Capital allowances versus the annual investment allowance on a mixed purchase
Fenwick Engineering Ltd is a small company with a 31 March year end. In the year to 31 March it spends: £180,000 on a new CNC machine; £40,000 on a second-hand delivery van (not zero-emission); £12,000 on office furniture; and £9,000 on a new computer system. It also incurs £6,000 on replacing the roof of its factory (the original roof was damaged by storm, not an improvement) and £25,000 on a new integral air-conditioning system. The company has taxable trading profits of £260,000 before capital allowances and wants to know its capital allowances position. It has not previously claimed the annual investment allowance above £100,000 in any year.
1. Classify each item and state which pool it belongs to, explaining the treatment of the roof and the air-conditioning.
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| Item | Cost | Treatment |
|---|---|---|
| CNC machine | £180,000 | Plant and machinery - main pool (not special rate). Eligible for AIA. |
| Second-hand delivery van | £40,000 | Main pool. Cars have restrictions, but vans are ordinary plant. Not zero-emission, so no 100% first-year allowance. Eligible for AIA. |
| Office furniture | £12,000 | Main pool. Eligible for AIA. |
| Computer system | £9,000 | Main pool. Eligible for AIA. |
| Factory roof replacement | £6,000 | Repairs and renewals - revenue deduction, not capital. The roof was damaged, and the replacement restores the asset rather than improving it, so it is deductible as a trading expense. |
| Integral air-conditioning | £25,000 | Special rate pool. Integral features (including air-conditioning systems) are not main-pool plant. They attract writing-down allowance at 6%, and AIA is available on them. |
The key distinction the examiner tests is repair versus improvement (the roof is revenue) and plant versus integral feature (the air-conditioning is special rate, not main pool).
2. Calculate the maximum capital allowances available, applying the AIA where beneficial, and state the resulting taxable trading profit.
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AIA limit is £1,000,000, so all eligible expenditure can be covered. Total AIA-eligible expenditure: £180,000 + £40,000 + £12,000 + £9,000 + £25,000 = £266,000. This is well within the limit.
Maximum claim:
- AIA on all £266,000 = £266,000 allowance.
- Roof £6,000 is a revenue repair, deducted separately as a trading expense.
Taxable trading profit:
- Profit before capital allowances: £260,000
- Less AIA: £266,000
- Less repairs: £6,000
- Result: £260,000 − £266,000 − £6,000 = loss of £12,000.
Judgement point. Claiming the full AIA creates a loss, which is wasteful if the company cannot relieve it. A better answer notes that the company should restrict the AIA claim so that profits are reduced to nil but no loss arises - i.e. claim £254,000 of AIA and leave £12,000 in the pools to be written down at 18% (main pool) / 6% (special rate) in future years. The remaining £12,000 of expenditure carried forward gives future allowances, and the £6,000 repair is still deducted. Taxable profit then becomes nil rather than a loss. The examiner rewards recognising that maximum AIA is not always optimal.
3. Explain how the answer would change if the company were a sole trader rather than a company, and identify one restriction that could apply.
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Same allowances. A sole trader is entitled to the same AIA and writing-down allowances, and the same repair/integral-feature analysis applies. The pools are calculated identically.
Different relief for the loss. A company can surrender a loss for a repayment or carry it forward; a sole trader can set a trading loss against total income of the same year and/or the previous year, or carry it forward against future trading profits. The £12,000 loss would therefore be relieved against Ravinder-style other income rather than corporation tax, which changes the value of the loss.
Restriction to flag. The AIA is not available on cars (only writing-down allowances), and a sole trader's claim is restricted by the wholly and exclusively rule - private use of an asset (for example, the van if used partly for personal journeys) must be apportioned, with only the business proportion of the allowance claimed. A company does not face that private-use restriction because the asset belongs to the company. The candidate should also note that a sole trader cannot claim AIA if the expenditure is incurred on an asset used partly for non-business purposes without restricting the claim.