When trying to understand how much your business can claim back against it’s tax bill it is important to consider first‑year allowances. First‑year allowances were effectively abolished from April 2008, but the ones that remained are those given at 100%.
These are available to businesses who boost green technology, and energy‑saving. I stress energy‑saving as opposed to energy production, so three effective items here. We’ve got ultra‑low emission vehicles.
We have got energy and water‑saving plant and machinery. There’s a reference there to the ECA site, that’s the Enhanced Capital Allowances site. It’s another way of referring to these 100% first‑year allowances.
Also, and up to the 31st of March 2018 on zero‑emission goods vehicles. These are very helpful. Just to be clear, they are given in addition to the 100% AIA.
With the fact from the 1st of January 2016, the AIA was reduced from £500,000 per annum to £200,000 per annum. What we need to understand is what happens when the AIA changes and how that works across successive accounting periods, especially if the accounting period straddles two levels of the AIA.
Let’s have a look at an example here. Let’s say we have a company accounting period from the 1st of April ’15 to the 31st of March ’16. In very simple terms, we’ve got nine‑twelfths at the old rate, and three‑twelfths at the new rate. The maximum AIA is £425,000 over that 12‑month accounting period, but there is a hitch.
It depends on when the expenditure was made. If you make your expenditure, all of your expenditure up to £425,000, within the first nine months, that is, before the 1st January 2016, you can have the whole of the £425.000, but if you incur expenditure in the last three months of the straddle period, then the maximum that you can put away against the AIA is reduced to £50,000.
Everything else will just have to be conventional writing down allowances.
Whether an item is capital or revenue is a question of law to be determined in the light of the facts of an individual case. There is no single test. The authorities by which we mean the case law identify the approach and the relevant factors.
The question is not to be determined by accountancy evidence, which has been at least historically informative but not determinative. We need to note that there is a growing body of statute law which requires the accounting treatment to be adopted for tax purposes, examples including corporate intangibles.
For expenditure qualifying for normal writing down allowances, you put your expenditure into one of two pools. The main pool, whether writing down allowance on a reducing balance basis is 18% per annum, and the so‑called special rate pool, where the writing down allowance is given at 8% on a reducing balance basis.
Main pool expenditure, principally plant and machinery. Special rate pool expenditure, long‑life assets, features integral to a building, thermal insulation.
In computing capital gains capital allowances cannot be deducted, but are taken into account in computing a capital loss. There will only be a gain if an asset is sold for more than the acquisition cost.
In such a case any capital allowances given will be withdrawn by the cost being taken out of the capital allowance computation and, therefore, will not affect the computation of the gain.
Normally, there will not be a capital loss since any amount by which the sale proceeds of an asset fall short of the WDV will be taken into account in the capital allowances computation.
Adjustment of Profits to Reflect Capital Allowances
All trading profits are to be collated and adjusted to arrive at the taxable profits, which are the balance after deducting allowable expenses, capital allowances and losses from trading receipts.
To calculate the taxable profits it is necessary to determine which accounting period forms the basis of the assessment for the tax year and to identify the taxable income and allowable expenditure relevant to the basis period.
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