BIM70073 - Cash basis: transitional adjustments: leaving the cash basis: capital expenditure
S66A CAA 2001
In the cash basis, amounts paid for items of equipment (other than those specifically excluded, see BIM70035) would be deducted in arriving at a cash basis profit figure, just the same as any other trading expense paid by the business.
For businesses not in the cash basis, the cost of equipment is deducted for tax in a different way to other trading expenses. For qualifying items, capital allowances are claimed instead of deducting the total cost of the item.
In the first period after leaving the cash basis, some adjustments are required to make sure that future transactions involving the equipment are taxed correctly.
Qualifying Expenditure
Amounts paid for equipment (still in use by the business when leaving the cash basis and which were cash basis deductible in the periods that the business was in the cash basis, must be brought into a capital allowance pool. The amount of those payments that had already been relieved for tax must be deducted in the pool. In many cases, this should result in a net nil balance on the capital allowances pool.
Bringing the items into a capital allowances pool has the effect that any future disposal proceeds from selling such equipment will have to be brought into the pool.
Non Qualifying Expenditure
Where an expense has been brought into account under the cash basis which, if not for the operation of the cash basis, would not have been qualifying expenditure, the amount paid should not be brought into the capital allowance pool. Instead, any proceeds from the sale of the assets should be brought into account as a receipt in calculating the profits of the trade in the account period in which the sale took place.
Example 1
While in the cash basis a business purchased tools and equipment and paid £5,000 for them. They claimed the full amount as a deduction.
They should first allocate the full amount of the cost to the main pool and then deduct the full amount of expenditure that has been claimed as a deduction. In many cases this will leave a balance of nil for the tools and equipment in the main pool.
| - | Main pool |
|---|---|
| Add | £5,000 |
| Deduct | £5,000 |
| Balance to be brought into the pool | NIL |
Example 2
While in the cash basis a business bought some equipment for £2,000. They paid £1,000 on delivery and agreed to pay two further instalments of £500. When they left the cash basis they had one payment of £500 to make.
They should allocate the full amount of the cost to the main pool and deduct the amount they have already claimed.
| - | Main Pool |
|---|---|
| Add | £2,000 |
| Deduct | £1,500 |
| Balance to be brought into the pool | £ 500 |
Example 3
There are special capital allowances rules for items purchased under a HP contract.
While in the cash basis, the business has been buying a computer (total cost £6,000 not including interest) on Hire Purchase paying monthly (£550 per month, £500 towards the cost and £50 interest) instalments. As at the end of the last cash basis period, £4,400 of instalments had been paid and had been deducted for tax. This is made up of 8 payments of £550 (£4,000 towards the cost and £400 interest).
If the business had not been in the cash basis, the entire £6,000 cost would have been treated as having been paid on the day the business started to use the computer in the business, so that capital allowances could have been claimed on the £6,000 from such date.
The transitional adjustment required in the first period after leaving the cash basis is to bring in the full £6,000 cost into the capital allowances pool, and deduct from the pool balance the amount of expenditure on the computer but not the interest relieved, which is £4,000 in this example.
This would give a balance on the pool of £2,000.
| - | Main Pool |
|---|---|
| Add | £6,000 |
| Deduct | £4,000 |
| Balance to be brought into the pool | £2,000 |