Confused about - Capital Allowances - Equipment Depreciation - Corporation Tax

Discussion in 'Accounts & Finance' started by Dave0108, Aug 17, 2017.

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  1. Dave0108

    Dave0108 UKBF Contributor Free Member

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    Hi Forum,

    I would appreciate if anyone has some time to help me out.

    For instance I purchase some equipment for my business. There is a laptop, camera, printer, desk, chair etc. The cost of these items is £1000 (ex VAT).

    Is my understanding correct that every year these items would depreciate by 25% and therefore after 4 years their value would be £0 in terms of my accounting records?

    Therefore every year I will reduce my corporate tax liability by £250 due to this depreciation?

    Obviously in the real world they would still be worth something.

    For example if I sell all this equipment after 4 years for say... £200. How would this money I receive be treated formally?

    As a profit made by selling stock that has a purchase price of £0?
     
    Posted: Aug 17, 2017 By: Dave0108 Member since: Oct 16, 2015
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  2. STDFR33

    STDFR33 UKBF Big Shot Free Member

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    Depreciation isn't an allowable expense for tax purposes.
    Instead, capital allowances are claimed for certain purchases.
     
    Posted: Aug 17, 2017 By: STDFR33 Member since: Aug 7, 2016
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  3. Dave0108

    Dave0108 UKBF Contributor Free Member

    52 1
    So basically what I said is correct, its just I havent said it correctly? You cannot deduct depreciation as an expense, but you allocate it under capital allowance and then deduct it from corporate tax liability?

    Is there a place that lists in more detail about how it works?

    I read this page:
    https://www.gov.uk/capital-allowances

    But it is so vague that it 1000s of questions arise in my mind about how it actually works.

    For instance there is this Annual Investment Allowance, which pretty much says you can invest into plant and machinery up to £200,000 and claim 100% of it in same year?

    Why bother with depreciation then?

    Also what happens when you sell an item that has depreciated to £0? (in real world it is still worth more than £0 obviously).
     
    Posted: Aug 17, 2017 By: Dave0108 Member since: Oct 16, 2015
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  4. STDFR33

    STDFR33 UKBF Big Shot Free Member

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    No, because you said:
    Which isn't right.

    Depreciation is an accounting adjustment.

    Capital allowances are a tax relief of certain types of capital expenditure.

    Depreciation is an entry so that accounts show a true and fair reflection of the assets in the business.

    If you sell an asset of which capital allowances have been claimed you have a balancing charge / allowance.
     
    Posted: Aug 17, 2017 By: STDFR33 Member since: Aug 7, 2016
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  5. SteveHa

    SteveHa UKBF Ace Free Member

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    You can pretty much set the rate of depreciation at whatever you want for your accounts. However, any deduction is added back when computing profits for tax purposes.

    Capital allowances are the tax deductible equivalent, though there is also the possibility of claiming annual investment allowance (AIA) which, in your case and for such small costs, would probably be the simpler option. AIA enables you to claim the total capital costs in the accounts for the year of purchase.
     
    Posted: Aug 17, 2017 By: SteveHa Member since: Jun 16, 2016
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  6. Clinton

    Clinton UKBF Legend Full Member

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    This page was written for contractors, but the explanation there on depreciation and capital allowances applies to all businesses. Hope you find it useful.
     
    Posted: Aug 17, 2017 By: Clinton Member since: Jan 17, 2010
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