BUSF_A01.qxd

Chapter 5 • Practical aspects of investment appraisal

In 2009, Carriers Ltd buys a delivery van for £12,000. The capital allowances would be

claimable as follows:

Year Opening balance Capital allowance

££

2009 12,000 3,000 [25% of £12,000]

2010 9,000 2,250 [25% of (£12,000 −£3,000) ]

2011 6,750 1,688

2012 5,062 1,266

and so on and so on

This pattern will continue until the van is sold or scrapped.

Example 5.3

When the asset is disposed of, in broad effect, any unrelieved expenditure is

relieved. Similarly, any excess of relief is ‘clawed back’ by HM Revenue and Customs.

For example, if Carriers Ltd (in Example 5.3) disposed of the van for £6,000 in the

year 2012, tax would be charged on £938 (that is, £6,000 −£5,062). On the other hand,

were the disposal proceeds to be £4,000, additional relief of £1,062 (that is, £5,062 −

£4,000) would be given to the business.

The broad effect of capital allowances is to give tax relief on the difference between

the acquisition cost of the asset and its disposal proceeds (if this is a lower figure),

spread over the life of the asset.

Industrial buildings

These are buildings used directly or indirectly in manufacturing, the transport indus-

try and for other restricted purposes. Not included in the definition are shops and

offices.

Relief is granted by allowing businesses to deduct 4 per cent of the cost of the build-

ing from the taxable profit in each year of its ownership and use. On disposal the pro-

ceeds will cause a clawback of excess allowances or an additional allowance, if the

difference between cost and the disposal proceeds has not already been fully relieved.

Capital allowances

Capital allowancesare set against the taxable profit to give tax relief for expenditure

on non-current assets. There are several categories of asset into which the law has placed

the various types of business non-current asset. Each of these has its own rules for

granting the allowance. In practice, two of these, dealing with plant and machinery

and with industrial buildings, are by far the most important to the typical business.

Plant and machinery

This includes a wide range of assets, from industrial machinery to the reference books

of a lawyer, and includes motor vehicles. For expenditure on plant and machinery,

businesses are allowed to deduct 25 per cent of the cost of the asset from the

(otherwise taxable) profit of the period during which the asset was acquired. In each

subsequent year of ownership of the asset, 25 per cent of the balance brought forward

may be deducted.

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