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HMRC internal manual

Capital Allowances Manual

PMA: WDA & balancing adjustments: Rate of WDA

CAA01/S56

Prior to FA2008 the annual rate of WDA was normally 25%.

The rate was 10% (subject to Revenue & Customs Brief 40/07) for overseas leasing CA24000 and 6% for long-life assets (LLAs) CA23700.

Main pool of P&M expenditure

FA2008 reduced the main rate of WDAs from 25% to 20% -

  • for CT, from 1 April 2008,
  • for IT, from 6 April 2008.
  • FA 2011 reduced the main rate of WDAs from 20% to 18%-
  • For CT, from 1 April 2012
  • For IT, from 6 April 2012

There are exceptions for -

  • small pools of P&M expenditure (either in the main pool or in the special rate pool - see below). Where the amount is £1,000 or less CA23225 that amount may be written-off as the WDA for that chargeable period
  • expenditure incurred wholly for the purposes of a North Sea ring fence trade, taxable under ICTA/S501A (supplementary charge in respect of ring fence trades) where the WDA is 25%.

 

Transitional provisions: When the chargeable period of a business begins on 1 April 2008 (CT) or 6 April 2008 (IT) the 20% rate will apply to the main pool of P&M expenditure from the start of that period. But when the chargeable period spans the relevant start date a ‘hybrid rate’ rate (see below) will apply for that transitional chargeable period.

When the chargeable period of a business spans the date the rate of WDA of the main is reduced, 1 April 2012 (CT) or 6 April 2012 (IT) a “hybrid rate” will apply for the transitional chargeable period.

Special rate pool

FA2008 also introduced a 10% pool called the special rate pool, which contains expenditure incurred on or after 1 April 2008 (for CT purposes) or 6 April 2008 (for IT purposes), on -

  • the provision or replacement of integral features CA22300, which includes both solar photovoltaic and solar thermal panels from 1/6 April 2012, see CA22335.
  • long-life assets (LLAs) CA23700, and
  • thermal insulation CA22220.
  • FA2011 reduces the rate of WDAs for the special rate pool from 10% to 8%-
  • For CT, from 1 April 2012
  • For IT , from 6 April 2012
  • Where a chargeable period spans the date the rate of WDA of the special pool is reduced a “hybrid rate” will apply for the chargeable period.

 

Transitional provisions: LLA expenditure: When the chargeable period of a business begins on 1 April 2008 (CT) or 6 April 2008 (IT) an already existing LLA pool will be transferred to the new special rate pool and will attract 10% WDAs from the start of the period. But when the chargeable period of a business spans the operative date, the following rules apply:-

  • all new LLA expenditure incurred on or after 1 (or 6) April 2008 is to be allocated to the new 10% special rate pool
  • A ‘hybrid rate’ will have effect for expenditure in the LLA pool for the whole of that transitional period, and
  • At the start of the next chargeable period, all unrelieved expenditure in the LLA pool is to be transferred to the new special rate pool.

Hybrid rate

When a business’s chargeable period spans the relevant change date: 1 April 2008 (CT) or 6 April 2008 (IT), a hybrid rate is used to calculate the rate of WDA for that transitional period.

  • The hybrid rate for the main P&M pool is arrived at by calculating the proportion of the chargeable period falling before the change date, and the proportion falling after it, calculating the rate for each portion at the 25% and 20% rates respectively, and then adding the two percentages together.
  • The hybrid rate for the LLA pool is calculated in the same way, but by applying the 6% and 10% rates to the portion of the period before and after the change date respectively, and once again, by then adding those two percentages together.

FA2011 Changes

For a business whose chargeable period spans 1 April (CT) or 6 April (IT) there will be two hybrid rates for unrelieved expenditure; one for any expenditure that qualified for the 20% rate and one for any expenditure that qualified for the 10% rate.

The hybrid rate is arrived at by calculating the proportion of the chargeable period falling before the change date and the corresponding proportion falling after the change date.

The apportionment must be calculated in days.

Example

A business draws up accounts for the period 1 January 2012 to 31 December 2012. It has no new expenditure but has carried forward £20,000 in the main pool. Because of the change in writing down allowance it must apply a hybrid rate. This is calculated as follows (Note the apportionment must be made in days: There are 366 days in 2012

The hybrid rate will be:

[96/366 days before 6 April 2012 @ 20%=5.25%] + [270/366 days on and after 6 April 2012@ 18%=13.28%] = 18.53%

The maximum writing down allowance is £20,000 x 18.53% = £3,706

Long or short chargeable periods - general

Reduce or increase the appropriate rate proportionately if the chargeable period is less or more than a year. You should also reduce the rate proportionately if the qualifying activity has been carried on for part only of the chargeable period.

General

The taxpayer may claim less than the full amount of a WDA.