The computation of capital allowances is one serious matter that a trader or a person having new company registration UK should be familiar with. The topics to be discussed in the blog fall under the category of plant and machinery on which the capital allowances are to be applied or restricted respectively. We will see that how are the capital allowances treated when considering assets for private usage and motor cars. We will end our discussion with the hire purchase and leasing and successions in a trade.
It should be remembered that the main pool consists of expense on plant and machinery, cars with CO2 emissions of 130 g/km or below while the special rate pool consists of expense on thermal insulation, long life assets, solar panels etc.
Assets for Private Usage
The dealing of an asset being used privately by a trader is done in a single asset pool and the capital allowances are refrained. An asset, such as a car, is put into its own pool or a single asset pool when it is used partly for private purposes by a partner or a sole trader.
The calculation of the capital allowances is done on the full cost. However, only the proportion of allowances for use in business is permitted as a subtraction from trading profits. The restriction is applicable to the annual investment allowance (AIA), first year allowance (FYA), writing down allowances (WDAs), balancing charges and balancing allowances.
There is no restriction on the asset being used privately by an employee working in a set up company London or UK. The taxation of the employee may be done on the basis of an employment benefit, so the capital allowances are acquired by the business on the asset’s full cost.
Dealing of Motor Cars
In general, the dealing of motor cars is done under the special rate pool (cars with an emission rate of 130 g/km) or the main pool, unless the trader has a private use.
As you may know, the categorization of motor cars is done according to the carbon dioxide emissions:
The cars having an element of private usage are kept distinct from the main and special pools and their dealing is done in single asset pools. They have an entitlement of a WDA of 18% (cars having emission rate between 96 and 130 g/km) or 8% (cars having emission rate over 130 g/km).
The allowances that are due on an asset can be brought forward by short life asset elections. A trader can make election of those particular items of plant, which are supposed to have a small working life, if they are kept from the main pool in a separate manner.
A short life asset is defined as any asset that is subject to election and such an election is referred to as a ‘de-pooling election’.
The election is irrevocable, i.e. it cannot be undone. After starting a company UK or business which is of unincorporated nature, the time limit for an election is January 31st which is 22 months after the termination if the year of tax in which the accounting period of expense comes to an end. In the case of a UK incorporation business or new company registration UK, it is two years after the end of the expense’s accounting period. The claim of short life asset treatment cannot be made for any motor cars or plant being used partly for non-trade purposes.
The short life asset is kept in a single asset pool. Under the condition that the disposal of a short life asset is made within eight years after the end of accounting period in which its purchase is made, a balancing allowance or a charge takes place upon disposal.
If the disposal of the asset is not made within this time period, its value of writing down tax is added to the main pool at the start of the next accounting period (period of account for companies). This will be done after the claim of allowances has been made nine times on the asset; once in the acquisition period and then every year for the next eight years. Hence, the election should be made for assets that are to be sold for less that their values of tax written down within the period of eight years. As a usual practice, it should not be made for assets which are expected to be sold within the period of 8 years for more than their values of written down tax. There is no need to show from the outset that the asset will actually have a short life, so it should be judged if there is a requirement of election.
The annual investment allowance (AIA) can be set against the assets having a short life. The decision of allocation of AIA can be made by the taxpayer. It is considered to be more tax efficient if the allowance is set against main pool expense in priority to short life asset expense.
The treatment of short life asset cannot be claimed for plant or motor cars being used partly for the purposes, non-trade in nature.
Hire Purchase and Leasing
The assets whose acquisition is done by hire purchase or lease, the capital allowances are available in this case.
Assets on Leases of Hire Purchase or Long Term Leases
The treatment of any asset (car inclusive) that is purchased on hire purchase (HP) is done as if it was bought outright for the cash cost. Hence, as a normal practice, the buyer acquires capital allowances on the cash price at the beginning of the agreement and the finance charge may be written off by him in the form of a trade expense over the term of contract of hire purchase (HP).
The treatment of the long term leases is done in a similar manner as that of hire purchase transactions. It is worth remembering here that the long term leases are the ones with a term of 5 years or more than that.
Regulations for Assets on Long Term Leases
According to a long term lease, the asset is hired merely by the lessee over a time period. As a normal practice, the charge of a hire can be subtracted during the computation of profits from trade. In case of a car having an emission rate over 130 g/km being leased, the maximum amount of allowable subtraction from trading profits for lease rentals is restricted to 15% as mentioned earlier.
As a normal practice, the benefit of capital allowances is acquired by a long term lessor although there are provisions of anti-avoidance that deny or restrict the capital allowances on specific finance leases. Hence, leasing is an activity that has an attraction for the allowances of tax and can be utilized to defer the liabilities of tax where the provided capital allowances become more than the rental income. For individuals, any losses occurring from leasing are available for offset against other income only if the individual tends to devote all of their time substantially for the conduction of a business involved in leasing.
Regulations for Successions in Business
The calculation of the balancing adjustments is done when the cessation of a trade takes place. If the transfer of a business is made to a person in connection, the transfer of the written down value can be done instead.
The occurrence of balancing adjustments can be noted when the cessation of a trade takes place. No provision of writing down allowances is done, but the final proceeds (limited to cost) on the sales of plant are placed in comparison with the tax WDV for the calculation of balancing charges or allowances.
The avoidance of the balancing charges may be done in the case where the trade is passed on from one connected person to another. In the case of occurrence of a succession, both of the parties should make an election if there is a requirement of avoidance of the balancing adjustments. As a result of the election, the plant will be transferred at its value of written down tax for the purposes of capital allowances. Even when an election for a succession takes place, there is an occurrence of cessation of trade so no allowances are available to the transferor in the final period in which the transfer of trade takes place.
If, upon the transfer of a business to a person in connection, no election is made, the sale of assets is deemed to be made at their market values.
As mentioned earlier, an individual has a connection with their spouse, their brother or the brothers of spouse, sisters, ancestors, and lineal descendants, with their spouses, with partners of business and their relatives and spouses, and with a company having UK incorporation under their control (either alone or in conjunction with the persons in connection with them). The civil partners are included under the definition of spouses.
Where a person becomes successful to a business under a will or on intestacy, then even if they did not have any connection with the deceased person, they may make an election to take over the assets at the lower of their market value and the written down value of their tax.
For both the cases of transfers with persons in connection and transfers at the unfortunate event of death, where the making of elections takes place, the limit of proceeds to be brought under consideration on the future sale of an asset is the original price of the asset, and not the deemed cost to be transferred.
Points to Remember