Capital allowances are a tax deduction for capital expenditure incurred on qualifying assets and are calculated as a percentage of the expenditure. The tax written down value (TWDV) of an asset is the expenditure remaining after capital allowances for a chargeable period have been claimed.
The TWDV is carried forward to the following chargeable period and is the figure on which the allowances for the following year are calculated. If the asset is disposed of for less than the TWDV then a balancing allowance can be claimed as a final deduction for that asset. If the disposal value is more than the TWDV then a taxable balancing charge will arise.
Assets classified as plant and machinery are usually aggregated into a pool. Expenditure on any qualifying asset is added to the pool and capital allowances are calculated on the pool as a whole. In this case the TWDV remaining after the allowances have been claimed will relate to the whole pool and if disposal values of any assets in the pool in any period exceed the TWDV a balancing charge will arise.