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Definition
Writing down allowance (WDA) is a term commonly used in the UK in the context of capital allowances. Capital allowances are a form of tax relief that businesses can claim on certain types of capital expenditure, allowing them to deduct a portion of the cost from their taxable profits.
What is writing down allowance?
Writing down allowance is calculated using the reducing balance method. This means that the allowance is applied to the decreasing value of the asset, taking into account any allowances claimed in previous years.
Qualifying expenditure refers to the eligible cost of the asset on which a business can claim writing down allowance. It typically includes the actual cost of the asset plus certain additional costs related to its purchase and installation.
At the time of selling or disposing of the asset, businesses may need to calculate balancing allowances or charges. This takes into account any unclaimed allowances or adjustments for previous claims.
The annual investment allowance is a separate allowance that provides 100% relief on qualifying capital expenditure up to a certain limit. Writing down allowance may apply to the remaining expenditure beyond the AIA limit.
If a business does not fully use its writing down allowance in a particular tax year, the unclaimed portion can be carried forward to following years.
Tax laws and regulations, including capital allowances, may be subject to changes. Businesses should stay informed about updates and seek professional advice to ensure compliance.
When to use writing down allowances
Writing down allowances are used when you need to reduce the taxable value of your business assets over time. They are applicable when the assets do not qualify for the annual investment allowance or if your business has exceeded its AIA limit.
These allowances allow you to deduct a percentage of the asset’s value from your taxable profits each year, spreading the cost over its useful life. This is particularly useful for high-value or long-term assets, ensuring a more gradual tax relief.
Why is it useful to claim capital allowances?
Claiming capital allowances is useful because it reduces your taxable profits, thereby lowering your tax liability. This allows businesses to offset the cost of purchasing and maintaining capital assets, such as machinery, equipment, and vehicles.
By claiming these allowances, you can improve cash flow, reinvest savings into the business, and better manage financial planning. Additionally, capital allowances can incentivise investment in business growth and development.
Example of writing down allowance
ABC Corporation purchases machinery for its manufacturing operations at a cost of £100,000. According to tax regulations, the machinery falls under a specific category eligible for capital allowances.
The government provides a writing down allowance of 20% per year on the reducing balance basis for this category of machinery.
In the first year, ABC Corporation claims a writing down allowance of £20,000 (20% of £100,000).
At the end of the first year, the book value of the machinery decreases to £80,000 (£100,000 – £20,000).
In the second year, ABC Corporation claims a writing down allowance of £16,000 (20% of £80,000).
This process continues each year until the book value of the machinery reaches zero or until the company decides to dispose of the asset. The writing down allowance allows businesses to gradually deduct the cost of assets over time for tax purposes.
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