Managing a business requires expertise. Cash inflows in a business are balanced against taxes to obtain viable profits. A writing down allowance provides a sigh of relief for new and old business owners as it reduces the taxes on purchasing machinery or installing a factory.
A writing down allowance is the percentage of the value of assets included in the profit calculations of a specific period to get tax deductions. Business owners can get a 20% tax deduction on purchasing a plant and machinery. It is also available on items such as cars that do not account for an Annual Investment Allowance (AIA) or Capital Allowance.
Moreover, a writing down allowance continues to offer tax deductions over the years as compared to the AIA. Various items are purchased in pools and get tax deductions based on the percentage of that pool.
What is Writing Down Allowance?
You can use the writing down allowance if you don’t claim the entitled amount of all the annual investment allowance or the first year allowance. It extends over several years, and you can use it for assets that aren’t eligible for other deductions, such as gifts, cars, or entities owned before being used in business.
However, when an item was given as a gift or under another person’s ownership, you should utilise the market value to determine deductions such as a first-year allowance. When the AIA is unavailable, either it has reached its limit, or the expenditure does not qualify for the AIA, such as car, gifts, etc.
A writing down allowance of 18 % applies to items in the main rate pool. You can estimate the allowance on the basis of the declining balance. Unless an item is of a type that must be assigned to a single rate pool or is in a single asset pool, it remains in the main pool.
What Qualifies For Writing Down Allowance?
Writing Down Allowance allows you to deduct a percentage of an item’s value from your profits each year. The item does not qualify for Annual Investment Allowance if you’ve already claimed AIA on items worth more than the AIA amount, and the items including:
- Business cars, Gifts
- Lifts and moving walkways
- Space and water heating systems
- Air cooling systems and air-conditioning
- The system is used for business and its not for toilets and kitchen
- Hot and cold water systems
- Electrical systems
- Solar shading
- Things you owned before you used them in your business
CO2 emissions determine the rate deductible for business cars, and the percentage of the item’s worth that you can claim varies by the pool.
How Do I Claim Writing Down Allowance?
To calculate your Writing down allowance, organise the items you’ve purchased into ‘Pools’ based on the percentage rate they’re eligible for. You can calculate how much you can claim and deduct it from your profits before paying tax on your tax return after knowing your items’ rate.
- Calculate the item’s value, which is usually the price you paid.
- Use the market value if it was a gift or if you already owned it.
- The starting balance for the next accounting period is the amount left in each pool.
Claiming the writing down allowances depends upon the item rates and the item groups in pools. There are three types of pools which are:
- The main pool has a rate of 18%
- Special rate pool that has a special rate of 6%
- Single asset pools with a rate of 6% or 18% depending on the purchased items.
How is WDA calculated?
You can calculate the writing down allowance as per British government rules and regulations. You must meet the minimum requirement that makes you eligible for the WDA for a chargeable period. Make sure you check the pool on which your requirements have fallen and compare any disposal values purchased to account during the chargeable period.
- If you calculate the WDA and the disposal values are more than the pool, the difference is the balancing charge.
- Calculate writing down allowance if the disposal values are lower than the pool. The chargeable period(corporation tax or income tax) is not the chargeable period in which the business or trade stops.
For Example,
Chargeable Period = 18 months
Rate = 25%
WDA = 25% x18/12
= 25% x1.5
= 37.5
The pool is more than the disposal values if the trade stops when the chargeable period. The main difference between the pool and the disposal values is a balancing allowance.
What is a Writing Down Allowance example?
A writing down allowance lets us deduct taxes on the profits made over items used in business. You can get an 18% writing down allowance on machinery and plant installation.
A 6 to 8% per cent writing allowance is available on the following items:
- Escalators
- Parts of a property that last for 25 years or more.
- Cars with higher CO2 emissions.
Short Term Assets
Short term assets are those that have a life of up to eight years. These are also called current assets and include:
- Bank accounts
- Cash
- Securities
- Receivable Accounts
- Inventory
- Business equipment
- Any assets that last for five or less than five years.
The writing down allowance does not reduce to zero as it builds on the profit made on an item in the last year. For example, an asset costs £20,000 and qualifies for the 8% writing down allowance. You can claim an allowance of 8% in the first year, which is £16,00 here. In the coming year, you will be able to claim 8% of the last year’s writing down allowance.
Conclusion
You can list writing down allowance as a tax deduction made on the profits obtained by your business. Calculations are made on the items used in business and gifts. The market price of these items helps in the calculation of profits. All the items are specific to a “pool” and each pool has a specific rate. You can get writing down allowance after determining the prices of the items and the specific pools.
