Example
Assume P:
starts trading as a plumber on 6 April 2002;
prepares accounts to 5 April each year; and
buys during 2002-03 a van for £5,000 and a computer for £1,000 for use wholly and exclusively for business purposes.
P has for the year ending 5 April 2003:
£5,000 first-year qualifying expenditure under section 44 (expenditure incurred by small or medium-sized enterprises) on which P can claim allowances of £5,000 x 40% = £2,000; and
£1,000 first-year qualifying expenditure under section 45 (ICT expenditure incurred by small enterprises) on which P can claim allowances of £1,000 x 100% = £1,000.
But P does not have to claim these first-year allowances. If, for example, P has income only £1,000 greater than the personal allowance then P might decide to claim first-year allowances of £1,000 in respect of only half the expenditure on the van and none in respect of the expenditure on the computer.
Section 53: Pooling of qualifying expenditure
270.This section makes explicit that qualifying expenditure must be pooled to arrive at writing-down allowances and balancing allowances or balancing charges.
271.As noted in paragraph 98 above, Part II of CAA 1990 does not refer to pools as such. Expenditure is pooled by requiring it to be aggregated for the purposes of working out writing-down allowances, balancing allowances and charges for each trade, deemed trade or notional trade. In this Act these requirements are expressed in terms of pools for qualifying activities.
272.Subsection (2) requires that expenditure for separate qualifying activities must be allocated to separate pools. So a person carrying on several qualifying activities may have several main pools and class pools plus separate sets of single asset pools.
Section 54: The different kinds of pools
273.This section sets out explicitly the different types of pool. In CAA 1990 the class pools and single asset pools are notional trades. The main pool is the default for the actual trade – or the activity treated as a trade.
274.Subsection (2) provides that a single asset pool cannot contain expenditure in respect of more than one asset. CAA 1990 achieves this by creating a notional trade for expenditure on the provision of an asset separate from any other trade carried on.
275.Subsection (3) points to provisions which determine if qualifying expenditure has to be allocated to a single asset pool (if it is allocated to a pool).
276.Subsection (4) and (5) provide similarly for class pools.
277.Subsection (6) provides what is the default rule in CAA 1990. This is that expenditure can only be allocated to the main pool if it does not have to be allocated to a class or single asset pool.
Figure 2: example of requirement that expenditure relating to the different activities must not be allocated to the same pool.
Section 55: Determination of entitlement or liability
278.This section is based on section 24(2) and (5) of CAA 1990. It decides whether a pool gives rise to entitlement to an allowance or liability to a charge.
279.The amounts of available qualifying expenditure (AQE) and total of any disposal receipts (TDR) are not defined until later in this Chapter. But putting this section here lets readers see why they matter:
if AQE is greater than TDR, they are entitled to claim an allowance; and
if AQE is less than TDR, they are liable to a balancing charge.
Section 56: Amount of allowances and charges
280.This section is based mainly on section 24(2), (3) and (5) of CAA 1990. It decides the amount of any allowance a person is entitled to claim for a pool or the charge for which they are liable.
281.Subsections (1) to (4) deal with writing-down allowances. The amount is generally 25% of the excess of AQE over TDR, adjusted up or down if the chargeable period is more or less than a year and/or the qualifying activity is carried on for less than the whole chargeable period. For the class pool for long-life assets the rate is 6%. For the class pool for overseas leasing it is 10%.
282.Subsection (5) allows a person to claim less than their full entitlement to a writing-down allowance. Section 24(3) expresses this differently. It requires a person to claim the allowance and to require it to be reduced to a specified amount. But the effect is the same.
283.Subsection (6) provides that if TDR is greater than AQE, the balancing charge is the excess: that is TDR-AQE.
284.Subsection (7) provides that if:
AQE is greater than TDR; and
it is the final chargeable period for a pool,
then the balancing allowance is the excess: that is AQE-TDR.
285.Both a balancing charge and a balancing allowance have the effect, in colloquial terms, of “emptying the pool”.
Section 57: Available qualifying expenditure
286.This section is based on section 25(1) of CAA 1990 which gives the general rule as to what is (in this Act) available qualifying expenditure. But it includes additional pointers to other provisions.
287.Subsection (1) gives the general rule. This is that AQE is the sum of:
qualifying expenditure allocated to the pool in the chargeable period; and
unrelieved qualifying expenditure brought forward from the pool from the previous chargeable period.
288.Subsections (2) to (4) point to other provisions which may affect AQE.
Section 58: Initial allocation of qualifying expenditure to pools
289.This section is based in part on section 25 of CAA 1990 and section 118(6) of FA 1994. There are also minor changes in the law. The section sets out the rules for what qualifying expenditure can be allocated to a pool and when.
290.Subsection (1) introduces the rules. It leaves implicit that a person is generally free to allocate or not allocate qualifying expenditure to the appropriate pool subject only to the detailed rules. (The “appropriate pool” is defined in subsection (8) as that which this Part requires.)
291.This flexibility over the allocation of qualifying expenditure is a change in the law. On close examination section 25(1) of CAA 1990 requires expenditure to be allocated to a pool in the first chargeable period it can be. This would be the chargeable period it is incurred unless first-year allowances are made. In that case it would be the next chargeable period. However the approach taken in this section is in keeping with the generally prevailing practice and maintains the flexibility taxpayers have had in practice to add qualifying expenditure in a later chargeable period (whether by design or because it was accidentally omitted in an earlier chargeable period). See Change 8 in Annex 1.
292.Subsection (2) prevents qualifying expenditure being used twice.
293.Subsection (3) prevents qualifying expenditure being allocated to a pool before it has been incurred.
294.Subsection (4) prevents qualifying expenditure being allocated to a pool unless the person owns the plant or machinery at some time in the chargeable period. This is based on section 118(6) of FA 1994.
295.Subsection (5) means that:
qualifying expenditure cannot be allocated to a pool for a chargeable period for which a first-year allowance is made on it – this may be only be part of the qualifying expenditure on the plant or machinery because of section 52(4); but
the balance of qualifying expenditure less first-year allowances can then be allocated to a pool in any later chargeable period (subject to the other rules such as the person still owning the plant or machinery).
296.This incorporates minor changes in the law which make the legislation more flexible. Again, see Change 8 in Annex 1. In summary subsection (5):
drops the requirement in section 25(3) of CAA 1990 that taxpayers must elect by notice to the Inland Revenue if they wish to allocate first-year qualifying expenditure to a pool for the chargeable period they incur it; and
leaves the balance of qualifying expenditure less first-year allowances made to be allocated to the appropriate pool as and when the taxpayer wishes (subject of course to the other rules).
297.Subsection (6) is based on section 25(5). It allows the balance of first-year qualifying expenditure less first-year allowances made to be added to the appropriate pool if there is a disposal event in the same chargeable period. That way the net cost of the plant or machinery is taken into account either by way of first-year allowances or in the pool.
298.It is up to the taxpayer to choose how much of the balance of first-year qualifying expenditure is added to the pool. Normally it will be all of the expenditure. But subsection (6) requires that at least some qualifying expenditure is allocated to the pool; and subsection (7) adds that this may even be a nil amount. This is a necessary corollary to section 64 in which this Act provides that a person does not have to bring a disposal value into account if they have allocated no expenditure to the pool. (Without the rule in subsections (6) and (7), a person might for example buy plant or machinery for £100, sell it for £90 and be left with £100 first-year allowances when the net cost is only £10.) See Change 8 in Annex 1.
299.Section 220 makes further provision about the allocation of qualifying expenditure in relation to finance leases.
