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CTA09/PART8/S729 (5)

General

For periods of account after the period in which expenditure on an asset is first capitalised the amortisation or impairment charge in the accounts is adjusted in the ratio which the tax written down value of the asset bears to its accounting value immediately before the charge is made. The tax written down value of an asset is defined (in CTA09/PART8/S742) as its original tax cost:

• reduced by previous tax deductions for sums written off the asset
• increased by any taxable credits arising where, exceptionally, the asset has been revalued (see CIRD13050)

See CIRD12795 for the reduction of the tax written down value of an asset following its part realisation.

The accounting value of an asset is defined (in CTA09/PART8/S719) as its 鈥榥et book value鈥� recognised for accounting purposes (or - an accounting synonym - its 鈥榗arrying amount鈥�).

Example

Assume that annual amortisation charge in the accounts continues to be 拢100 a year for the asset in the example in CIRD12760 (where it is acquired at a capitalised cost of 拢1000 in the accounts, its tax cost is 拢800 and the amortisation change for the period of acquisition is 拢100).

The tax written down value of the asset for the second period of account is 拢800 - 拢80 = 拢720. Its accounting value immediately before the amortisation charge for the second year is 拢1000 - 拢100 = 拢900. The tax deduction is therefore 拢100 x 拢720 / 拢900 = 拢80.

Where no further expenditure on an asset is capitalised the proportionate adjustment of the charge in the accounts for periods after the first will always be the same as the adjustment for the first period. In the example above 拢720 / 拢900 (the fraction applied for the second period) and 拢800 / 拢1000 (the fraction applied for the first period) are equal at 80%.

Subsequent enhancement expenditure

The use of tax written down value etc for these subsequent periods (rather than original cost) ensures that enhancement expenditure is correctly handled.

Example

Assume in the example above that enhancement expenditure on the asset of 拢300 is capitalised in year 2 and the revised book value of the asset of 拢1200 (拢900 + 拢300) is amortised over a further ten years (at 拢120 a year). The tax written down value of the asset therefore becomes 拢1020 (拢720 + 拢300), the deductible debit for year 2 will be 拢120 x 拢1020 / 拢1200 = 拢102.

For subsequent periods, if no further expenditure is incurred on the asset, the same proportion of the amortisation charge in the accounts will be deductible. For year 3 the tax written down value of the asset immediately prior to the amortisation charge will be 拢918 (拢1020 - 拢102) and the accounts value at that time 拢1080 (拢1200 - 拢120). The deductible debit is therefore 拢120 x 拢918 / 拢1080 = 拢102. And so on over the economic life of the asset.

Other relevant provisions

This formulaic approach would prevent any tax relief being given where an asset is acquired with an accounting cost of nil even though the asset鈥檚 tax cost may be some positive figure. See CIRD12780 for the special rule to deal with this situation.

See CIRD12790 for the computation of deductible debits following the revaluation of an asset in the accounts (or the restoration of past losses).

See CIRD12795 for the computation of deductible debits following the part-realisation of an asset.

See CIRD12775 for the revision of this approach where syndicate capacity at Lloyd鈥檚 is written down in a company鈥檚 accounts for accounting periods prior to those to which Part 8 applies.