In every tax exam, you can expect a question on capital allowances. Capital allowances are tax depreciation that can be claimed on assets that are functional and used in the business. The assets that a business can claim allowances include machinery, cars, furniture, and office equipment.
The majority of assets go into the main pool and are eligible for a writing down allowance (WDA) of 18% reducing the balance. The great news is that new additions to the main pool except for cars are now eligible for a super deduction of 130%.
High emission cars and integral features of a building (such as lifts, electrical, heating, and security systems) go into a special rate pool and are eligible for a much smaller writing down allowance of 6%.
New additions to the special rate pool are now eligible for the first-year allowance of 50%.
In addition, the business is allowed to claim an annual investment allowance (AIA) of £1M each year on any asset except for cars.
What this means is for most businesses, any new assets would be eligible for the AIA except for cars. The WDA would be claimed on existing assets and cars.
It is now tax efficient to claim the super deduction on the main pool additions and then allocate the AIA to the special rate pool before the 50% FYA.
Please bear in mind that the super deduction and the 50% FYA can only be claimed on new assets, but the AIA can be claimed on second-hand assets.
New low emission cars such as electric cars get an amazing first-year allowance of 100% to encourage businesses to upgrade to more environmentally friendly cars.
When assets are sold the disposal value is lower of cost and sale proceeds.
If you are planning on doing Tax or Advanced Tax in June 22, I recommend you purchase the condensed notes to learn all the technical areas efficiently and learn the outline of the capital allowance proforma.
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