How Short Life Asset (SLA) Allowances Work

If new main pool assets exceed 100% AIA limits, short life asset pools will allow tax losses on disposals to be set against taxable profit.

Glossary

The following acronyms are commonly used in respect of capital allowances. For the sake of brevity they are also sometimes used in this article.

SLA Short Life Asset A main pool asset with an maximum expected working life of eight years
AIA Annual Investment Allowance i.e. 100% annual capital allowance against new assets (Limit £25K)
WDA Written Down Allowance i.e. 18% on written down tax value B/Fwd. and new assets above £25K

Benefits of SLA - Short Life Asset Pools

New fixed assets such as plant and machinery, office equipment and commercial vehicles are usually to a "main pool" which attracts an AIA of 100% up to a limit of £25K.

If that limit is not exceeded the written down tax value of the pool will always be zero. If however new main pool assets are expected to exceed that limit, only WDA of 18% then applies to the excess leaving a balance carried forward that is again reduced by WDA in subsequent years. In theory this could go on indefinitely.

If a short life asset such as a computer or delivery van is later sold, that  will simply reduce the value main pool balance before WDA is assessed. If however it is instead assigned to its own short life asset pool, substantial tax reliefs that might otherwise be lost can become available as this article explains.

How Main Pool Capital Allowances are Calculated

Assume that there is a written down tax value for main pool assets B/Fwd from the previous year and new assets, including a van for £20,000 are forecast to be purchased for the current year:

 Capital Allowances and Written Down Tax Value £ Year 1 £ Year 2
Written down tax value of Main Pool Assets B/Fwd. 15,000 28,700
 add: New Plant and Machinery  25,000 0
 add: New Delivery Van  20,000 0
 Sub-Total of Main Pool Assets  60,000 28,700
 less: 18% WDA on written down tax value of Main Pool B/Fwd  2,700  5,166
 less: 100% AIA on New Main Pool Assets (limit £25K)  25,000  0
 less: 18% WDA on £20K Balance of New Main Pool Assets  3,600 0
 Total Capital Allowances  31,300  5,166
 Written down tax value of Main Pool Assets C/Fwd.  28,700 23,534

Allocating Short Life Assets to the Main Pool

The problem with the above is with having allocated the van to the main pool.

If 100% AIA is claimed against the long life plant and machinery, capital allowances of 18% for the van over two years will amount to £6,552, leaving a written down tax value of £13,448. Selling the van in year 3 for £5,000 would then create an apparent tax loss of £8,448.

However because the van has been allocated to main pool assets in this example, the pool’s  written down tax value £23,534 B/Fwd from year 2 would simply be reduced by the sale proceeds of £5,000 to £18,534 in year 3. This new pool value would then be reduced by 18%, meaning that the substantial loss incurred on the sale of the van would not be recognised and therefore not tax deductible.

Short Life Asset Pools and Capital Allowances

By electing to isolate the van by allocating it to a “special” short life asset (SLA) pool, this problem can be avoided. Short life is defined by HMRC as being no more than eight years following the year in which the asset was acquired.

The 100% annual investment allowance would be claimed against the £25,000 of new (long life) plant and machinery. Capital allowances of 18% would still apply to the van, meaning that after two years, WDA allowances of £6,552 would remain the sum of capital allowances claimed, leaving its written down tax value C/Fwd. into year 3 of £13,448, exactly as before.

The difference assigning the van to its own short life asset pool arises however when the van is sold during year 3 for £5,000 as follows:

Cost of Van £20,000
less; 2 Year's Capital Allowances £6,552
Written Down Tax Value C/Fwd. £13,448
less; Proceeds of Sale £5,000
Balancing Allowance £8,448

Applying the Balancing Allowance

As the van was separated into its own short life asset pool, a balancing allowance has now been calculated, representing the £8,448 tax loss incurred when it was sold: That means the loss is now recognised and is tax deductible.

The £8,448 tax loss plus the £6,552 of WDA claimed over the previous two years will then represent a £15,000 reduction in the taxable profits on which corporation tax has been charged over the van’s three year's working life in the business.

This compares with a reduction of just £7,452 in taxable profits; - i.e. two year's capital allowances of £6,552 plus £900 in WDA as a result of the reduction of £5,000 in year 3’s main pool written down tax value had the van not been separated into its own short life asset pool.

In the unlikely event that the sale of an short life asset produces a profit against its written down tax value, a balancing charge arises instead which would then be added to the taxable profit.

Rules Governing Short Life Asset Pools

Each short life asset has to be allocated to its own unique pool. Cars and long life assets such as plant and machinery do not qualify for short life asset pool treatment.

Electing to allocate a main pool asset to an short life asset pool must be advised to HMRC in writing within two years of the end of the financial year in which it was acquired (company) or by 31st. January after the end of the income tax year (sole trader). An election to do so is irrevocable; you cannot subsequently change your mind.

Short life means what it says: If, eight years after the financial year during which the asset was acquired it is still in the balance sheet, it's written down tax value has to be transferred to the main pool.

FAQs
How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions Depreciation