ACCA F6 FA09 Study Text 2010
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Chapter 6: Capital allowances – plant and machinery
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If there is an expensive car with private use, the WDA is calculated in the following
order:
restrict to £3,000 if necessary first, then
time-apportion the WDA for the length of the accounting period and deduct
from the expensive car column, then
enter the business proportion of the allowance in the total allowances column in
the proforma.
8.3 Long periods of account
If an individual sole trader or a partnership changes its accounting date and
produces a set of accounts in excess of 12 months, the treatment for capital
allowances depends on whether or not the accounts exceed 18 months in length.
Long period of account not exceeding 18 months
If the accounts are more than 12 months in length, but not in excess of 18 months:
One adjustment of profit computation is produced for the long period of
account.
Only one capital allowance computation is produced and the WDA is scaled up
according to the length of the accounting period. For example if a 17-month set
of accounts is produced, the WDA for plant and machinery is 20% × 17/12. This
is different from the rule for companies (see later chapter).
Note that only the AIA and WDA are scaled up. FYAs and balancing adjustments
are not subject to time-apportionment.
If there is an expensive car with private use in a long period of account, the WDA is
calculated in the same order as mentioned above for short periods of account,
except that the WDA is scaled up, not time-apportioned downwards.
Long period of account in excess of 18 months
If the accounts are in excess of 18 months in length:
One adjustment of profit computation is produced for the long period of
account.
However, two capital allowance computations are required, one for the first 12
months of the long period of account and one for the remaining period.
The first capital allowances computation will show the normal AIA, FYA and
WDAs. The balance period will be a short period of account and the AIA and
WDA must therefore be time-apportioned. As always, FYAs and balancing
adjustments are not subject to time apportionment.
The capital allowances of both periods are deducted from the one adjusted profit
before capital allowances figure and then the basis of assessment rules are
applied to the adjusted profit after capital allowances.
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For example, if the accounts are from 1 January 2009 to 30 September 2010 (i.e. 21
months):
The first capital allowances computation brings in additions and disposals for
the 12 months ended 31 December 2009 and full annual rates of WDAs are
available.
The second capital allowances computation brings in additions and disposals for
the nine months ended 30 September 2010 and the WDAs are restricted to 9/12.
Example
Gwen started to trade as a self-employed dressmaker on 6 April 2009 and prepared
her first set of accounts to 31 July 2010. In the 16 month period she made the
following capital purchases:
Purchases
£
6April2009
Twosewingmachines 6,200
15June2009 Officeequipment 2,000
1July2009
Computerequipmentandsoftware 5,500
1July2009
Secondhandcar
(60%privateuseandCO
2emissionsof150g/km)
15,800
Gwen has no asset disposals in the period.
Required
Calculate the capital allowances for the 16 month period ended 31 July 2010.
Answer
Gwen–Capitalallowances,
16monthsended31July2010
Main
pool
Secondhandcar
(40%businessuse)
Total
allowances
£
£
£
AcquisitionsnotqualifyingforAIA Nil
15,800
AcquisitionsqualifyingforAIA
£
Sewingmachines
6,200
Officeequipment
2,000
Computerequipment
5,500
13,700
AIA (13,700)
13,700
Nil
WDA(20%×16/12) (Nil)
(4,213) (40%)
1,685
TWDVc/f Nil
11,587
Totalallowances
15,385
Note
As the car was purchased after 6 April 2009, the new rules apply and its WDA is not
restricted to £3,000 pa.
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Paper F6 (UK)
Taxation FA2009
CHAPTER
7
Capital allowances
– industrial buildings
Contents
1 Definition of an industrial building
2 Allowances for industrial buildings
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Definition of an industrial building
Industrial buildings and structures
Non-industrial buildings and structures
Qualifying hotels
1 Definition of an industrial building
1.1 Industrial buildings and structures
The tax legislation provides a comprehensive definition of an industrial building.
This definition includes buildings and structures that are used:
for the manufacturing or processing of goods or materials (e.g. factories)
for the storage of goods or materials (e.g. warehouses)
for the repair or maintenance of goods or materials (e.g. workshops)
as technical drawing offices
as employee welfare facilities (e.g. canteens, workplace nurseries, sports
pavilions).
Industrial buildings allowances (IBAs) are available on the cost of these buildings.
If the industrial building is built by or for the business, IBAs are available on the
cost of the construction. This cost includes:
any costs incurred in preparing the site for the construction of the buildings (e.g.
cutting, levelling or tunnelling the land)
legal and professional fees relating to the building (e.g. architect’s fees, solicitors’
fees)
associated car parks, roads and fencing.
However, IBAs are never allowed on the cost of the land itself, nor any associated
incidental expenses (including legal and professional fees) relating to acquiring the
land.
If the business purchased the building second-hand, but is the first business to
use the building for industrial purposes, the qualifying cost depends on whether
the seller of the building is a builder.
If the building is purchased from a builder, IBAs are available on the purchase
price paid to the builder.
If the building is purchased from anyone else, IBAs are available on the lower of
the cost of construction and the purchase price.
Chapter 7: Capital allowances – industrial buildings
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1.2 Non-industrial buildings and structures
The following buildings and structures are non-industrial buildings:
shops and showrooms
residential accommodation
general offices.
However, IBAs are available on non-industrial buildings in the following
circumstances:
if the non-industrial buildings are an integral part of a factory site, and
the cost of the non-industrial part is not material in terms of the total cost of all
of the buildings on the factory site.
The cost of the non-industrial part is not material if it is not more than 25% of the
total cost of all of the buildings (= the total cost of all buildings, industrial and non-
industrial, but excluding land).
If the cost of the non-industrial part exceeds 25% of the total cost, IBAs are only
available on the industrial buildings element. The full cost of the non-industrial
element is not eligible for IBAs.
Example
A plc constructed a new factory site in the year ended 31 December 2009. The cost of
construction was as follows:
£
Land(including£2,500legalcostsrelatingtothepurchaseofland) 118,500
Preparationofthelandbeforebuildingcommenced 58,000
Architect’sfees42,000
Mainfactorybuilding 335,000
Canteen 23,200
Generaloffices 101,800
Required
Calculate the cost which qualifies for IBAs.
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Answer
QualifyingcostforIBAs
£ £
Land 116,000 Notallowable 0
Legalcosts(retheland) 2,500 Notallowable 0
Preparationoftheland 58,000 Allowable 58,000
Architect’sfees 42,000 Allowable 42,000
Mainfactorybuilding 335,000 Allowable 335,000
Canteen 23,200 Allowable 23,200
Generaloffices 101,800 Seeworkingbelow 101,800
678,500 560,000
Working
The general offices are non-industrial buildings that are an integral part of the
factory site.
25% × Total cost of all buildings on the site (but excluding the cost of the land and
associated legal costs)
= 25% × (£678,500 - £118,500)
= 25% × £560,000 = £140,000.
Cost of office space = £101,800. This is less than 25% of the total cost of all the
buildings (£140,000). Therefore the cost of the general offices qualifies for IBAs.
1.3 Qualifying hotels
A qualifying hotel is a hotel that meets all of the following conditions:
It has at least 10 letting bedrooms available for short-term stays. (A short-term
stay is defined as not more than 30 days).
It is open for at least 4 months during the holiday season. (The holiday season is
defined as April to October).
It provides normal hotel services such as bed-making and cleaning services,
and offers both breakfast and evening meals.
If the definition of a qualifying hotel is satisfied, the hotel is treated as if it is an
industrial building.
Chapter 7: Capital allowances – industrial buildings
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Allowances for industrial buildings
Writing down allowances
Disposal of a building
2 Allowances for industrial buildings
2.1 Writing down allowances
A WDA of 2% (3% for the year ended 31 March 2009) is available for a 12-month
period.
It is calculated on a straight line basis (= 2% of cost for each 12-month period.)
It is based on the qualifying cost of the building.
The WDA must be time-apportioned if the business has a short accounting period.
WDAs are only available if the building is in industrial use on the last day of the
accounting period.
2.2 Disposal of a building
The disposal of an industrial building on or after 21 March 2007 has no tax
consequences. No balancing adjustments arise.
Example
B plc prepares its accounts to 31 March each year. On 14 February 2008 it purchased
a factory for £590,000 (including land of £90,000) and brought it into industrial use
on 1 April 2008.
The business was very successful and grew considerably. B plc decided that to
expand further, a larger factory site was needed. On 31 July 2010 it sold the old
factory to C Ltd for £625,000 (including land of £90,000) and purchased a bigger
factory in the next town.
Required
Calculate the IBAs available to B plc for all relevant years.
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Answer
Allowancesclaimed
y/e31March2009
£
Qualifyingcost(£590,000‐£90,000)=500,000
WDA(3%×£500,000) 15,000
y/e31March2010
WDA(2%×£500,000) 10,000
Notes
No WDA is available in the year ended 31 March 2008 as the building is not in
industrial use on that date.
As the building has been disposed of after 21 March 2007, no balancing adjustment
occurs.
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Paper F6 (UK)
Taxation FA2009
CHAPTER
8
The basis of assessment rules
for unincorporated
businesses
Contents
1 Overview of the basis of assessment rules
2 The opening year rules
3 The closing year rules
4 Choice of accounting date
5 The rules on a change of accounting date
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Overview of the basis of assessment rules
The need for basis of assessment rules
The current year basis of assessment
1 Overview of the basis of assessment rules
1.1 The need for basis of assessment rules
Sole traders and partnerships can prepare their accounts to any date they choose.
They are not obliged to produce accounts to the end of the tax year (i.e. with a year
ending 5 April). However, it is important to know in which tax year the tax-adjusted
profits will be assessed to tax.
Tax legislation therefore needs rules for matching the adjusted profits after capital
allowances of an unincorporated business with tax years. These rules are known as
the basis of assessment rules.
1.2 The current year basis of assessment
The normal basis of assessment for trading income is the current year basis (CYB):
Basis period for a tax year =
the 12-month accounting period ending in the
current tax year
The term basis period refers to the time period which is assessed for a particular tax
year.
Example
John has been trading for many years preparing accounts to 31 March each year. He
has recently received an enquiry from HMRC regarding the trading income figures
he entered into his tax return for 2009/10.
Required
Which set of accounts must John find to check the facts of the enquiry from HMRC?
Answer
The accounts which end in the 2009/10 tax year = Year ended 31 March 2010.