Capital allowances (UK)
These are deductictions allowed by the Inland Revenue from the profits of businesses assessed under Schedule D for the depreciation of capital assets. The assets against which the allowance may be claimed are those specifically designated by the tax authorities but tend to include most industrial plant and machinery, including road vehicles necessarily employed and industrial, rather than commercial, buildings. The allowances normally relate to companies, in so far as industri I manufaturing bodies tend to be companies, and the rules governing the amount and entitlement of allowances are constantly changing. A major change occurred as a result of the provisions contained in the Finance Act 1971. After this date assets ceased to be written down as individual items and became ‘pooled’ according to category. This meant that an allowance was given in total against the written-down value of all plant in use, after adding acquisitions and deducting items disposed of.
Industrial buildings are given allowances on a straight line basis. Plant, machincry and cars arc treated by a diminishing balance method or, in tax terms, on a written-down basis. As a result assets in the latter category receive large allowances in the first year; this means that the written down value may be much lower than for normal accounting purposes, particularly when initial allowances (an extra percentagc in the year of acquisition) are applicable.
To compensate for this it is usual for the relevant difference to be set aside from distributable profits in a deferred tax account. The balance on this account is then adjusted each year to correspond with the total difference outstanding. When an asset is disposed of the amount received must be subtracted from the written-down value for tax purposes; the balance, known as a balancing allowance, can be claimed from the Inland Revenue (or deducted from the cost of the replacement asset if the Inland Revenue agrees). On the other hand, if the proceeds exceed the written-down value a balancing charge becomes payable.
Reference: The Penguin Business Dictionary, 3rd edt.