What Is Tax-Allowable Depreciation?
Tax-allowable depreciation (capital allowances) is the tax system's version of depreciation — the relief you claim on capital assets instead of the accounting charge. Here's how it works in ACCA.
Tax-allowable depreciation — often called capital allowances or tax depreciation — is the deduction the tax rules allow for the cost of qualifying capital assets. Because accounting depreciation is not tax-deductible, the tax system substitutes its own standardised allowance, and this appears in both TX and investment-appraisal questions in FM and AFM. Specific rates change, so confirm them against the Finance Act for your sitting.
Why it replaces accounting depreciation
When calculating taxable profit, you add back the company's own depreciation (which is subjective) and deduct tax-allowable depreciation instead, so every business is treated consistently for tax purposes.
How it affects NPV calculations
In investment appraisal, tax-allowable depreciation does not itself move cash, but it reduces taxable profit and therefore the tax paid — a tax saving. The exam method is:
- Calculate the tax-allowable depreciation for each year (for example on a reducing-balance basis).
- Multiply each year's allowance by the tax rate to get the tax saving.
- Include the tax saving as a cash inflow, watching the timing (often a year in arrears).
- Deal with the balancing allowance or charge when the asset is sold.
Getting the timing and the balancing adjustment right is where the method marks are — and under the own-error rule those steps score even if a figure slips.
Marking a full appraisal answer against the official ACCA scheme with The 50% Club shows you which of these method and own-figure marks you earned.