General: claims: types of capital allowance
There are five types of capital allowance:
- initial allowance (IA);
- annual investment allowance (AIA)
- first-year allowance (FYA);
- writing down allowance (WDA);
- balancing allowance.
Charges under the capital allowance system are called balancing charges.
Capital allowances are broadly intended to give:
- a taxpayer relief for the reduction in value of an asset while he or she owns it (such as PMA), or
- relief on a particular cost but which may be shared amongst more than one taxpayer (such as IBA or ABA).
But the reduction in value of the asset concerned or the way in which a cost is to be shared is normally impossible to predict when capital allowances begin to be given. Balancing allowances and balancing charges are the mechanism by which adjustments are made to achieve the broad intentions set out in the previous sentence. As a simple example, a car in a single asset pool CA20006 that cost £19000 may be sold 3 years later for £12000. The net cost of the car to the taxpayer is £7000 (= £19000 - £12000). The taxpayer must (in most cases) treat as a balancing adjustment the difference between the total allowances made in respect of that car and the net cost of £7000.
- The difference is a balancing charge if the allowances given total more than £7000; or
- the difference is a balancing allowance if the allowances given total less than £7000.
(The allowances will also be adjusted to account for the non-business use)
This manual applies to all types of allowance and to balancing charges.