ACCA Taxation (F6) Practice Exam

What type of capital allowance should not be pro-rated?

1. Annual Investment Allowance

2. First Year Allowance

3. Special Rate Allowance

4. Capital Allowance for Small Pools

The correct answer is: First Year Allowance

The First Year Allowance is a type of capital allowance that is not pro-rated because it is designed to provide a greater incentive for businesses to invest in qualifying new assets immediately. This allowance allows businesses to claim a significant percentage of the cost of eligible capital assets against their taxable profits in the first year of ownership, rather than spreading that claim over the life of the asset. In contrast, other types of capital allowances, such as the Annual Investment Allowance and Special Rate Allowance, often require pro-rating based on the period the asset is owned during the accounting year, especially if the asset was not in use for the entire accounting period. Capital Allowance for Small Pools also typically requires pro-rating since it allows businesses to claim a lump sum for small balances of unclaimed allowances that have not been claimed in previous years, based on their usage and ownership period. Thus, the First Year Allowance stands out as the one that allows immediate and complete deduction in the year of purchase, without the pro-rating requirement that applies to other forms of capital allowances. This feature encourages investment and aids cash flow for businesses.