Something that has puzzled me for a long time, is it disadvantageous to claim capital allowances? It seems to me you are worse off compared to cash accounting.
Van purchased for £25k Capital Allowances over 5 full years comes to £3146 However depreciation over 5 years comes to £5000 added back to the profit, meaning you have "paid" an extra £1954. If you then sell the van at £9300 there is no balancing charge or allowance, so you have been "taxed" nearly 2k for the privilege.
Contrast that with cash accounting and you can claim the full amount as expenses and pay £5000 less tax. Sell it after 5 years for £9300 and you're still better off by £3140
I'm no doubt missing something but I can't figure out what it is.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Forgive me if this is a daft question, but I'm just curious as to why would you claim written down allowance when you can claim 100% annual investment allowance?
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All thoughts are my own and should not be used as professional advice.
My musings are primarily hypothetical, but was reminded when a similar example has cropped up in some accounts I will be working on shortly.
In my case there isn't enough profit to justify AIA, but it could be that it's a car for example. The problem still remains the same though.
AIA in year one £5000 tax reduction but 1000 added back via depreciation (assuming 5 years) For the sake of example, FA bought at start of first year and sold after end of 5th year.
after 5 years you have "paid back" the original tax deduction via depreciation but if you then sell the vehicle (say £9000) you have to pay £1800 of the AIA tax allowance originally claimed.
From what I can see, with cash accounting you benefit from the £5000 tax reduction in the first year and pay back £1800 after year 5, but are not penalised by depreciation.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
My musings are primarily hypothetical, but was reminded when a similar example has cropped up in some accounts I will be working on shortly.
In my case there isn't enough profit to justify AIA, but it could be that it's a car for example. The problem still remains the same though.
AIA in year one £5000 tax reduction but 1000 added back via depreciation (assuming 5 years) For the sake of example, FA bought at start of first year and sold after end of 5th year.
after 5 years you have "paid back" the original tax deduction via depreciation but if you then sell the vehicle (say £9000) you have to pay £1800 of the AIA tax allowance originally claimed.
From what I can see, with cash accounting you benefit from the £5000 tax reduction in the first year and pay back £1800 after year 5, but are not penalised by depreciation.
Hi John
Not entirely sure I understand what you are saying, you can not compare depreciation which is not allowed for tax relief with CA which are, there can be no comparison, in your example you say that 1000 is added back but it has already been taken off so all it does is cancel out the depreciation allowed in the accounts, how are you penalised by depreciation?
With cash accounting what would happen if you paid £25k for a van but there was not enough profit to justify it? the same as you say for AIA
And also cash accounting is unavailable to Ltd Co
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
The depreciation reduces the profit in the accounts and then is disallowed for tax purposes, so say the profit is 25k and depreciation takes it down to 20k, the profit is still 25k in reality. I was fixated on the profit after depreciation, not before.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
Hi John
Only thing to add really - you take each client based on existing circumstances whilst having a weather eye for future plans.
Always worth doing the calculations but bear in mind a fair few businesses will find that the cash basis is not appropriate for a number of reasons and if turnover gets to the exit threshold then you have to make adjustments in the accounts for capex expenditure as well as income and expenses.
I recently had one that was in business a very short term over a couple of years, classic for cash basis in normal circumstances but accruals made more sense on a couple of points, not least the sideways loss relief.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Hi John Only thing to add really - you take each client based on existing circumstances whilst having a weather eye for future plans.
Hi Joanne
Foe some stupid reason I had it in my head that a having a cash accounting fixed asset would be more beneficial than one using AIA or cap ex. The penny dropped last night when Doug answered but generally I use accrual unless I believe cash accounting would suit that business.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
