ACCA Advanced Taxation (ATX) Practice Exam

What is a key rule to remember when an unincorporated business ceases to trade regarding capital allowances?

1. All pools must be increased

2. WDAs, FYAs, and AIA are available in the final year

3. All pools will need to be bought down to nil

4. Only balancing adjustments are necessary

The correct answer is: All pools will need to be bought down to nil

When an unincorporated business ceases to trade, a critical consideration regarding capital allowances is that all pools must be brought down to nil. This process entails calculating any balancing adjustments that may arise from the cessation of trading. The rationale behind this rule lies in the treatment of capital allowances in the final periods of a business. When a business ceases trading, it must evaluate the value of its capital assets in order to ensure that capital allowances previously claimed are accurately reconciled. This includes ensuring that any remaining value in the capital allowance pools is fully utilized or accounted for through balancing charges or balancing allowances. Bringing all pools down to nil effectively ensures that all capital allowances have been exhausted and prevents any future claims on assets that are no longer in use. It ensures that the business does not continue to benefit from capital allowances for assets that are no longer generating income, thereby aligning tax relief with the actual economic situation of the business. In contrast, the other options present different approaches that do not align with proper tax treatment upon cessation of trade. For instance, increasing pools or claiming allowances in the final year may contradict the requirement to reconcile those pools to nil at cessation. Balancing adjustments alone would not fulfill the overall objective of ensuring all claims are settled correctly in