Capital allowances come up in every exam, yet many students lose these easy marks. Capital allowances are simply tax depreciation and there are 3 types of allowances -writing down allowance (WDA), annual investment allowance (AIA) and the first-year allowance (FYA) on low emission cars.

With the WDA and the AIA, you must time apportion it if the period is not 12 months in length.

When there is a cessation of trade, a balancing adjustment will arise. The mistake most people make is they think of a profit or loss on disposal which is computed as sale proceeds less net book value.

A balancing adjustment is correctly computed as Tax written down value less sale proceeds. A positive figure is a balancing allowance which is simply an extra allowance available on disposal.

Alternatively, a negative figure is a balancing charge which is a negative allowance and must be added to profits.

On a pool, a balancing charge can arise at any time while a balancing allowance can only arise on cessation of trade.

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