Special Rate Pool and Capital Allowances

The special rate pool is a capital allowance category used for certain business assets that have a longer useful life or lower depreciation rate compared to assets in the main pool. It applies to specific plant and machinery, including integral building features and high-emission vehicles. Understanding how the special rate pool works helps businesses manage tax relief efficiently and comply with capital allowance regulations.

1. What Is the Special Rate Pool?

The special rate pool is a separate capital allowance category that includes assets with a slower depreciation rate. Instead of claiming 18% Writing Down Allowance (WDA) like the main pool, businesses claim a lower rate of 6% per year on a reducing balance basis.

A. Key Features of the Special Rate Pool

  • Applies to long-life assets and integral features.
  • Writing Down Allowance (WDA) is set at 6% per year.
  • Annual Investment Allowance (AIA) can be used to claim 100% tax relief on eligible expenditures before using WDA.
  • New and used assets can be added to the pool.

B. Assets That Qualify for the Special Rate Pool

  • Integral building features:
    • Electrical systems, including lighting.
    • Hot and cold water systems.
    • Heating, ventilation, and air conditioning (HVAC).
    • Lift, escalator, and moving walkway installations.
    • External solar shading.
  • High-emission cars:
    • Cars with CO₂ emissions exceeding 50g/km (for purchases from April 2021).
  • Long-life assets:
    • Items expected to last at least 25 years.

2. How the Special Rate Pool Works

The special rate pool allows businesses to claim capital allowances through a gradual deduction of asset values.

A. Writing Down Allowance (WDA)

  • Applied at 6% per year on the pool balance.
  • Calculated using the reducing balance method.
  • Carried forward each year until the pool balance reaches zero.

B. Example Calculation

A company purchases an HVAC system for $100,000. The WDA is applied as follows:

  • Year 1: $100,000 × 6% = $6,000 deduction → Remaining balance: $94,000
  • Year 2: $94,000 × 6% = $5,640 deduction → Remaining balance: $88,360
  • Year 3: $88,360 × 6% = $5,301 deduction → Remaining balance: $83,059

The process continues until the pool balance is fully deducted.

3. Special Rate Pool vs. Main Pool

While the main pool covers most plant and machinery, the special rate pool applies to long-life assets and integral building features.

A. Differences Between the Two Pools

Feature Main Pool Special Rate Pool
Writing Down Allowance (WDA) 18% per year 6% per year
Qualifying Assets General plant and machinery Integral building features, high-emission cars, long-life assets
Vehicle Eligibility Most business vehicles Cars with CO₂ emissions over 50g/km

B. When to Use the Special Rate Pool Instead

  • If the asset qualifies as an integral building feature.
  • If a business vehicle exceeds CO₂ emission limits.
  • If the asset has a long depreciation period.

4. Using Annual Investment Allowance (AIA) for Special Rate Pool Assets

Businesses can claim 100% tax relief on qualifying special rate pool expenditures using the Annual Investment Allowance (AIA).

A. AIA Eligibility

  • Applies to most plant and machinery, including special rate pool assets.
  • Up to the AIA threshold (e.g., $1,000,000), businesses can deduct the full cost in the first year.

B. Example AIA Claim

  • A business installs an air conditioning system for $80,000.
  • It claims 100% under AIA, reducing taxable profits by $80,000 in Year 1.
  • Without AIA, it would only claim 6% per year under WDA.

5. Disposing of Special Rate Pool Assets

When an asset in the special rate pool is sold, its disposal value is deducted from the pool balance.

A. Adjustments for Asset Disposal

  • If the sale price exceeds the remaining pool balance, a balancing charge applies.
  • If the sale price is lower, the pool balance continues to be reduced annually.

B. Example Disposal Adjustment

  • Special rate pool balance: $50,000.
  • Business sells a heating system for $10,000.
  • New pool balance = $50,000 – $10,000 = $40,000.
  • 6% WDA applied on the new balance next year.

6. Maximizing Tax Savings Using the Special Rate Pool

Businesses can optimize tax relief by effectively managing their special rate pool capital allowance claims.

A. Use AIA for Immediate Tax Relief

  • Claim 100% deduction on eligible expenditures before applying WDA.
  • Ensure that qualifying assets are classified correctly.

B. Plan Asset Purchases Strategically

  • Time major expenditures to maximize capital allowance claims.
  • Monitor tax changes to take advantage of temporary reliefs.

C. Maintain Accurate Records

  • Keep detailed records of purchases, installations, and disposals.
  • Ensure assets are classified correctly in tax filings.

7. Ensuring Compliance in Special Rate Pool Claims

Proper tax reporting and documentation ensure that special rate pool claims are processed correctly.

A. Maintain Asset Registers

  • Document asset purchase costs, capital allowances claimed, and disposal values.
  • Ensure correct classification between main pool and special rate pool.

B. Seek Professional Tax Advice

  • Consult a tax specialist for complex asset claims.
  • Stay updated on changes in capital allowance regulations.

8. Optimizing Capital Allowances with the Special Rate Pool

The special rate pool provides businesses with structured tax relief for long-life assets, integral features, and high-emission vehicles. By understanding how WDA, AIA, and asset disposals affect tax claims, businesses can strategically plan investments and minimize tax liabilities effectively.