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Tricks of the trade

Get to know your capital allowances

As we know, capital allowances are always examined, but apart from knowing the basic pro forma, what else can we look for to ensure we do not fall into the examiner's traps?

1. Date of acquisition/disposal
The date of purchase or sale is only relevant in deciding which period the allowances are claimed, not for how much the allowances are. In effect, a purchase of plant and machinery on the last day of the year gets the same allowances as a purchase at the start of that year. The only difference that may be caused by the date is what rate of allowances it qualifies for as the rate in each finance act sometimes change.

2. Short period of account
If the financial statements are not drawn up for a 12-month period, then the WDAs need to be time apportioned accordingly. However, FYAs are never time apportioned.

3. FYAs
Remember that different sized businesses qualify for different rates of allowances on different plant and machinery. In particular, note that all businesses get FYAs at 100% on energy saving equipment but that large companies qualify for no FYAs on other purchases. This is because the 100% allowance was introduced to reduce the carbon emissions of the UK as opposed to the 40%-50% allowances for small/ medium businesses that was introduced to enable these businesses to compete with their larger competitors.

4. Company or sole trader long periods Although the capital allowances are broadly similar for both business structures, there is a big difference if the period of account is over 12 months. A company with a long set of accounts splits it into two for capital allowances (first 12 months, then balance) and considers purchases and sales in these two periods. This leads to the additional trap that the second period will be less than 12 months.

5. Cars
As in many areas of tax, cars have special rules. Firstly, cars do not qualify for FYAs unless they are low emission cars in which case they get 100% FYAs. Next we have the issue of cars that cost over £12,000, these cars receive 25% allowances but no more than £3,000 for a 12-month period. It is important to remember that a car is expensive if it cost the business over £12,000. even if its TWDV is now under £12,000. Expensive cars also have a balancing allowance or charge when they are sold.

6. Private use adjustment
An adjustment of all allowances is required for any private use by the owner of an asset. Although the full allowances are deducted to get the TWDV carried forward, it is important to realise that this will never apply to companies. Fairly obvious really – have you ever heard of BT using a company car to take Vodaphone out on a date? Where students get tricked is they tell you the director also owns all the shares of a company and uses the car 30% privately. Who cares? The company owns that car and, as noted above, companies cannot drive!

7. Vans and lorries
Vans and lorries are not cars, so point 5 of this article does not apply to these items.

8. P&M included in expenses
If an adjustment to profit calculation is required then it is possible that an item was disallowed because it was capital, in which case you should also consider if it would qualify for CAs, in which case it should be added to the additions.

9. Long life assets
Capital allowances are only available at 6% if over £100,000 is spent in a year on plant and machinery that has an expected useful life of over 25 years.

10. Last but not least
The inclusion in a question of some expenditure on a building, such as an office, which of course is not plant and machinery and as such does not qualify for capital allowances. However, there are always those who treat the building as plant!
Hopefully, the list above gives you some ideas of what to look out for and the mistakes not to make.
* Thanks to lecturers at CAMS College for this article

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