Tag: CT600

How Capital Allowance interact with Capital Gains Tax

This article explains how capital allowance effects capital gains calculations.

A common occurrence in trading businesses is sale of plant & machinery or vehicles used in the business. Rules shown below are applicable both in moveable and fixed plant & machinery for a business following accrual based accounting , for business following cash basis see Bonus point 4 below.

Two scenarios could happen:

  1. Disposal proceeds are less than purchase cost – a loss (usual case)
  2. Disposal proceeds are less than purchase cost – gain

We will try to explain these scenarios, by way of an example.

We need to prepare two calculations – one for capital allowance (CA) and other for capital gains.

X is an individual trader for many years. He brings forward main pool expenditure of £40k. In year 1, he buys a van for £20k and a computer for £5k. He claims AIA on all expenditure. In year 2, he sells the van for £12k and the computer for £8k.

We have illustrated below, how these transactions will affect the Capital Allowance and Capital Gains calculations.

Capital Allowance calculation

Year 1                                                                          Main pool                                        
WDV b/fwd                                                                  40,000
Additions                                                                     25,000
AIA                                        25,000                                                              
                                                                                         40,000
WDV 18%                                                                       7,200                                                              
WDV c/fwd                                                                   32,800

Year 2
WDV b/fwd                                                                   32,800
Disposal value                                                             17,000 a
                                                                                          15,800
WDV 18%                                                                      2,844                                                              
WDV c/fwd                                                                   12,956

a. Disposal value = £12k (van) plus £5k (computer), as disposal value is restricted to original purchase cost.

Capital Gains Calculation

Capital gains is only applied on assets if sold above its original purchase price. Thus, van is ignored for Capital Gains.

                                                                                   Computer b         
Disposal proceeds                                                 8,000
Purchase cost c                                                        5,000
Unindexed Gain                                                      3,000
Indexation allowance (estimated)                 (500)
Indexed Gain                                                             2,500

Note:

b. Gain or loss is computed on each asset individually.
c. Capital allowance taken on assets are completely ignored. TCGA 1992 sec 41

Practice notes:

  1. We should keep note of each item added to the pool – date added/purchased and amount added. Date is important as companies get indexation allowance for items purchased before 31st December 2017. Usually, commercial tax filing software will have the facility to record assets individually and calculate indexation allowance.

Source:

  1. Book – Taxation by Alan Melville
  2. Book – Tolley’s Tax Guide para 22.19, 22.46 and 38.4

Bonus:
1. In case X sells a table to his friend for £1k (market value £2k). Disposal value will be £1k if his friend runs a trading business where he can claim Capital Allowances . In case his friend does not run a trading business and cannot claim Capital allowances disposal value will be £2k.

2. In case X gifts the table to his employee, disposal value will be nil. But tax maybe payable by employee under ITEPA 2003.

3. In case X gifts the table to his brother, disposal value will be £2k (market value).

See HMRC Manual CA23250 on disposal values.

4. For business following cash basis accounting – When a asset is disposed off for more than its purchase price, business owner will be taxable on the full disposal value even if it is higher than purchase price. Source ICAEW Tax guide 04/24.

Loan to directors and Shareholder

These rules are covered under Corporation Tax Act (CTA) 2010: Section 455 to 465

Section 455 will apply to loans to directors who are also shareholder (owning 5% or more) and to shareholders who are not directors. It does not apply to directors who are not shareholders.

When was the loan repaid Tax Position
Within 9 months of Year end (YE) No Tax
After 9 months of YE Tax @ 32.5% (previously use to be 25%)

Relief given in the YE when loan re-paid. Relief should be claimed within 4 years.

 

Tax avoidance measures:

Section 464C introduced w.e.f. 20 March 2013. Basically any window dressing is set aside. For more information see CTM61615.

 

Repaying loan via dividends/salary/bonus is not window dressing.

 

Points to be aware:

1)     No non-business expenses posted as business expense.

2)     All employment income has appropriate tax and NIC deducted.

3)     If DLA balance anytime during the year over £10k. It will be treated as beneficial loan and showed by reported in P11D and NIC Class 1A paid.

Please note this limit does not apply to Sec 455 charge.

To avoid this , one can issue interim dividends to ensure loan balance does not go over £10k anytime during the year.

Useful links:

Agent toolkit

 

Corporation tax : Two tax return in the first year

Often client are confused when we tell them that we will need to file two tax returns for the first year of the company’s life.

GOV website has explained it lucidly:

https://www.gov.uk/first-company-accounts-and-return

 

 

 

Group relief : Capital allowance

During the expansion phase of a business. Clients invest a lot of money which is eligible for capital allowance but the company under which investment is made may not have sufficient profits to absorb it.

If a client has other profitable companies within the group. Current year’s capital allowance can be transferred to the profitable companies to reduce the tax over all group tax bill.
more information:

http://www.accaglobal.com/uk/en/technical-activities/technical-resources-search/2011/september/company-losses.html

 

Corporation tax : Shorten tax year

If one wishes to shorten the Tax year before the end of the tax year as per HMRC records.
It can be only done by calling HMRC.

It takes 15 working days to be completed at HMRC end.

Please note in case you are closing the company, please specifically ask the HMRC person you are speaking on the telephone to make the company dormant after the shortened period end date, otherwise HMRC will expect tax return for period after this date.

Also remember to change the `accounting reference date` in Companies House records.