In every tax exam, you can expect a question on capital allowances. Capital allowances are tax depreciation which 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 a main pool and are eligible for a writing down allowance (WDA) of 18% reducing balance

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%.

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.

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 March, 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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