ACCA Advanced Taxation (ATX) Practice Exam

For plant and machinery loans, which period is relevant for tax relief?

1. Loan period of one year only

2. Relief is for the purchase year and the following two years

3. Relief is unlimited until the asset is sold

4. Relief ends after five years from purchase

The correct answer is: Relief is for the purchase year and the following two years

The correct answer is grounded in the tax treatment of capital allowances associated with plant and machinery. In most tax jurisdictions, when a business acquires an asset such as plant and machinery, it is allowed to claim tax relief in the form of capital allowances. This relief is designed to acknowledge that the asset will depreciate in value over time as it is used for business activities. Usually, in the case of plant and machinery, the tax relief is structured to apply in the year the asset is purchased and is extended for the following two years. This means that businesses can claim tax relief on capital allowances in the purchase year and the subsequent two years, effectively allowing for a total of three years of relief associated with the initial purchase. This structure is particularly beneficial as it enables businesses to manage their tax liabilities more effectively in the years immediately following the acquisition of significant assets. By contrast, the other choices do not align with the conventional treatment of tax relief for plant and machinery: - The loan period of one year only does not account for the necessary relief period associated with asset depreciation. - Unlimited relief until the asset is sold is unrealistic since tax legislation typically imposes limits on how long capital allowances can be claimed. - Relief ending after five years from purchase doesn’t reflect