Below you will find information and examples of pooling expenditure, plant and machinery pools, long life and short life assets and unrelieved expenditure.
Pooling of Expenditure
Qualifying expenditure on P & M, subject to certain exceptions, is pooled for calculating WDAs and balancing charges. For this purpose, there are single asset pools, class pools and the main pool.
Qualifying expenditure on plant and machinery is placed in a pool for calculating WDA, balancing allowances and balancing charges. If an expenditure does not have to be allocated to a class pool or single asset pool, it will be allocated to the main pool.
From April 2012 the rate has been decreased from 20% to 18% a year.
Click here for details on hotel capital allowances.
Small Plant and Machinery Pools
Businesses can claim WDA for P&M of up to £1,000 where the unrelieved expenditure in the main pool or the new special rate pool (long life assets) is £1,000 or less.
Businesses do not have to claim the maximum allowance in respect of the balance in their small pool. Businesses with a main or special rate pool of £1,000 or less can claim less than the whole residue if they prefer.
This ensures that very small concerns will not be disadvantaged by being required to take the full allowance immediately. For example, by not using the full allowance, a taxpayer who has only a small total income may be able to make full use of his personal allowance.
Ciaran has a small joinery business. On 6 April 2012 he has a capital allowances pool of £850. His profits for 2012/13 are £8,305 and his accounting year ends on 31 March.
If Ciaran has other income he can make use of the whole pool against his profits for the year.
However, if he has no other income he should only claim sufficient allowances to enable him to make maximum use of his personal allowance for the tax year which is £8,105.
To avoid wasting a part of his personal allowance, he should only use £200 from the pool leaving £650 which he can claim in a later year.
Click here for more information on AIA capital allowances.
Special Rate Pool for Long Life Assets
The rate of WDA on long-life assets is 8% (10% before April 2012) and the original pool brought forward is called a special rate pool. A long life asset is one that is reasonably expected to have a useful life of at least 25 years when new.
In addition some integral features of a building, expenditure will be allocated to the new special rate pool and will attract WDAs at 8% a year (10% from April 2008 until April 2012).
Expenditure incurred on certain integral features attracts the 8% special rate of WDAs.
These assets include:
1. electrical systems (including lighting systems);
2. cold water systems;
3. space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems.
Click here for more information on capital allowances on property improvements.
Long Life Assets of at Least 25 Years
The WDA rate on long-life assets is 8% (10% before April 2012) and the original pool brought forward is called a special rate pool. A long life asset, when new, is expected to have a useful life of 25 years.
For some buildings with integral features the expenditure will be allocated to the new special rate pool and will attract WDA at 8% per annum (10% from April 2008 to April 2012).
A WDA of 8% special rate applies to expenditure incurred on certain integral features, which include:
(a) electrical systems (including lighting systems);
(b) cold water systems; and
(c) space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems
The rules for WDA apply to both initial and replacement expenditure. Replacement expenditure is incurred where either the whole or more than 50% of the integral features is replaced in a 12-month period.
Click here for info on capital allowances on cars.
Short Life Asset Pool
The pooling of short-life assets within the main pool would not give full relief for the cost over their life-span.
This is because when they are disposed of any unrelieved expenditure remains in the pool to be written off over future years, except where the business has ceased, when a pool adjustment is made.
Therefore, an election can be made to have the capital allowances on specified items of P&M calculated separately in single asset pools under the “short-life assets” provisions.
A balancing allowance or balancing charge can arise if an asset is disposed of either within 4 or 8 years from the end of the accounting period in which it was acquired.
Assets with Part Private Use
Where business assets are also privately used by a sole proprietor or a partner, such an asset will be dealt with in the single asset pool.
Allowances and charges for each privately used asset are calculated in the normal way, but the available allowance or charge is restricted to the proportion used for the business. An individual balancing adjustment is made on the disposal of such an asset.
Pool of Unrelieved Expenditure
The example below shows the computation for unrelieved expenditure.
Example: On Unrelieved Expenditure
Bobby’s accounting year ends on 5 April. In the year to 5 April 2015 he bought equipment for his bakery business totaling £6,000. He has a capital allowances pool of £12,000 brought forward on 6 April 2014.
The sum in the capital allowances Bobby can claim is worked out below:
Expenditure qualified for AIA is £6,000.
Year 2014-15 Pool b/f £12,000
WDA 18% of £12,000 (£ 2,160)
Balance c/f £9,840
Year 2015-16 Pool b/f £ 9,840
WDA 18% of £9,600 (1,771)
Balance of pool c/f £8,069
For 2014-15 the total allowances claimed is £8,160 (i.e., £6,000 (AIA) + £2,160 (WDA).
Notes: b/f = brought forward, and c/f = carried forward.
Click here for an annual investment allowance example.
Balancing Adjustment (Allowance or Charge)
A balancing adjustment may arise when the taxpayer sells an item on which capital allowances have been given, or gives it away or stops using it in their business.
This aims to line up the allowances given with the actual depreciation of the asset. Balancing charges (recovery of allowances) are treated as part of the income of the business. Balancing allowances (further allowances) are treated as an expense of the business, like other CAs.
Disposal of an Asset
When an asset is sold on which a claim was made for capital allowances, an adjustment will have to be made. In the event the amount written off against the expenditure on the asset is more than the actual difference between that expenditure and the sale proceeds, a balancing charge will be made by adding the charge to profits.
If the amount written off is less than the difference between the expenditure on the asset and the sale proceeds, a balancing allowance will be reflected in the account by a deduction.
The example below illustrates this.
Example: On Balancing Charge
Gary bought tools for his engineering business at a cost of £7,500. For a number of years he claimed altogether £6,000 in capital allowances and then sold the tools for £5,000.
Gary’s balancing charge is £3,500 (£5,000 – (7,500-6,000)). However, if Gary had sold the tools for only £500, instead of a balancing charge he will have a balancing allowance of £1000 (£500 – (7,500-6,000)).
Capital allowances on Plant and Machinery (P&M)
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The WDA rate on long-life assets is 8%