ACCA Advanced Taxation (ATX) Practice Exam

Which of the following describes a key aspect of capital allowances when a business ceases to trade?

1. Only a portion of the allowance can be used

2. No WDAs, FYAs, or AIA in the closing year

3. Closing year allows for full write-off

4. They are fully transferable to other businesses

The correct answer is: No WDAs, FYAs, or AIA in the closing year

When a business ceases trading, the rules around capital allowances emphasize that there are no write-down allowances (WDAs), first-year allowances (FYAs), or annual investment allowances (AIAs) available in the final accounting period of the trade. This means that during the year in which the business ceases its operations, there will be no new claims for capital allowances against profits. This is a significant aspect because it affects how the tax liabilities are managed in that final year. Without the opportunity to claim these allowances, the business cannot reduce its taxable income through depreciation on capital assets, potentially resulting in a larger tax burden when winding up the business. Capital allowances are effectively intended to incentivize investment during the operating period, but the cessation of trade alters how these allowances can be utilized. In contrast, the other options suggest various scenarios regarding the use of capital allowances that do not accurately reflect the legislative framework. For instance, the notion of using only a portion of the allowance or that the closing year allows for full write-off is misleading since the rules clearly state that no allowances can be claimed in that conclusive year of trading. Lastly, the idea of allowances being transferable to other businesses does not reflect the general principles governing capital allowances, as they typically remain