Download Capital Allowances: Annual Investment Allowance and Writing-Down Allowances and more Study Guides, Projects, Research Business in PDF only on Docsity!
Late change to Annual Investment Allowance rules
When Finance Act 2020 was published, the Annual Investment Allowance (AIA) was set to fall from £1,000,000 to £200,000 from 1 January 2021. However, in December 2020 the government announced its intention to retain the £1,000,000 amount. By this time your Business Tax material had been published, showing the planned fall in the relief. In response to this late notice change, the AAT has decided that they will mark as correct any answers which use either a £200,000 AIA (as in your original material), or a £1,000, AIA (which is now technically correct). We would suggest that in fact you use a £1,000,000 AIA because this is simpler. To help you with this, we have reproduced the relevant sections of Chapter 3 Capital allowances, using the £1,000,000 AIA. Any changes to numbers are highlighted in yellow, and deletions required are crossed out. Solutions to the relevant activities are at the end of the chapter. In addition, in your Passcards you will need to make a change to page 17 in the Annual investment allowance section. The three bullet points should read: £1,000,000 (£200,000 prior to 1 January 2019) Scale up/ down for short/long periods of account Use hybrid AIA for periods of account that straddle 1 January 2019 and 1 January
Finally, the changes you will see in the AAT reference materials and tax tables are at the back of this document.
Capital allowances
Chapter overview
Time apportion if not 12m period
AIA
WDA
FYA
Main pool Capital allowances
- plant and machinery Capital Claim relief over several periods via capital allowances Revenue Claim all relief this period Capital v Revenue CO 2 ≤ 50g/km 100% FYA CO 2 > 50g/km ≤110g/km Pooled 18% WDA No AIA CO 2 > 110g/km Special rate pool 6% WDA Previously 8% WDA No AIA Cars Restricted relief Sole trader only Private use assets Proceeds restricted to cost Separate assets Balancing charge or allowance Pooled Balancing charge only (unless ceasing to trade) Short life asset Depool for nine periods Balancing adjustment on sale Disposals
4.3.1 Periods of account which straddle the change in AIA Where a business has a period of account which straddles 1 January 2021, ie it starts before 1 January 2021 and ends after that date, the maximum AIA for that period of account is calculated by time apportioning the relevant AIA limits based on the number of months in the period of account which fall before 1 January 2021 and the number of months which fall after. Where a business has a period of account which straddles 1 January 2019, ie it starts before 1 January 2019 and ends after that date, the maximum AIA for that period of account is calculated by time apportioning the relevant AIA limits based on the number of months in the period of account which fall before 1 January 2019 and the number of months which fall after. Assessment focus point The rules for calculating the maximum AIA available for periods straddling 1 January 2019 are slightly more complex than we have shown below. However, the AAT have advised us that the full complexity of this will not be needed and tasks in the Business Tax assessment will be designed to accommodate this. Capital allowances on plant and machinery Taxation tables for business tax
3: Capital allowances Illustration 1 Matthew began trading on 1 April 2020 and prepared accounts for the year to 31 March 2021. In the year ended 31 March 2021, Matthew buys equipment for his business at a cost of £600,000, all of which qualifies for the AIA. All expenditure was incurred prior to the 1 January 2021. First we must calculate the maximum AIA that Matthew can claim. His period of account is 12 months long but nine of those months are before 1 January 2021 and three are after 1 January 2021. This means that the maximum AIA is as follows: So the maximum AIA for the year ended 31 March is £800,000, which will be sufficient to cover all of Matthew’s £600,000 expenditure. Illustration 2 Teddy began trading on 1 December 2018 and prepared accounts for the 16 months to 31 March 2020. In the period ended 31 March 2020, Teddy buys equipment for his business at a cost of £850,000, all of which qualifies for the AIA. First, we must calculate the maximum AIA that Teddy can claim. His period of account is 16 months long but one of these months is before 1 January 2019 and 15 are after 1 January 2019. This means that the maximum AIA is as follows: So, the maximum AIA for the period ended 31 March 2020 is £1,266,667, which will be sufficient to cover all of Teddy’s £850,000 expenditure.
1 April 2020 to 31 December 2020 9/12 £1,000,000 750, 1 January 2021 to 31 March 2021 3/12 £200,000 50, Maximum AIA for the year ended 31 March 2021
1 December 2018 to 31 December 2018 1/12 £200,000 16, 1 January 2019 to 31 March 2020 15/12 £1,000,000 1,250, Maximum AIA for the period ended 31 March 2020 1,266,
3: Capital allowances
Activity 8: Calculation of capital allowances
Oscar, a sole trader, makes up accounts for the 18 months to 30 June 2021. The brought forward value on his main pool on 1 January 2020 was £81,000. He bought and sold the following assets: £ 10 July 2020 Plant 1,410, 10 August 2020 Car for salesman (CO 2 emissions 49g/km) 11, 12 September 2020 Plant 550, 1 June 2021 Disposed of plant (cost £30,000)
Required Calculate the capital allowances claim that Oscar can make for the period ended 30 June 2021. Solution
Test your learning
2 Nitin, who prepares accounts to 30 September each year, had a balance on his main pool of £22,500 on 1 October 2020. In the year to 30 September 2021, he sold one asset and bought one asset as follows: Addition (eligible for AIA) 1.12.20 £171, Disposal proceeds on sale on 1.8.21 (less than cost)
The amount of capital allowances available for the year ended 30 September 2021 is: £
3: Capital allowances
CHAPTER 3 Capital allowances - Solutions to Activities
Activity 1: Annual investment allowance
Delson can claim an annual investment allowance of
Workings (on-screen free text area provided in the CBT as part of larger question) Nine-month period.
Max entitlement is therefore 9
Assets eligible are: £ 15 January 2021 Manufacturing equipment 450, 16 January 2021 Computer equipment 160, 7 May 2021 Office furniture 130, 13 May 2021 Delivery vans 20, 760, As the eligible assets are greater than the limit, Delson may only claim £750,000. Note. The balance of expenditure will be eligible for other allowances.
Activity 2: Writing-down allowances in the main pool
Jamie can claim an annual investment allowance of
Jamie can claim writing-down allowances of
Workings (on-screen free text area provided in the CBT as part of larger question) AIA £ Main pool £ Total £ TWDV b/f 10, Additions Car 18, Van 9, Manufacturing plant (Total = £850,000)
3: Capital allowances together the pro-rated AIA for the part of the period prior to 1 January 2021 to the pro rated AIA to the part of the period starting on 1 January
- This is (£1,000,000 12/12) + (£200,000 6/12). The total AIA is therefore £1,500,000 (£1,000,000 18/12). 2 This working would not be the same had it related to a company, as the 18-month period would be split into two accounting periods (a 12- month period and a 6-month period). We look at accounting periods for companies later in the Course Book.
Solutions to Test your learning
Workings Year ended 30 September 2021 AIA £ Main pool £ Allowances £ B/f 22, Addition qualifying for AIA Addition 1.12.20 171, AIA (See Note) (171,250) 171, Disposal 1.8. Proceeds (7,800) 14, WDA @ 18% (2,646) 2, C/f 12, Allowances 173, Note. Maximum AIA = £1,000,000. This is sufficient to cover all of the expenditure on qualifying assets.
Changes to AAT reference materials and tax tables
1 Taxation tables for business tax – 2020/
1.1 Capital allowances Annual investment allowance Prior to 1 January 2019 £200, Between From1 January 2019 and 31 December 2020 £1,000, From 1 January 2021 £200,
Capital allowances on plant and
machinery
7.1 Layout of capital allowances on plant and machinery computation
