How Does Depreciation Work?

[dal]

With a ltd co - does depreciation work in this manner:

1. You deduce your items of plant & machinery each year for your annual accounts & pool these assets in their according pools; main pool, single asset pools between; class pools;
2. Your profit & loss sheet displays a nonsensical figure which you then need to ignore your deductions of depreciation & deduct 18% on main pools, between 18 - 6% on single asset pools, 6% on class pools;

So for simplicity sake you have £20k turnover in a single year & the only expense you've had is £10k of plant; straight-line depreciation over 5 years with no resale value. For simplicity lets sake there's been no more business apart from this.
So in your accounts you have depreciation of £2,000 per annum. At the end of 5 years you've depreciated £10k in your own accounts.
However from HMRC's perspective the main pool capital allowance - you receive 18% relief of these items totaling £1,800 over the course of the 5 years.
You've suffered £8,200 of inaccurate revenue?

 

[Scalloway]

Depreciation and tax allowances for capital expenditure are two completely different things.

You depreciate assets so that you write off the original cost over the asset's life. You only withdraw the profit declared in the accounts so that you have money laid aside in the business bank account for a replacement.

HMRC generously allow you to claim all or part of the cost of the asset against your taxable profit so you pay less tax and it gives you an incentive to buy more assets.

 

[dal]

Thanks Scalloway, sorry to ask such silly questions. How do you account for this in your accounts? So the ltd company prepares it's accounts based on straight-line depreciation. The profit you have listed in your company accounts & subsequent corporation tax is an incorrect value. Maybe this is the reason you are able to submit separately to HMRC & Companies House? You'd need to prepare 2 completely independent sets of accounts?

"HMRC generously allow you to claim all or part of the cost of the asset against your taxable profit so you pay less tax and it gives you an incentive to buy more assets." If you made a loss that year you'd not want to claim the full-amount & use a writing-down-allowance instead I imagine?

I'm so confused .

 

[Scalloway]

What you do the match the Companies House profit and the taxable profit is a calculation called the Tax Computation. This normally forms part of the software you use to submit your CT600. A simple version would be:

Profiot per accounts...............£X
Add back depreciaotion.......£X
Deduct Capital Allowances..£X
Taxable profit.............................£X

If you make a loss you can claim whatever Capital Allowances you wish, or none at all. Claiming anything is not compulsory. If you realise the second year is going to be very profitable you can set a previous year loss against that profit to save tax.

You can claim a proportion of AIA in the year of purchase and claim writing down allowance thereafter.