BIM72067 - Cash basis transitional adjustments: entering the cash basis: capital allowances
Source: gov.uk (2025-04-09)


Capital allowances: unrelieved balances

In the cash basis, a business deducts amounts paid for equipment (but not payments for a car or other specifically excluded expenditure see BIM72035 (https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim72035)) in arriving at its cash basis profit figure.

If, prior to its first cash basis period, a business had been claiming capital allowances (under sections 59(1), 59(2), 461 or 475 of CAA2001), and there are unrelieved balances relating to the trade available on which capital allowances could still be claimed and which would be deductible under the cash basis, a transitional adjustment has to be made to ensure the correct amount of tax relief.

Any remaining unrelieved expenditure on assets that are in any capital allowances pool at the end of the period before the business starts using the cash basis (apart from that on non-cash deductible expenditure) becomes a deduction in the first year of the cash basis and the pool is reduced to zero.

An existing car pool remains and continues to operate.

For mineral extraction trades, a deduction is allowed providing that the expenditure is cash basis deductible and there would have been qualifying unrelieved balances if not for Sections 419A(1) of CAA2001.

The examples below explain how this works in practice.

Example 1

A business purchased equipment some years ago. It had been paid for in full and the expenditure had been pooled in the main capital allowances pool. Allowances had been claimed on the balance in the pool. At the end of the final period before the cash basis started the balance in the pool that would have been carried to the start of the new period was £1,545. In the cash basis period, new equipment costing £1,250 has been purchased.

A transitional adjustment is required to ensure the business gets tax relief for the £1,545 that has been spent on equipment in previous periods (this amount has not been relieved for tax because the capital allowances had not yet been claimed). So

Amount

Amount paid for new equipment in the cash basis period

£1,250 deduction

Transitional adjustment:

-

Capital allowances not yet claimed

£ 1,545 deduction

Both these amounts are treated as allowable expenses in calculating trade profits using the cash basis.

Non-cash deductible expenditure

If either the main pool or the special rate pool includes expenditure which is non-cash basis deductible in the amount of the unrelieved expenditure, the full amount of unrelieved expenditure cannot be a deduction in the first year of the cash basis. The amount that can be deducted is found by reducing the amount in a just and reasonable way.

Example 2

The business bought two main rate cars some years ago. They were used only for business purposes, so the expenditure was pooled in the main pool and writing down allowances were claimed. The business bought other equipment in a later year and did not claim Annual Investment Allowance (AIA) in that year, so the expenditure was added to the balance of expenditure in the main pool and writing down allowances were claimed. At the end of the last period before the business starts to use cash basis the balance of unrelieved expenditure in the main pool was £15,000. Some of that is the balance of the expenditure on the cars and some is the balance of expenditure on the other equipment.

The balance of expenditure on the equipment can be deducted in the first period of the cash basis. The balance of expenditure on the cars cannot be deducted in the cash basis.

The amount of the £15,000 that can be deducted is determined on a just and reasonable basis.

The amount of the £15,000 that is the balance of the expenditure on the cars is left in the pool (which is separate to any pool for a car with private use) and the business will continue to claim allowances on the balance each year.

Capital allowances: assets not fully paid for

If a business has been buying equipment by paying for it in instalments, which are cash-basis deductible and for which they have claimed capital allowances (under Parts 2,5,6,7 or 8 of CAA2001) and there are instalments still to be paid when the first cash basis period begins, this also will need to be considered when looking at the transitional adjustments. The principle of the cash basis is that tax relief is not given until a payment is made.

Example 3

The business has been buying a computer on hire purchase paying monthly (£250 per month) instalments, to be spread over 24 months. Its total cost is £6,000, and that entire cost was treated as having been paid on the day the business started to use the computer in the business. The business claimed the full amount of £6,000 as an Annual Investment Allowance (AIA) in the last tax year. At the end of the last tax year, there were 21 instalments of £250 left to pay.

In the cash basis period, the instalments will be deducted when paid. But the full £6,000 cost has already been relieved for tax. A transitional adjustment is needed so that the business does not get more tax relief than it is entitled to. The transitional adjustment treats the amount of the unpaid instalments when the cash basis period started as a receipt in the first period of the cash basis. There were 21 instalments of £250 not yet paid, so the cash basis receipt is £5,250 (21 x £250).

The business can claim a deduction for each instalment as it is paid. There will be 12 instalments paid in the first cash basis period, giving a deduction of £3,000 (12 x £250). In addition, the business pays £700 for new equipment in the cash basis period (giving a total spend of £700 + £3000 = £3,700). So

Amount

Amount

Amount paid for equipment in the cash basis period

(£700 + £3000)

£3,700 deduction

Transitional adjustment:

-

-

Instalments not yet paid by the end of the last tax year

(£5,250) receipt

-

If the computer is used partly for business and partly for other purposes the amounts claimed as deductions and receipts are to be adjusted on a just and reasonable basis so that only the part of the expenditure for business use is claimed as a deduction.

At the end of the first cash basis period, the business has 9 more instalments to pay, which will be paid in the second cash basis period. So the business will deduct those payments (9 x £250 = £2,250) in the second cash basis period.

Note that the instalments in this example relate to the capital cost of the computer only. The business proportion of the interest element of any instalments will be allowable in full (see BIM70040 (https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim70040).

Example 4

In the period of account before the cash basis the business purchased new office furniture costing £ 5,000. The furniture was delivered at the end of the period of account but the business did not have to pay for it for 60 days. The business claimed the full £5,000 as AIA in the final period before the cash basis. The £5,000 payment was made in the cash basis period. Additionally, the business paid £4,000 for new equipment in the first period of the cash basis, so payments totalling £9,000 were made in the cash basis period.

At the end of the last period before the cash basis, the amount the business has paid for the furniture (nil) was less than the allowances given (£5,000).

The difference between the amount paid and the allowance given is treated as a receipt in the first period of the cash basis - here, the difference is £5,000.

The business can claim a deduction for the £5,000 payment when it is made. So

Payments for equipment

Amount

Amount

in the cash basis period

(£5,000 + £4,000)

£9,000 deduction

Transitional adjustment:

-

-

Amount

Difference between amount paid for furniture

and allowances given

(£5,000) receipt