The Main Pool and Special Rate Pool Expense under the Calculation of Capital Allowances after Business Registration UK

04 Jan

During the calculation of the capital allowances, it is important to consider the main pool and the special rate pool. The expense incurred on both of these and the related regulations will be discussed in the blog keeping in view the balancing charges and allowances.  The blog will provides help for the readers who wish to know about the capital allowances and are a part of an open limited company UK.

Main Pool

With the calculation of the capital allowances, the primary focus is to get the accurate layout. Once this has been achieved, you will notice that the figures will then fall into place.

Expense of Main Pool

Most of the expense on plant and machinery, involving the cars with carbon dioxide emissions of 130 g/km or below whose acquisition has been done on or after April 6th 2013 (April 1st 2013 for companies), is placed into the expense of main pool on which the claim of capital allowances can be made. An addition results in the increment of pool while a disposal leads to a decrement.

As an exception, there are items that are not included in the main pool. These include:

  • Assets being used privately by the trader
  • Dealing of assets done in the special rate pool
  • Short life assets in the case of an election

For a person who is about to start trading by open limited company UK or other businesses, the expense on plant and machinery by him is treated as suffered on the trading's first day. The assets that were under the ownership of trader previously and then at the start of open Ltd UK or after the trade were brought into it, are considered as purchased for their market values at the times when they are brought in.

Allowance of Yearly Investment

Each of the businesses, after business registration UK hold an entitlement of annual investment allowance (AIA) of the first of an amount equal to £250,000 spent every year on plant and machinery, including the assets in main pool, but excluding motor cars. The expense on motor cycles does make a qualification for the annual investment allowance.

There is a proportional increment or decrement in the maximum allowance when the accounting period is more or less than one-year time.

After making the claim of AIA, the transfer of balance of expense on the assets of main pool takes place instantly and there is an eligibility to get the allowances in the same period in a written form.

Annual Investment Allowance between Related Businesses and its Allocation

The related businesses either British company register or other businesses have an entitlement to a single allowance of annual investment between the businesses. The allocation of the allowance may be done by the businesses between them as they find it fitting.

The open Ltd UK companies or businesses are considered to be in relation if their control or operation is under the same individual or partnership and either the businesses are sharing the same premises or the businesses are engaged in the same activity.

A business will be under the control of a person in a year of tax if it is under the control of that person at the termination of chargeable period for that business coming to an end in that year of tax.

While making the decision of the allocation of allowance between the businesses, the nature of expense by one business may prove of some relevance. For example, it is more efficient with respect to tax that the annual investment allowance is set against expense of special rate pool due to the lower rate of subsequent writing down allowances on the special rate pool (8% pa) as in opposition to the main pool (18% pa).

There exist some similar but distinct rules related to the companies that are under one common control and the companies in a group.

Allowances for First Year and Enhanced Capital Allowances

An allowance for first year (FYA) at the 100% rate is available on new cars that are low emission in nature. The availability of enhanced capital allowances (ECAs) can be found on green technologies. The ECAs and FYAs are never pro-rated in the short accounting periods.

First Year Allowance on Low Emission Cars

The car that has carbon dioxide emissions of 95 g/km or below are categorized as the low emission cars. The availability of a 100% first year allowance can be found for the expense suffered on new motor cars of low emission nature.

If the claim of FYA is not made in full, the balance of expense is shifted to the main pool after the calculation of any writing down allowance has been done on the main pool.

Enhanced Capital Allowances (ECAs)

The qualification of capital expenditure on new (not second hand) energy and water saving plant and machinery ("green technologies") is done for 100% enhanced capital allowances (ECAs). The surrendering of ECAs by companies can be done for a tax credit equivalent to 19%

Short Accounting Periods

Unlike the AIA and writing down allowances, ECAs and FYAs are not reduced pro-rata in a short period of account.

Writhing Down Allowances (WDAs)

The qualification of most expense on plant and machinery is done for a writing down allowance every 12 months at 18%.

A WDA is given on the expense of main pool at an 18% rate each year (on the basis of a reducing balance). The calculation of the WDA is done on the tax written down value (TWDV) of pooled plant, after the addition of the present period's additions and taking out the disposals for the present year.

When the sale of a plant is made, the proceeds are taken out of the pool that are restricted to a maximum of the original price. The remaining pool balance is written down in future by WDA under the condition that the trade is still under operation, even if no assets are left.

Short and Long Accounting Periods

Writing down allowances are calculated as 18% * number of months/12: In case of the unincorporated businesses in which the accounting period is longer than or shorter than 12 months.

In case of companies where the period of accounting is less than 12 months (the accounting period of a company for the purposes of tax is never more than 12 months), or in case where the trade in question commenced in the accounting period and hence was carried on for less than 12 months.

Small Balance on Main Pool

The claim of a writing down allowance equal to unrelieved expense in the main pool can be made in case of having £1000 or less. If the claim of maximum WDA is made, then the main pool will have a nil balance carried forward.

The available tax planning opportunities should be noted. It may be important to purchase a plant right before an accounting date, in order to confirm the availability of allowances as soon as possible. As an alternate manner, it may be desirable to make a claim of less than the maximum allowances to even out the yearly profits liable to tax and refrain from a higher tax rate in the upcoming years.

The Charges of Balancing and Allowances

The occurrence of the balancing charges takes place when the subtracted value of disposal becomes more than the remaining balance in the pool. The charge is equal to the excess and is effectively a negative capital allowance, increasing profits. This happens in a most common way when the cessation of trade takes place and the sale of the remaining assets is made. However, its occurrence is also possible when the trade is still being carried on.

The occurrence of balancing allowances on the special and main pools of expense takes place only at the event of cessation of trade.

The balancing allowance equals the remaining concealed expense after subtracting the value of disposal of all the assets. Balancing allowances may also occur on the items of single pool whenever the disposal of those items takes place.

Interaction with the Value Added Tax (VAT)

The irrecoverable value added tax (VAT) is included in the qualifying expenditure. The reason to the VAT being unrecoverable may be the fact that the trader is not registered for VAT, or because it is the type of expense on which the recovery of VAT is not possible (for example, the car acquisition not used entirely for the purposes of business).

If the trader is registered for VAT and make a reclaim of VAT upon a purchase, only the expense net of VAT will be a qualifying expense. In a similar way, when an asset is disposed of on which the claim of a capital allowance has been made, if charge of VAT is made by the trader upon disposal, only the deduction of the disposal proceeds net of VAT will be done.

The VAT should be considered during the performance of calculations related to the capital allowances.

Special Rate Pool

The special rate pool consists of expense on thermal insulation, solar panels, long life assets, features integral to a building and cars with carbon dioxide emissions over 130 g/km. The usage of AIA can be found against such expense except the cars. The writing down allowance is 8%.

Function of the Special Rate Pool

The expense on thermal insulation, solar panels, long life assets, features integral to a building and cars with carbon dioxide emissions over 130 g/km whose acquisition is done on or after April 6th, 2013 (April 1st 2013 for companies), is not considered under the main pool but is considered as a part of the special rate pool.

The AIA can be applicable to expense on such assets except on cars. The taxpayer has the liberty to make a decision of the allocation of annual investment allowance. It will be more tax efficient if the allowance is set against the expense of special rate pool in priority to the main pool expense where there is expense on assets in both pools of the period.

The WDA for the special rate pool is equal to 8% for a period of 12 months. As with the WDA in the main pool, the adjustment of this is done for both the short and long periods of account. In case where the tax written down balance of the special rate pool is equal to £1000 or below, the claim of a WDA can be made of up to an amount of £1000. This is in addition to any similar claim related to the main pool.

Regulations for the Long Life Assets

The assets with an expected working life of 25 years or above are known as the long life assets.

The rules for the long life assets are only applicable to the businesses whose total expense on assets is more than an amount of £100,000. Note that these assets have an expected working life of 25 years or more in a chargeable period. If the expense becomes more than £100000, the entire expense enters the special rate pool. For this purpose, the treatment of all the expense suffered under a contract is done as incurred in the first chargeable period to which that contract is related.

The limit of £1000is made subject to an increment or decrement in a proportionate way in the case of a chargeable period being more or less than 12 months.

It should be noted that cars and plant and machinery dwelling in houses, showrooms, retail shops and offices are not considered as the long life assets.

Important Features

The features that are important for a building are as follows:

  • Systems for cold water
  • Powered systems of ventilation, air conditioning or cooling
  • Lifts and escalators
  • Electrical and lighting systems
  • Space or water heating systems

When the sale of a building is made, the purchaser and vendor are allowed to make a joint election in order to determine how the division of the sale proceeds is done between the building and its important features.

* The email will not be published on the website.