2.14 Dividend income is not taxable in a limited company. This is on the basis that the profits from which the dividend has been paid have already been subject to corporation tax, and it is recognised that there should not be a second charge.
3Capital Allowances
3.1 Capital allowances are computed by reference to the cost of the relevant assets but the allowances are generally given on a reducing balance basis, that is the allowance reduces each year. The current rate of capital allowances for most assets is 20% on the reducing balance. For the nuclear physicists amongst our readers we can perhaps retain your interest a little longer by explaining that capital allowances at a rate of 20% have a half life of 3.12 years.
3.2 We can compare the accounts charges and the capital allowances for an item of equipment bought by Rickinghall Printers Limited which is considered by the directors to have a life of ten years and no residual value. It has an original cost of £10,000 and realises £1,300 at the end of year 9:
Depreciation and loss on disposal
Tax pool carried forward
Capital allowance / balancing allowance
Accounts net book amount
Year
0 1 2 3 4 5 6 7 8 9
10,000
-
10,000
-
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000
1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
8,000 6,400 5,120 4,096 3,277 2,621 2,097 1,678
2,000 1,600 1,280 1,024
819 656 524 419 378
-
700
-
_____ 8,700
_____ 8,700
Total
3.3 It is a feature of capital allowances and depreciation that the two are equal over the life of an item of plant or equipment, but the allocation of the allowances over the different accounting years varies. In this example the depreciation in year 1 is £1,000 but the capital allowances are £2,000. In year 8 the depreciation is still £1,000 but the capital allowances are only £419. 3.4 Most items of capital expenditure go into a common pool so the equilibrium shown above is not evident in the computations. There are certain items of capital expenditure, such as short life assets and cars which have their own pools: this enables the taxpayer to obtain the allowances rather more quickly in respect of short-
24
Made with FlippingBook Learn more on our blog