BUSF_A01.qxd

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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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