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Main features
Capital expenditure and depreciation cannot be deducted in calculating taxable profits. However, some capital expenditure can be deducted as initial or writing down allowances (WDAs).
Costs of some assets are pooled and a writing down allowance is calculated each year on the balance. When a pooled asset is sold, the proceeds are normally deducted from the pool balance. If the proceeds are greater than the pool balance, the excess is treated as a balancing charge and is added to the profits for the relevant year.
Most cars costing over £12,000 are dealt with individually.
Short-life plant and machinery may benefit from accelerated capital allowances if an election is made.
Balancing allowances are available on items that are not pooled and when a business ends. If the sale proceeds are less than the written down value, the difference will reduce profits for the relevant year.
Main allowances
The straight line basis means that a constant percentage of the initial investment is allowable each year. The reducing balance basis means that a percentage is allowed of the written down value after deducting the allowances for the previous periods.
Plant and machinery, patent rights and know-how: WDA (reducing balance) normally 25% pa; 6% pa for certain assets with a life of at least 25 years, if annual expenditure on such assets exceeds £100,000. First-year allowance of 40% for plant and machinery bought by small and medium size businesses; 100% allowance for information and communication technology bought by small businesses between 1 April 2000 and 31 March 2003; 100% allowance for qualifying energy-saving equipment (all businesses).
Cars: WDA (reducing balance) 25% pa with maximum per car of £3,000pa; first-year allowance 100% for new cars emitting up to 120g/km CO2.
Industrial buildings, hotels, agricultural buildings, dredging: WDA (straight line) 4% pa.
Enterprise zone buildings, research and development and certain expenditure on residential flats over commercial property: Initial allowance 100%.
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