CA20006 - PMAs: Introduction: Outline

Depreciation of fixed assets charged in the accounts is not allowed as a deduction in computing taxable profits. Capital allowances may be given instead. Plant and machinery allowances give relief at prescribed rates for the depreciation of fixed assets that are plant or machinery.

In order to qualify for PMAs, a person must:

• be carrying on a qualifying activity CA20010, and
• incur qualifying expenditure. Qualifying expenditure is capital expenditure on the provision of plant or machinery CA21000 wholly or partly for the purposes of the qualifying activity. Normally the person must own the asset as a result of incurring the expenditure.

The range of qualifying activities for PMA is very wide. It broadly covers all taxable activities other than passive investment, including a trade, profession, vocation, office, employment or Schedule A business.

The range of assets that qualify as plant and machinery is also very wide. Broadly it covers all fixed assets used in the business other than intangible assets apart from computer software, land and buildings. The main difficulty in determining whether an asset qualifies as plant or machinery comes with assets incorporated into buildings.

Normally, the taxpayer must also own the plant or machinery as a result of incurring the expenditure. There are exceptions to this condition, however, in particular for fixtures CA26000.

There are two main types of PMA - first year allowance (FYA) and writing down allowance (WDA).

FYA is only due in certain circumstances. It is a special allowance given at a higher rate than the normal WDA for the chargeable period in which the expenditure is incurred. Any expenditure left unrelieved qualifies for WDAs for subsequent periods.

WDAs are calculated using the pool basis. A pool may cover a single asset or a class of assets. Pooling works by keeping a running total of the unrelieved expenditure on the assets in the pool. WDA, normally at 20%pa, is given on the current total. This is known as the reducing balance basis.

Example Bennett & Darcy Ltd. runs a transport business. It draws up accounts to 31 December each year. Its pool of expenditure at 31 December 2008 is £32,000. In the year ended 31 December 2009 it buys a lorry for £8,000 at a time when FYA is available at the 40% rate and claims FYA on it. It also sells a lorry for £4,000 in that year. This is Bennett & Darcy Ltd.'s CA computation for the year ended 31 December 2009.

*The pool brought forward at 1 January 2010 is £27,200 (= £4,800 + £22,400).

There are single asset pools, class pools and the main pool, which contains all expenditure that does not go into a single asset or class pool. Expenditure on some assets is kept separate from expenditure on all other assets and does not go into the main pool. It is dealt with in single asset pools. These include assets used partly for purposes other than the qualifying activity, short life assets and cars costing more than £12,000 (but only where the expenditure was incurred before 1/6 April 2009). There are two class pools; one for special rate expenditure and one for expenditure on plant & machinery for overseas leasing. Certain expenditure must be allocated to the special rate pool and will attract WDA at 10% rather than 20%. Special rate expenditure includes expenditure on thermal insulation, integral features, long life assets and cars with CO2 emissions exceeding 160g/km driven bought on or after 1/6 April 2009. Where a person carries on more than one qualifying activity, PMAs are calculated separately for each activity with a separate pool or pools for each of them.