Depreciation vs capital allowances

[Jon12345]

This one has always confused me.

Let's assume you have an asset you bought for £5K, and you are using straight-line depreciation in your accounts over 5 years.

£5K > £4K > £3K > £2K > £1K > £0K. Gone! I've got that bit.

The capital allowances are 18%. So, in year one, you can claim for:

£5K x 18% = £900.

But what capital allowances can you claim in year two? Is it £4K x 18% or is it £4.1K x 18%?

I'm not sure if you reduce the asset by 18% each year in this case if you see what I mean.

 

[Somos Accounting]

Is it £4K x 18% or is it £4.1K x 18%?

£4.1K * 18%, i.e. the reduced balance or written down value (WDV).

Perhaps worth also checking first if it would qualify for Annual Investment Allowance (AIA).

 

[Jon12345]

Thanks for that. I use Xero as my accounting package. It does the depreciation automatically, so that side is covered.

But does that mean you need to create a separate spreadsheet to track all the written down values for each asset, by year?

e.g.

Year 0: £5K
Year 1: £4.1K
Year 2: £3,362 (£4.1K - (£4.1k x 18%))

 

[Somos Accounting]

https://www.gov.uk/work-out-capital-allowances/work-out-what-you-can-claim explains the calculation further.

Yes, you would need to keep a separate calculation of the capital allowances for tax purposes.

 

[CriticalThinker]

Yes, you would need to keep a separate calculation of the capital allowances for tax purposes.

Only if the OP is planning on calculating their own taxable profits and tax; which of course may be the case.

If you are just wanting to maintain your company accounting records then you only need to worry yourself with depreciation as this the method to account for the write down of value over time in your accounts. Capital allowances are the equivalent used for tax purposes to level the playing field for businesses otherwise, as you can imagine, with the discretion that company's can choose their own depreciation policies you would have a lot of businesses writing down asset values early in their useful life to accelerate the tax deductions.

If you are engaging an accountant to undertake the tax calculations for you then there is no particular reason for you to maintain WDV records as they will have all that information

 

[Somos Accounting]

Only if the OP is planning on calculating their own taxable profits and tax; which of course may be the case.

If you are just wanting to maintain your company accounting records then you only need to worry yourself with depreciation as this the method to account for the write down of value over time in your accounts. Capital allowances are the equivalent used for tax purposes to level the playing field for businesses otherwise, as you can imagine, with the discretion that company's can choose their own depreciation policies you would have a lot of businesses writing down asset values early in their useful life to accelerate the tax deductions.

If you are engaging an accountant to undertake the tax calculations for you then there is no particular reason for you to maintain WDV records as they will have all that information

Yes, valid points - I'd assumed the OP was doing their own accounts and returns (perhaps I should have stated my assumptions).

 

[CriticalThinker]

Yes, valid points - I'd assumed the OP was doing their own accounts and returns (perhaps I should have stated my assumptions).

I understood but of course using an accountant would be highly beneficial to anyone to make use of all the knowledge and allowances, AIA for instance (btw it's purely just coincidental that two accountants are the only posters to this post )

 

[Jon12345]

Yes, doing my own accounts. Good assumption! I am using the AIA for a laptop I bought, but the other capital allowance is for a car. I think I know what to do now. This process has always confused me, as I wasn't sure if I should have applied the 18% to the current asset pool value, after factoring in depreciation. But it looks like there will be two schedules to keep: depreciation and WDV.

 

[CriticalThinker]

ut it looks like there will be two schedules to keep: depreciation and WDV.

Correct - one for accounts purposes, the other for tax.

capital allowance is for a car

Just be aware that you need to consider the emissions of the car to determine the capital allowance pool and rates to be claimed

 

[Jon12345]

Great advice guys and much thanks.

 

[Jon12345]

May I ask one more question? I am at this part of the online tax form:

"My 'basis period' (the self-employed period for which I am taxable) is not the same as my accounting period (Optional) "

My accounts run 1/1/17 to 31/12/17. So that is my accounting period. Is the basis period April to April and so, therefore, I have to check that box, showing that they are different periods?

 

[CriticalThinker]

Is this financial year (1 Jan 17 to 31 Dec 17) your first trading year?

The simple answer is yes, the basis period is different to your accounting period however I am conscious that you get the basis period correct this year and next and this may result in overlap profits.

For your first tax year the basis period is always the date from when you commenced trade to the following 5 April and thus should have been 1 January 2017 to 5 April 2017 (2016-2017 TY). The second year should then be 1 January 2017 to 31 December 2017 (2017-2018 TY) and the third year is then YE 31 December 2018 (2018-2019 TY). This results in 3 months of overlap profits (1 Jan - 5 April) with overlap relief then being given when you cease trading

 

[Jon12345]

No, it is about my 15th trading year! So does that make it different?

 

[CriticalThinker]

Yes because as a continuing business for the last 15 years, as in the example above, the basis period (the period in which you are taxed) should be the same as your accounting period (Jan - Dec each year) i.e. you will be taxed in 2017-18 on the profits earned in the year ended 31 Dec 2017 which is now your 'basis period'

Therefore you need to click no. Why the revenue continue to use a negative to ask the question I don't think we'll ever find out!?

 

[Jon12345]

Yes, you are right. They will be using double negatives next!

I don't have a yes or no option. Only tick the box or not. So, the statement with a checkbox next to it is:

My 'basis period' (the self-employed period for which I am taxable) is not the same as my accounting period (Optional)

So, am I correct in thinking that my basis period is now the same as my accounting period, and therefore I do not check the box? And so I, therefore, don't "click no", but in fact leave the box blank?

 

[CriticalThinker]

Got it

 

[Jon12345]

Thank you!

 

[Jon12345]

I've just read something that says that you cannot claim capital allowances if on a cash basis. I am on cash basis. So I am wondering if this applies to cars too. And my laptop, which was going through the AIA. Is the AIA ok to claim if on cash basis, or is AIA considered a type of capital allowance?

I've got a headache!

 

[CriticalThinker]

Who would be an accountant hey?! I'll try to make this as pain free as possible so not to cause a migraine!

The laptop can be claimed as a usual business expense; the tax effect being the same as if you used the AIA which you can't use under the cash basis (it is a capital allowance).

The car will have capital allowances applied as previously discussed (I'm assuming you don't use HMRCs simplified expenses scheme to work out the business costs for the vehicle)

 

[Jon12345]

Thank you, you've been great. Just when I think I have it all sorted, the rabbit hole goes deeper!

Ok, so with the laptop, since I have put it down as an asset in Xero, I presume I need to do some kind of journal entry so that it shows up under expenses. Is that right?

The car is not using simplified expenses scheme so that looks like what we all discussed earlier still applies. Yay!

I've also just noticed that I can use a flat rate for home use. I work from home. I will need to add an entry for that too.

 

[CriticalThinker]

Ok, so with the laptop, since I have put it down as an asset in Xero, I presume I need to do some kind of journal entry so that it shows up under expenses. Is that right?

Correct. You will need to DR expenses P&L CR cost of asset BS (if you've put through depreciation you'll also need to reverse and DR dep'n BS CR dep'n P&L) so that your balance role forward correctly.

I've also just noticed that I can use a flat rate for home use. I work from home. I will need to add an entry for that too.

Correct, this flat rate is based on hours worked from home (I would imagine you've seen the applicable rates). The journal entry for that would be DR use of home expenses CR capital account (Jon)

If you hadn't wanted to do all the individual journals you could prepare your accounts then do some opening balance adjustments to correct Xero to match the filed accounts

 

[Jon12345]

I did a journal entry and actually understood what I was doing!

There is one thing I am stuck on before I complete my accounts. I have my laptop as a fixed asset in Xero, but I am cash basis so I want to convert that to an expense. I did a journal entry to put the cost of the laptop as an expenses, taking it away from the fixed asset journal. But in Xero, you register an asset. So when I click the Run Depreciation button, it depreciates all my assets, including the laptop.

I am scared to delete the laptop fixed asset in case it messes up something in my accounts. i.e. the laptop costs disappear.

What to do? Is it safe to delete the laptop under fixed asset, or will it mean I need to change something else?

 

[CriticalThinker]

Ok great, almost there!

Right what you'll need to do is remove the asset from the fixed asset register (it's nice to see someone actually using this function in Xero!). Doing this will not affect the journal entries that you made as these are postings to the general ledger.

There are two ways you could delete the asset:

1) Delete the asset - see link
2) Process it as a disposal - see link

If you do one of the above and have issues with the postings made, let me know and I can always sort some correcting journals for you so you get back to where you want to be.

 

[Jon12345]

It's ok, I think I have worked out what to do. I will delete the asset and just change the account entry from computer equipment under assets, to IT stuff under expenses.

Thanks for everybody's help. It was really useful.

Edit: Our posts crossed. I will delete the asset. Then, I will edit the account the original purchase went to, so it reflects expenses, rather than assets