MS 3255
BUSINESS TAXATION
CAPITAL ALLOWANCES:
PLANT AND MACHINERY
Table of content
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
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.
Capital Allowances
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:
This means that
the asset is:
Plant and
machinery?
An active
function
Apparatus with
which the
business is
carried on
YES
A passive
function
The setting in
which the
business is
carried on
NO
However…
Certain types of expenditure not thought to be
plant BUT are TREATED as plant by specific
legislation. For example,
1.
2.
3.
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
1. All business size
2. Acquisitions of general
plant and machinery and
acquisitions of “special
rate pool” items
3. Air condition and
electrical systems
Prohibited
1. Cars
2. Trade cessation
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:
a. FYA (between 6 April 2009 to 5 April 2010)
b. 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
1.
Unused AIA
Unable to carried forward and carried
back
2. Is lost
Annual Investment Allowance (AIA)


Business choose expenditure where AIA is
matched.
Most beneficial AIA to be allocated against
expenditure:
1. Expenditure eligible for WDA
2. 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
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
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:1. A 12 month period
2. Second period of account to deal with the remaining
months.
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
≤ 110 g/km
Low emission
111 – 160
g/km
˃ 160 g/km
Treatment in capital
allowances computation
100% FYA is allowed
Standard
emission
Included in general pool as
addition not qualifying for AIA or
FYA
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…
o
o
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…
o
o
o
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
General Pool
• 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
• 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.

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
Long Life
Assets
Thermal
insulation of
a building
Special
Rate
Pool
High emission
cars/purchased
on/after 6th
April 2009
Integral
features of
a building
or structure
Example:
Reference:


“Capital allowances: Plant and machinery” in
ACCA: Paper F6 The Complete Text (2009) (pp.161211) 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
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