Further information on whole life costings
Legislation
Glossary of taxation terms
For more information on aspects of taxation and allowances, see the chapter on Capital allowances.
Capital expenditure: Money expended in acquiring long-life assets (including land, buildings, permanent improvements or additions or extensions to existing assets, including associated professional fees, furniture and equipment thereto) that are intended for use in business operations. These assets should have a useful life of more than 1 year.
Revenue expenditure: Expenditure incurred as a trading expense, such as on salaries, consumables, and occupancy and regular maintenance costs.
Taxation 'depreciation' allowances (for taxation purposes): A collective term for taxation relief afforded to commercial (tax-paying) organisations to offset the cost of capital expenditure incurred upon assets used for the purposes of their trade.
This should be differentiated from the rate of depreciation adopted by accountants and auditors when preparing company management accounts to allow provision for the replacement of assets. This is because the depreciation allowance for taxation purposes is fixed by legislation.
When an asset is disposed of, a review of the allowances received is required and an adjustment may be necessary.
Industrial building or structures that qualify for capital allowances are defined in section 18 of the Capital Allowances Act 2001. These include factories, manufacturing facilities, storage facilities, docks, tunnels and mines. There are specific rules that apply where part of a building is used for a non-qualifying purpose.
Initial allowances/first year allowances: Governments use successive Finance Acts to vary the proportion awarded, in order to increase or reduce this incentive, as a method of influencing or stimulating capital investment within the commercial sector of the economy.
Annual 'writing down' allowance: The annual depreciation allowance awarded in respect of 'qualifying expenditure' as a proportion of the residual balance of the initial expenditure (i.e., the original cost less the amounts already calculated and benefiting from tax relief).
Balancing allowance: On disposal of an asset, a comparison between its value and the written-down amount remaining on the owner's accounts is required.
If the asset is sold for a sum in excess of the vendor's after-tax-relief cost, then a 'profit' arises, which is subject to an adjustment to the depreciation allowance (that is, a reduction of tax relief), termed a 'balancing charge'. Alternatively, if the asset is 'scrapped' or disposed of at low value (compared with the residual amount), then an additional tax relief is awarded, termed a 'balancing allowance'.