually.
• Scaled for non-12-month periods.

Special Considerations

Small Plant and Machinery Pools

• Small Pool Limit: If the main pool balance is below £1,000 after adjustments, claim the full value to write down to nil.

Cars and Private Use Assets

• Cars treated based on CO2 emissions and purchase date.
• Cars with private use by sole traders/partners go into separate pools, with business-use allowances claimable.

Balancing Adjustments

Balancing Charge

• Occurs when an asset’s sale exceeds its TWDV, reducing allowances or increasing trading profits.

Balancing Allowance

• Happens if an asset is sold below its TWDV; added to available allowances for the period.
• No allowances (AIA, FYA, WDA) are given during business cessation, only balancing adjustments.

Next Steps

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