Just looking to see what other people would do on this one.
If you know the client has ceased trading in the following tax year & you are completing previous tax years return, how would you go about the capital allowance.
I know you are not allowed to claim capital allowances in the final year of trading, and I know that I will have to add back into the pool assets which have a value at current market value (as he is keeping the tools). Would it be easier to only claim the portion of the value of the assets in this years return, leaving a 0 balancing charge for next year? So as to not increase his tax liability next year?
Also any tips of working out current market value of second hand tools i.e. drills & ladder? Do you have to find similar being sold second hand, or can you approximate (similar to depreciation value) depending on estimated working life of asset. What sort of proof would HMRC expect to see if they audited it?
Your question seems to be mixing up depreciation and capital allowances.
The amounts involved are not enough to be looking at tax planning so lets just treat it as a basic case of Joe blogss finishes trading and there are a few minor assets left in the business.
ok, lets see if I've got the sums right.
3 power tools between £60 and £200, ladder for £75. therefore 435 - 75 = 360-200-60 means that the other power tool is £100 (not that I have to work out every little detail, lol).
Depreciation for the penultimate year will be £180 for the power tools (£360/2) + £25 for the ladder so £205 depreciation leaving a carrying value of £230.
There is no depreciation in the year of cessation so everything would be written down/up to the realisable value.
For AIA you would put through the full £435 as the business was still trading, did not forsee itself not being trading and was not in the year of cessation, leaving no residual in the general pool.
As far as the assets go they still have a value when the company ceases to trade as they cannot have been fully depreciated during the given time frame but remember that the value will be market value, not the worth to the company so probably negligible disposal procedes for the gift of the power tools.
Don't have access to your data (and even if I did I don't have the time at the moment) so no idea if any early year losses will be brought into play at cessation.
Market value is determined by reference to an active market for similar goods. In this case Ebay would be a good example. For insignificant items such as these just find similar items that have actually been sold (not the prices people want but the prices they actually got) sufficient to deduce a meaningful average price and record the reasoning behind the price with copies of each of the pool of sales.
HTH,
Shaun.
p.s. amended just to add into the 7th paragraph the line "did not forsee itself not being trading" as that would have changed the financial statements from an historical cost to break up basis.
-- Edited by Shamus on Tuesday 25th of June 2013 09:27:12 AM
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi anyone have any ideas on this. Figures are pretty small. My idea is to claim a AIA capital allowance for the difference between the purchase price & what he could sell the items for approximately second hand after 1 years use.
He has 4 capital purchases - 3 power tools with a value from £60 to £200, and a ladder which cost £75.
I estimate that power tools last around 2 years with constant use so working the "market value" at around 50% of the purchase cost and the ladder at 3 years. I have checked on ebay and this seems pretty fair.
So if I put the £435 capital expenditure in General Pool, claiming £195 AIA, leaving a WDV of £240. So next year, the WDV will be reduced to 0 as assets are removed from the business as he is no longer trading.
Sorry to throw in a late one on this... are the power tools and ladders, replacements? I usually put anything below £100 to repairs and renewals (or loose tools and maintenance, depending what you like to call it).
Sorry to throw in a late one on this... are the power tools and ladders, replacements? I usually put anything below £100 to repairs and renewals (or loose tools and maintenance, depending what you like to call it).
I thought about mentioning that but discarded it as, as you realise Michelle materialarity must be considered in agregate.
The whole expensing less than a set figure is a bit of an urban legend perpetuated by those who handle clients with more substantial turnover than many of our's.
I may have jumped to completely the wrong conclusion about the business but my assumption was that it would fail one of the materiality tests (£435 would be material if turnover was less than £87k, Total assets less than £43.5k or Profit less than £8.7k (only one test needs to be failed to be material)).
Your more reasonable £100 in agregate for the year would mean an expectation of turnover of £20k, total assets of £10k and profit of £2k so a much more reasonable assumption for micro businesses.
Also of course, unless AIA was broached there is absolutely no tax saving by expensing. Lets take an example. In fact, this example (sorry if this is teaching my grannie to suck eggs but the post needs to be for the wider readership who may not appreciate things like the adding back of depreciation.
Anyway...
Assume profit is £1000
now if you expense the £435 (which you wouldn't, (see above) but lets just ignore materialarity issue for a minute and just think in tax terms) that leaves £565 @20% tax so tax of £113.
Now assume that you capitalise. The £1000 is reduced by the £205 depreciation to arrive at the paper profitof £795 but of course the depreciation is added back and replaced by AIA of £435 resulting in taxable profit of, yep, you guessed it, £565. So tax payable is still £113.
In principle the amounts that we are talking about here are a no never mind but the issue is that people mention deminimus limits on here a lot without considering them in relation to materialarity or aggregation.
As you say, your materialarity level of £100 is probably quite safe for your client base but just thought that I would chip in before others assume that there is some magical unofficial expense / capitalisation cut off level without realising that such is actually based on materialarity specific to the business rather than some official figure.
The above said, I would not capitalise a stapler even for a loss making business but my reasoning behind that is that despite a steapler being used over more than one period a stapler is stationary and stationary is always a consumable so expense.
kind regards,
Shaun.
p.s. the above is not saying that you are wrong Michelle, it's simply putting what you said into context (and trying to dispel an urban legend in the process).
p.s.2 the materialarity levels shown use the lower end of the generally accepted materiality levels of 0.5% of turnover, 1% of total assets and 5% of pre tax profit.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
