Discussion
Can anyone explain this "you can claim it all back in your tax" comment.
Say i buy a van for £20,000. I pay the VAT and claim it back as VAT registered.
When it gets to my next corporation tax payment, lets say its £8,000.
Does this mean i don't pay any corp tax ?
I will speak to my accountant but just wanted an understanding of it first
Say i buy a van for £20,000. I pay the VAT and claim it back as VAT registered.
When it gets to my next corporation tax payment, lets say its £8,000.
Does this mean i don't pay any corp tax ?
I will speak to my accountant but just wanted an understanding of it first
A van is seen as plant so its just a case of deduct 100% of the cost of the van from any pre tax profits. Profits are then due on the new sum.
I.e
Company has made £30,000 profit to date at the end of your tax year.
Van costs £20,000 and you buy it at the end of the FY (or near enough).
Company has now made £10,000 profit and tax would be due on only £10,000.
The Company now has an asset of £20,000 in plant and machinery which will be shown on your accounts.
You would claim any VAT paid at the time of purchase back too.
If the van is used for personal use there may be additional tax to pay.
That's it in a nutshell. However, make sure you speak to your accountant to A) get a full understanding of your position and B) make him / her aware as it may change the landscape for your CT600 depending how often you update them on your progress.
Going forward the company will have to "pay" depreciation. This comes from the bottom line of the profits in the next FY and on.
Be aware of that as it can effect how you take dividends as it will reduce your profits thus pot you could take divs from.
This is why you need to seek professional advice.
I.e
Company has made £30,000 profit to date at the end of your tax year.
Van costs £20,000 and you buy it at the end of the FY (or near enough).
Company has now made £10,000 profit and tax would be due on only £10,000.
The Company now has an asset of £20,000 in plant and machinery which will be shown on your accounts.
You would claim any VAT paid at the time of purchase back too.
If the van is used for personal use there may be additional tax to pay.
That's it in a nutshell. However, make sure you speak to your accountant to A) get a full understanding of your position and B) make him / her aware as it may change the landscape for your CT600 depending how often you update them on your progress.
Going forward the company will have to "pay" depreciation. This comes from the bottom line of the profits in the next FY and on.
Be aware of that as it can effect how you take dividends as it will reduce your profits thus pot you could take divs from.
This is why you need to seek professional advice.
It is absolutely true that you can claim 100% of the cost of a van against your profits for tax purposes (Income Tax if a sole trader/partnership, Corporation Tax if a limited company).
There are a few clarifications that will be needed.
I) the claim can only be made if the business is actually PURCHASING the asset. In other words, buying it outright or buying it using a bank loan or an HP account. If the asset is being acquired through some sort of leasing arrangement, then it is almost definite that the 100% Capital Allowance claim cannot be made. In a lease situation, the asset remains the property of the leasing company for the entire life of the lease agreement - so it is THEY who will be making any Capital Allowance claims on the asset.
ii) the 100% claim is known as the Annual Investment Allowance. It is NOT a simple deduction against the profits of the business. In fact, it is not shown in the accounts of the company in that way. For accounting purposes, the asset is allocated to the balance sheet as an addition to the fixed assets and an annual depreciation charge is put through the accounts.
For TAX purposes, the 100% claim is made through the Income Tax/Corporation Tax computation in the Capital Allowance claim section
iii) because the accounting treatment and the tax treatment is very different, this means that the net profit and accumulated reserves of the business IS TOTALLY UNAFFECTED by the 100% Capital Allowance claim. For that reason, in the case of a limited company, the 100% Capital Allowance claim has no affect on whether a dividend can be paid in the year the asset was purchased.
iv) at the end of the asset's life with the business it will be disposed of in some way or other. In most cases, there will be some "proceeds on disposal". This will usually be in the form of an actual sale or a trade in. Whatever the case, these proceeds will need to be taken account of in the tax computations and income tax or Corporation Tax liability for the year will be increased as a result.
v) VAT - if the trader or company is registered for VAT, and VAT is being charged on the purchase of the vehicle, the VAT can be reclaimed. When the asset is disposed of and some proceeds are received on disposal (by sale or trade in), then Output VAT needs to be accounted for on the disposal in the relevant VAT return.
If the asset is being acquired under a leasing arrangement, then everything is very different, from an accounting, tax and VAT point of view.
There are a few clarifications that will be needed.
I) the claim can only be made if the business is actually PURCHASING the asset. In other words, buying it outright or buying it using a bank loan or an HP account. If the asset is being acquired through some sort of leasing arrangement, then it is almost definite that the 100% Capital Allowance claim cannot be made. In a lease situation, the asset remains the property of the leasing company for the entire life of the lease agreement - so it is THEY who will be making any Capital Allowance claims on the asset.
ii) the 100% claim is known as the Annual Investment Allowance. It is NOT a simple deduction against the profits of the business. In fact, it is not shown in the accounts of the company in that way. For accounting purposes, the asset is allocated to the balance sheet as an addition to the fixed assets and an annual depreciation charge is put through the accounts.
For TAX purposes, the 100% claim is made through the Income Tax/Corporation Tax computation in the Capital Allowance claim section
iii) because the accounting treatment and the tax treatment is very different, this means that the net profit and accumulated reserves of the business IS TOTALLY UNAFFECTED by the 100% Capital Allowance claim. For that reason, in the case of a limited company, the 100% Capital Allowance claim has no affect on whether a dividend can be paid in the year the asset was purchased.
iv) at the end of the asset's life with the business it will be disposed of in some way or other. In most cases, there will be some "proceeds on disposal". This will usually be in the form of an actual sale or a trade in. Whatever the case, these proceeds will need to be taken account of in the tax computations and income tax or Corporation Tax liability for the year will be increased as a result.
v) VAT - if the trader or company is registered for VAT, and VAT is being charged on the purchase of the vehicle, the VAT can be reclaimed. When the asset is disposed of and some proceeds are received on disposal (by sale or trade in), then Output VAT needs to be accounted for on the disposal in the relevant VAT return.
If the asset is being acquired under a leasing arrangement, then everything is very different, from an accounting, tax and VAT point of view.
Edited by Eric Mc on Saturday 7th October 10:42
Eric Mc said:
iii) because the accounting treatment and the tax treatment is very different, this means that the net profit and accumulated reserves of the business IS TOTALLY UNAFFECTED by the 100% Capital Allowance claim. For that reason, in the case of a limited company, the 100% Capital Allowance claim has no affect on whether a dividend can be paid in the year the asset was purchased.
So if a business at year end has made £50k and decides to buy a van for £25k you are saying the shareholders can still vote a div of £50k?Edited by Eric Mc on Saturday 7th October 10:42
Just, that's not what I have been advised of in the past.
Effectively yes, because the large write off (which the 100% Annual Investment Allowance represents) is not reflected in the body of the accounts. Instead, the write off in the accounts is spread over the expected useful life of the vehicle, which is usually four to five years at least - so the profit and loss account (and the reserves) are not affected in the same way.
Obviously, the decision to make a dividend payment is based on the judgement of the board and they need to take into account these matters - but certainly the reserves of the company will not be seriously reduced just because the directors have chosen to make use of a fairly generous tax break.
Obviously, the decision to make a dividend payment is based on the judgement of the board and they need to take into account these matters - but certainly the reserves of the company will not be seriously reduced just because the directors have chosen to make use of a fairly generous tax break.
red_slr said:
What reserves?
In your example you said that the business made £50k profit? That goes into "Reserves". When you pay your dividend it comes out of distributable reserves.The AIA/Capital allowances/Depreciation/CT calculations all take place before you work out your net profit.
And there is no accounting adjustment in the formal accounts in respect of the 100% write off claimed for purely tax relief purposes - so the profit and reserves are unaffected in any sort of negative way by the Capital Allowance claim. In fact, the reserves are improved to some extent because the amount of Corporation Tax payable is reduced - leaving more reserves available for a dividend to be paid, if the board so wishes.
Well that's left me totally confused. Every few years we go through a process of buying new vehicles and in that year our div is usually reduced. I am going to have to speak to the accountant...
Our div also reduces the following year as the depreciation is higher as the vehicles are newer.
In your example that should not be the case. Will forward him this thread!
Our div also reduces the following year as the depreciation is higher as the vehicles are newer.
In your example that should not be the case. Will forward him this thread!
red_slr said:
Well that's left me totally confused. Every few years we go through a process of buying new vehicles and in that year our div is usually reduced. I am going to have to speak to the accountant...
Our div also reduces the following year as the depreciation is higher as the vehicles are newer.
In your example that should not be the case. Will forward him this thread!
Do you mean the dividend actually paid during that particular year is reduced OR the dividend paid on profits made during that particular year (which is paid the year after when profits have been calculated)?Our div also reduces the following year as the depreciation is higher as the vehicles are newer.
In your example that should not be the case. Will forward him this thread!
So if you buy a van during 2016/17 it shouldn't have any impact at all on the dividend you receive during 16/17 as that will have been based on the profits earned during the previous year.
It will have an impact on the profits you make during 16/17 and (all other things being equal) depreciation will reduce your profits which will reduce the amount you can pay by way of dividend.
In simple terms buying a van reduces your profits and it will reduce the amount of dividend which can be paid. However buying a van this year won't affect last year's profits.
If a van is bought outright, there is obviously a reduction in cash or bank reserves. But the transaction has no effect on the profit - so the dividend decision may not be affected. All that happens is that one asset (cash/bank balance) reduces and another asset (motor vehicles/plant and machinery) is increased. The only accounting impact on the profit will be the annual depreciation charge.
Don't forget, that a van can be purchased using a finance agreement or a loan, so the asset can be acquired with little impact on available cash/bank reserves.
Don't forget, that a van can be purchased using a finance agreement or a loan, so the asset can be acquired with little impact on available cash/bank reserves.
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