N OW I N ITS 26TH ED ITI O N

TAXATIONFINANCE ACT 2020

AL AN MELVILLE

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◆ OVER 250 WORKED EXAMPLES ◆ OVER 250 EXERCISES AND QUESTIONS ◆

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EXAMPLE 10

Gurpreet (who prepares accounts to 31 December) pays £3m to acquire a piece of land and then pays a further £5m for the construction of a new purpose-built factory on this land. The construction contract was entered into on 1 February 2019 and the factory is first brought into use for trade purposes on 1 July 2020.

Gurpreet uses the factory in his manufacturing trade until 1 May 2035, when he sells it to another business for £11m (including £5m for land). Calculate the SBAs that may be claimed by Gurpreet and by the factory's new owner.

Solution

Eligible expenditure is £5m, so SBAs are (3% ´ £5m) = £150,000 p.a. Qualifying use begins halfway through the year to 31 December 2020, so the available SBAs for this year are £75,000 (£150,000 ´ 6/12). SBAs are then £150,000 for each of the fourteen years to 31 December 2034 with a final £50,000 (£150,000 ´ 4/12) in the year to 31 December 2035.

Assuming that the new owner does not demolish the building or start using it for residential purposes, SBAs of £150,000 per annum may be claimed for a further 18 years and six months (33 years and one-third years less the 14 years and ten months for which Gurpreet claims SBAs). The price paid by the new owner is not relevant to this calculation.

Miscellaneous capital allowances

Capital allowances are available in relation to some miscellaneous categories of capital

expenditure. These include patent rights, "know-how" and research and development. Each

of these categories is considered briefly below.

Patent rights

The treatment of purchased patent rights acquired for trade purposes is as follows:

(a) Patent rights expenditure is pooled together. The patent rights pool is adjusted in each

chargeable period for acquisitions and disposals and then WDA is calculated at 25%

per annum on the reducing balance.

(b) WDA is proportionately increased or decreased if the chargeable period is of more or

less than 12 months.

(c) As with plant and machinery, disposal value is restricted to original cost.

(d) If the disposal value of a patent exceeds the balance of unrelieved expenditure in the

pool, a balancing charge is made and the pool value is set to zero.

(e) On cessation of trade, there will be a balancing allowance if the patents are sold for

less than the balance of unrelieved expenditure in the pool. There will be a balancing

charge if the patents are sold for more than the balance of unrelieved expenditure.

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Know-how

"Know-how" is defined as industrial information and techniques of use in either:

(a) the manufacturing or processing of goods or materials

(b) the working of mineral deposits

(c) agricultural, fishing or forestry operations.

All expenditure on know-how is pooled and capital allowances are calculated in much the

same way as for patent rights. However, if know-how is sold for more than its original cost,

the disposal value used in the capital allowances computation is the full sale proceeds.

Depending upon the balance of unrelieved expenditure in the pool prior to the disposal, this

will either create a balancing charge or restrict the value of subsequent WDAs. In either

case, the profit made on the disposal is (in effect) treated as trading income.

Research and development

Capital expenditure on research and development related to the claimant's trade attracts a

first year allowance of 100%. Any proceeds subsequently received on the disposal of a

research and development asset are treated as a trading receipt.

Summary

4 Capital allowances are granted for chargeable periods. For income tax purposes, each

period of account usually ranks as a chargeable period, but periods of account lasting

more than 18 months are divided into two or more chargeable periods.

4 In order to qualify as plant and machinery, an asset must perform an active function in

the trade, not merely provide the setting in which the trade is carried on. There is

extensive case law in relation to this distinction.

4 With some exceptions, expenditure on plant and machinery is pooled together for

capital allowances purposes. Most general plant and machinery is allocated to the main

pool but certain items are allocated to the special rate pool.

4 Motor cars with emissions in excess of 110g/km are allocated to the special rate pool.

Cars with lower emissions are generally allocated to the main pool but cars with

emissions not exceeding 50g/km attract a 100% FYA.

4 Writing down allowances (WDAs) on plant and machinery are calculated at 18% p.a.

in the main pool and 6% p.a. in the special rate pool.

4 Expenditure on plant and machinery of up to a specified maximum is eligible for a

100% annual investment allowance (AIA). The AIA maximum amount is normally

£200,000 p.a. However, this increases to £1m p.a. for the two years from 1 January

2019 to 31 December 2020. AIA is not available on motor cars.

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4 An item of plant and machinery which is used partly for private purposes is dealt with

in a single asset pool. Capital allowances are calculated in the usual way but only the

business proportion of these allowances may be claimed.

4 Short-life assets are also allocated to single asset pools. A balancing allowance or

charge will arise if a short-life asset is disposed of within eight years.

4 Balancing allowances and charges will arise when plant and machinery is disposed of

on a cessation of trade, unless the business is acquired by a connected person.

4 Businesses which incur eligible capital expenditure on the construction of a qualifying

structure or building may claim a structures and buildings allowance (SBA) calculated

at 3% p.a. on the straight-line basis (2% prior to 6 April 2020).

4 Capital allowances are also available in relation to qualifying expenditure incurred on

patent rights, "know-how" and research and development.

Exercises

It should be assumed (unless stated otherwise) that maximum capital allowances are claimed in all

cases. A set of multiple choice questions for this chapter is available on the accompanying website.

11.1 Maurice prepares accounts to 5 April each year. The written down value of his main pool

at 5 April 2020 was £10,300. There was no special rate pool. His purchases and sales of

plant and machinery during the year to 5 April 2021 were as follows:

£

7 April 2020 Bought plant 600

11 April 2020 Sold machinery (original cost £4,000 in 2019) 4,200

11 July 2020 Bought motor car (emissions 104g/km) 8,000

1 November 2020 Bought machinery 400

12 January 2021 Sold equipment (original cost £7,000 in 2017) 3,000

Compute the capital allowances which may be claimed for the year to 5 April 2021,

assuming no private use of any of the assets.

11.2 Laura started trading on 1 February 2020, preparing accounts to 31 January. Her adjusted

trading profit for the year to 31 January 2021 (before deducting capital allowances) was

£259,171. Her purchases of plant and machinery during the year were as follows:

£

1 February 2020 Bought machinery 153,000

1 February 2020 Bought motor car (emissions 128g/km) 15,000

12 July 2020 Bought machinery 25,700

3 January 2021 Bought machinery 34,800

Compute her trading income for the first two tax years, assuming 40% private use of the

car by Laura. Also compute the amount of any overlap profits.

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11.3 Norma has prepared a set of accounts for the nine-month period to 31 December 2020.

The written down value of her plant and machinery at 31 March 2020 was as follows:

£

Main pool 178,400

Toyota motor car (50% private use by Norma) 18,200

Plant and machinery transactions during the period to 31 December 2020 were:

£

17 April 2020 Bought plant 64,450

1 May 2020 Sold Toyota motor car 15,000

1 May 2020 Bought Saab motor car (emissions 100g/km) 29,600

4 June 2020 Bought motor van 14,500

12 October 2020 Bought Ford motor car (emissions 47g/km) 11,600

3 November 2020 Bought Peugeot motor car (emissions 127g/km) 15,400

1 December 2020 Sold plant (original cost £10,000 in 2016) 3,400

There was 50% private use (by Norma) of the Toyota and Saab motor cars. Prepare a

capital allowances computation for the period to 31 December 2020.

*11.4 Raymond started trading on 1 October 2019. He chose 31 March as his accounting date

and his first accounts were for the period from 1 October 2019 to 31 March 2020. His

purchases and sales of plant and machinery during the first two accounting periods were

as follows:

£

1 October 2019 Bought machinery 130,000

1 October 2019 Bought motor van (emissions 212g/km) 16,200

12 November 2019 Bought motor car (emissions 153g/km) 18,800

18 December 2019 Bought office equipment 4,800

4 February 2020 Bought motor car (emissions 102g/km) 9,200

12 April 2020 Sold car bought in February 2020 9,600

12 April 2020 Bought motor car (emissions 110g/km) 15,500

25 November 2020 Sold machinery (cost £11,500 in October 2019) 8,300

3 February 2021 Bought machinery 60,000

There was 25% private use (by Raymond) of the motor car purchased in November 2019

but there was no private use of any of the other assets.

Required:

Prepare a capital allowances computation for the period to 31 March 2020 and for the year

to 31 March 2021.

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*11.5 Talat owns a large retail business and prepares accounts to 31 December each year. The

written down value of his plant and machinery after deducting capital allowances for the

year to 31 December 2019 was as follows:

£

Main pool 113,210

Special rate pool 9,900

VW motor car (30% private use by Talat) 14,500

He had the following transactions during the year to 31 December 2020:

£

6 January 2020 Sold VW motor car 17,200

6 January 2020 Bought BMW motor car (emissions 106g/km) 32,000

1 April 2020 Sold plant (original cost £1,000 in December 2019) 1,150

23 May 2020 Bought lifts and air conditioning systems 100,800

12 June 2020 Bought plant 112,550

5 October 2020 Sold main pool car (original cost £17,500 in 2017) 11,000

5 October 2020 Bought car (emissions 111g/km) 12,300

18 November 2020 Sold plant (original cost £4,200 in 2015) 1,310

The lifts and air conditioning systems bought in May 2020 qualify as "integral features"

for capital allowances purposes. Private use by Talat of the VW and BMW motor cars has

been agreed with HMRC to be 30%.

There were no capital transactions between 1 January 2021 and 31 March 2021, when

Talat ceased trading and sold his business. The plant and machinery was disposed of (on

31 March 2021) as follows:

(i) All of the plant and machinery other than motor cars was sold for £240,000. This

consisted of £150,000 for main pool items and £90,000 for special rate items. All

items were sold for less than original cost.

(ii) Talat took over the BMW car. Its market value on 31 March 2021 was £25,000.

(iii) The only other car remaining was the one acquired in October 2020 and Talat gave

this to his brother, who will be using it for private purposes. The market value of the

car on 31 March 2021 was £10,000.

Prepare the capital allowances computations for the year to 31 December 2020 and for the

period from 1 January 2021 to 31 March 2021. Assume that Talat decided to restrict his

AIA claim for the year to 31 December 2020 to £60,000, to be split equally between the

main pool and the special rate pool.