Year-End Capital Allowances and the Timing Trap
Bramble & Co is a UK company with a 31 March year end. In the year to 31 March it purchased plant and machinery for £180,000 (all qualifying for the annual investment allowance) and a new car with CO2 emissions of 110 g/km for £24,000. It also sold a machine for £15,000 that had a tax written-down value brought forward of £9,000. The main pool brought forward was £60,000. The company made a trading profit before capital allowances of £210,000. The director wants to know why the tax bill is 'higher than the accounting profit suggests' and asks whether delaying the car purchase to April would help.
1. Compute the capital allowances and taxable trading profit, showing the pools.
Read the worked answer
Plant and machinery £180,000: eligible for the Annual Investment Allowance, so 100% relief = £180,000 allowance.
Car, 110 g/km CO2: not eligible for AIA. Cars above 50 g/km (and up to 110 g/km under the rules in force) go into the special rate pool at 6% writing-down allowance. WDA = £24,000 × 6% = £1,440.
Main pool:
- Brought forward: £60,000
- Disposal: (£15,000)
- Balance: £45,000
- WDA at 18% = £8,100
- Carried forward: £36,900
Special rate pool: £24,000 − £1,440 = £22,560 carried forward.
Total capital allowances: £180,000 + £1,440 + £8,100 = £189,540.
Taxable trading profit: £210,000 − £189,540 = £20,460.
Note on the disposal: because the sale proceeds (£15,000) exceed the TWDV of the asset (£9,000) but the pool is not exhausted, there is no balancing charge - the excess simply reduces the pool.
2. Explain to the director why the tax bill differs from accounting profit, and advise on the timing of the car purchase.
Read the worked answer
Why tax differs from accounting profit:
- Depreciation charged in the accounts is not allowable for tax; it is replaced by capital allowances, which follow tax rules, not accounting rules.
- The AIA gives 100% relief up front on the £180,000 of plant, so tax relief is accelerated relative to accounting depreciation. This year the taxable profit (£20,460) is far below the accounting profit because of that acceleration - the 'higher tax bill' impression is likely a misunderstanding, or relates to other disallowables (e.g. entertaining, fines) not covered here.
- The car gets only 6% relief because of its CO2 rating, so most of its cost is relieved slowly over many years - this is why cars are tax-inefficient.
Timing advice:
- Delaying the car to April would move the £1,440 WDA into the following period - it would not save tax overall, only defer a tiny amount. Not worth restructuring the purchase for.
- More importantly, choosing a lower-emission car (at or below the threshold for the main pool, or zero-emission for 100% first-year allowance) would materially improve relief. That is the lever worth pulling.
- The AIA is generous but should be claimed in the period of purchase; ensure the £180,000 qualifies and is not disqualified (e.g. assets bought for leasing).