AIA on equipment and cars - The Book-keepers Forum (UK)

Ammers · Veteran Member

AIA on equipment and cars

Shamus · Forum Moderator & Expert

Sorry Anne Marie,

This one's going to be really negative.

AIA does not cover cars.

Items not covered by AIA either because such is beyond £50k (thought that it had moved up to £100k this year?) or because AIA is not applicable to them will not necessarily be at 20%. (Some items are at 10%).

Just because items are written off for tax purposes does not mean that they do not have to be depreciated in the normal way through the books. AIA is only a a tax concept and quite different to financial reporting.

Tax advice and financial planning is one of those area's where you really have to know what your doing or you can get yourself in a lot of trouble for giving the wrong advice. If it was that easy people wouldn't spend three years getting their ATT qualification.

Also be aware that although the law has not come in yet we are facing new rules where any individual who give anyone tax advice that leads to a tax loss to the Treasury will be guilty of a new offence of deliberate wrongdoing, which carries a fine of between £1,500 to £50,000. (for reference refer to the accountancy age article http://www.accountancyage.com/accountancyage/news/2257899/man-pub-caught-under-tax-advice).

You will probably find that your PII covers you only for your bookkeeping work and would not cover you for giving tax advice!

I'm sure that Rob will pick up on this thread in the morning as he's more on the ball with the intricacies of tax than myself (He's already ATT).

Suffice for now to say that if you are not qualified in tax matters it is extremely ill advised to give clients tax advice or even discuss tax at all with there where they could misconstrue your opinions as advice.

Even though this message is quite negative I really hope that it saves you a lot of grief later.

Shaun.

Ammers · Veteran Member

Hi Shaun,
Thanks for your advice. I can see what your saying but I have no intention of giving anyone tax advice.. I don't feel confident enough and like you say I'm not qualified. The question was something that she asked me but also that I wanted clarification for myself as well as my husband is getting a new company van for work this year. She has an accountant do her returns anyway which I'm going to advise her to continue with. As for the bookkeeping and payroll, I'm doing the exam in payroll soon with ICB so once I get my insurances and practice licence etc I would be covered to do those for her.
Just reading back my comment and realised I got it wrong, I didn't mean car, I meant Van. had a long day yesterday.. brain not working..
Cheers
AnneMarie

Shamus · Forum Moderator & Expert

Morning Anne Marie,

Sorry, the way that your initial post read I thought that you were giving tax advice to a client which made me jump into batman mode as it's the equivalent of playing hopscotch blindfolded on a minefield.

I'll start again.

a van is completely different and to the best of my knowledge AIA is available for the van where it is not available for a car.

bear in mind though that there is a difference between what you have in your books and what you actually get to write off in the first year.

As we touched on last night. AIA is a tax concept but your bookkeeping is an accounting concept .The van would still be written off through the books over its useful economic life (I assume four years?).

If you are not in a position where the tax obligation for the current year warrants the use of AIA then you still have the option not to apply AIA but rather to apply traditional capital allowances.

It isn't a mix and match however, you can't apply AIA on some things and not on others. It's either capital allowances or AIA for the whole lot.

I wrote a bit of an epic on AIA some time back. I'm just going to have a dig around and see if I can find it for you.

Talk in a bit,

Shaun.

RobH · Expert

Morning Shaun, Anne-Marie,

Shaun I would say you have covered this one, no need for me to add anything as usual!

Rob

Ammers · Veteran Member

Morning to you both..
you are right shaun, my post did sound like I was giving tax advice..... It was very late when I wrote it and reading it back now it sounds very muddled.... when the little voice in my head says " GO TO BED" i should probably listen to it and go to bed.... and not keep on working...
I would like to stress i would NEVER NEVER give tax advice.... seeing as I still need it myself!!
with regards to the van, i thought i was correct in so far as you can claim AIA but I understand as well how it would be written off through the books...
The biggest thing I have found since studying is one question opens doors for so many other questions.... no wonder people study for years and years.... and no wonder accountants can charge a lot...
if you can find the thread on AIA I would like to read it....
Thanks
AnneMarie

p.s I like the hopscotch blind folded comment, did make me chuckle...

Shamus · Forum Moderator & Expert

Morning Rob,

it was one of those posts where I don't think Anne Marie realised that it would send all the lights flashing and sirens going in the Amigo's bat cave.... And after midnight sirens and flashing lights are really annoying so I might have been a little less diplomatic in my answer than normal.

It is a real fear of mine though, not talking about Anne Marie here but a general observation that so many people on here can so easily get in well out of their comfort zone because clients just assume that they are getting cheaper accountants when they hire us and we don't want to lose clients by seeming to know less than they expect us to.

Personally I dumb down my knowledge for clients and "You'll need to confirm that with your accountant" seems to be used as much as punctuation.

Just trying to find that message about depreciation and AIA for Anne Marie as she might find it useful. Also, as it's a couple of months old it might be time to revive it anyway.

Talk in a bit,

Shaun.

Ammers · Veteran Member

you are so true.. I had had loads of people say to me, " oh I'll pass you my accounts if your cheaper" when they find out I'm doing bookkeeping etc,,, I've had to explain its not as easy as that and there is a reason why accountants study so much! Plus the fact I don't want to take on work I don't know how to do.. and I wouldn't be doing my reputation much good by doing so ..
cheers
annemarie

Shamus · Forum Moderator & Expert

Hi Anne Marie,

FOUND IT!

It came from quite a long thread that might confuse matters as some of the answers are incorrect and it also goes off at angles. So, just took out the bit about the link between depreciation and AIA.... Now would be a good time to get a coffee as this is going to be a long one.

Normally when one depreciates the value of an asset over its useful economic life then each year a charge is taken to the profit and loss representing the depreciation for that year.

So, if you have an asset that is worth £1000 to be depreciated to £0 over 4 years then on a straight line basis one would take £250 to the P&L for each of the next four years.

The general rule is that there is a full years depreciation in the year that the asset is purchased and then the three years after that.

In the balance sheet the value of the asset will be shown with the depreciation deducted. This is because the balance sheet should not be cluttered with workings but rather these are relegated to a note to the accounts with a reference pointer on the face of the balance sheet.

So you will see that the depreciation charge has been deducted from the assets value and the depreciation charge has also been included in the P&L which will reduce the profit for the year by the depreciation amount.

When the profit or loss is taken over to the share capital and reserves this makes the two parts of the balance sheet balance (depreciation taken from asset, depreciation causes reduction in profit by the same amount).

In year 1 the initial depreciation amount will be charged. In year 2 onwards we only take to the P&L the depreciation for that year. Not the full amount of depreciation charged to the asset as if you think it through the depreciation charged the previous year will already be included in the P&L balance carried forwards from the previous year which is already included in the share capital and reserves area of the balance sheet.

The depreciation applied to the accounts shows as accurately as possible the current economic position of the company.

AIA is not depreciation but Ill cover that later on in the note.

The tax question is a little different. The depreciation charge that has been calculated is what will appear in the P&L as a depreciation expense. Nothing gets added back there.

This forms part of the profit before interest and tax which is an important figure for some of the key ratios used for analysis of a companies accounts.

The next thing to be calculated is the interest. This will then result in the profit before tax.

The actual tax calculation is not simply a matter of taking the profit before interest and applying the tax rate. This is a complex area which you dont want to get into until much later but suffice to say that all the adjustments are applied to the taxable amount here to calculate the tax payable.

The calculations never go anywhere near the face of the balance sheet. You just need to accept that the tax amount is derived from the calculated figures but can seldom be taken as a direct percentage of them.

In your study texts authors may for simplicity may have calculated the tax figure as a percentage of the PBT but that is not really how it works in the real world.

I wont go into tax as that could fill books let alone a single message. What I will do is cover just the depreciation side.

In the tax calculation the depreciation (which is an accounting concept) is added back and the AIA (which is a tax concept) is applied.

The AIA will effectively be a 100% write down in the first year but it may take the depreciation charge some time to catch up with this.

A problem that this raises of course is that the item that is still being depreciated in thee accounts has effectively had it's tax allowance front loaded so if sold before fully depreciated there is an issue between the books and the tax situation.

Tax is never so simple as just removing depreciation and applying AIA. There will be possibly dozens of adjustments applied to come to the tax figure.

The important concept here is that it is extremely unlikely that the tax figure can be calculated directly from the PBT simply by applying a percentage.

The above caused some argument over whether depreciation was applied during the first year. This was resolved later in the thread by quoting directly from FRS15.

FRS15 Tangible fixed assets states only that depreciation is the measure of the economic benefits of the asset consumed during the period.

Consumption includes the wearing out, using up or other reduction in the useful economic life of the asset whether arising from use, effluxion of time or obsolescence. (Sorry, can't claim that last paragraph as my own. it was a paraphrased quote from FRS15).

Anyway, that ties in with FRS18 Accounting Policies (accruals concept) and the statement of principles in that the cost of the asset is spread over the period to which it relates.

There is no mention within the standards, principles or companies act as to how the depreciation is to be recognised in the first year provided that it is allocated in a systematic fashion over the useful economic life of the asset.

I've had a flick though an analysis of the UK GAAP on this as well and again it comes up pretty lacking in any real detail on this area.

FRS15 is quite clear though on the principle that the actual application of depreciation must be done consistently across all assets of the same class.

So, conclusion would be that provided that the depreciation accurately reflects the assets rate of consumption then there is flexibility on how the asset is depreciated.

For timing that could be :
- first year in full
- Part first year
- Nothing in the first year
- calculated to the month rather than year
and numerous other options.

For actual depreciation method one could adopt :
- Straight Line
- Reducing Balance
- Output / Usage Method
- Sum of digits
- Revaluation
and others if more suited to the clients rate of asset consumption.

Basically its whichever method gives the most accurate reflection of the rate of consumption of the assets value.

What really matters is accuracy and consistency.

I appreciate that there was a lot here to read but you should now appreciate the difference between the tax concept and the accounting concept involved in the application of capital allowances and AIA.

Hope that this helps,

Shaun.

Ammers · Veteran Member

thanks shaun, think I'll wait till the kids are in bed before I tackle that!

Wella · Expert

Afternoon Shaun

Just to pick up on Anne-Marie's strap line "Too much Knowledge is never enough!"

Do you know of any general guidance/ publication of what depreciation to apply to certain asset categories?

For example Motor vehicle Reducing Balance @ 25%, Buildings Straight line over 25 years etc or is it left completely up to the individual to make their own judgement?

Just an observation but I still can't reconcile depreciating an asset a full year in it's first year, regardless of when it was purchased/ put into service, it seem to contradict the accruals concept of matching the expense to the year it applies (to quote another Amigo, it seems a bit there or there abouts)

Hope you're having a good one

Bill

adi2402 · Senior Member

I read over the above pretty quickly so forgive me if its been said above. You mention that you may go over the £50k AIA limit. If this is the case then you will be entitled to claim First year allowances on the excess (in tax year 09/10 & 10/11 for the moment).

Thought i'd mention this as you say you might go over the £50k limit.

adi2402 · Senior Member

Remember and pro rata the AIA increase to £100k from 6 April 2010 onwards, so depending on your year end first year allowances may not be an issue.

-- Edited by adi2402 on Monday 19th of April 2010 12:48:06 PM

RobH · Expert

Hi Adi,

welcome to the forum, good to have you on board! Are you a qualified accountant?

Rob

Shamus · Forum Moderator & Expert

Hi Bill,

you don't have to depreciate a full year in the first one but if you do you should do so consistently against all assets of the same type.

That method makes sense to me as it takes into account the fact that as soon as you purchase something it falls in value (especially if it's a share that I've bought!!!). The best example of that would be a car I suppose as that loses more in the first few seconds of ownership than it does in the rest of the year.

As mentioned in the copied thread all that you should really be aiming for is whichever method gives the most accurate reflection of the rate of consumption of the assets value (which of course may be no depreciation at all).

Rather than go into details on any asset type could I suggest having a read of this text (I buy it every year and it's about the best £30 I spend on a book).

Kaplan Publishing, Paper P6, Advanced Taxation, The complete Text. ISBN for the current version (FA2009) is 978 1 84710 739 8 (Just looked it up on Amazon and it's £30.20 and in stock).

Be prepared for some serious weight lifting though as it's A4 size and almost 6cm thick. Huge book but I find it even more useful than the Annual Taxation book by Melville (Actually, haven't bought that one since FA2007).

Oh, and the examples in the Kaplan text are better than any puzzle book!

Talk in a bit,

Shaun.

Wella · Expert

Thanks Shaun

Will be having a look at the publication you suggested.

Hope you didn't invest in any airlines at the moment, or in my old employer (Japanese car manufacturer having bad press at the moment)

Cars should be given their own depreciation formula, they actually depreciate the second they are registered before you take possession but not because their usefulness has diminished. Having said that I know a couple of people that actually bought high end Italian cars as investments and never even take them out the garage (what a waste, even though I do prefer two wheels)

Bill

Ammers · Veteran Member

That sounds like a very good book... might have to get myself a copy.
need some good bedtime reading!

adi2402 · Senior Member

Hi Rob,

Yeah ACCA, just having a look around this forum, seem a friendly and helpful place.

Shamus · Forum Moderator & Expert

Hi Adi,

we try our best. Like to think that it's a bit more homely over here than over on Accounting Web.

Although mostly ICB, IAB and AAT we've also got quite a few ACCA's on here although mostly where they've passed all of the exams but can't get the required practical experience. (I'll be there as soon as I've passed P2).

Robs a bit of a non conformist so he's ATT and a PQ CIMA.

we've also got at least one CTA and an ACA on here but they haven't posted much recently.

We look forward to you joining in some of the debates that occasionally get sparked on the site... Normally in the threads that you would least expect to start a debate.

Anyway, welcome to the site and talk soon,

Shaun.

adi2402 · Senior Member

thanks shaun.