Capital Allowances
Discussion
Yes, I know, cutting it fine again.
A question about Capital Allowances when self employed.
Does one have to claim AIA in the first year - ie, full value of capital allowance, so then to add the complete value as a "profit" on disposal? It just seems a horrible way of having an unexpectedly large tax bill when selling the item?
Can I not just add it to the main pool and claim WDA 18% as normal with the difference between sale price and new written down value when disposing? Same overall outcome but without massive spikes.
Item in question is a high value musical instrument and unlikely to lose any money. I don't know how long I'll have it for though, maybe only a few years. Really not fancying a 5 figure spike in my "profits" if I have to sell it during a bad year...
A question about Capital Allowances when self employed.
Does one have to claim AIA in the first year - ie, full value of capital allowance, so then to add the complete value as a "profit" on disposal? It just seems a horrible way of having an unexpectedly large tax bill when selling the item?
Can I not just add it to the main pool and claim WDA 18% as normal with the difference between sale price and new written down value when disposing? Same overall outcome but without massive spikes.
Item in question is a high value musical instrument and unlikely to lose any money. I don't know how long I'll have it for though, maybe only a few years. Really not fancying a 5 figure spike in my "profits" if I have to sell it during a bad year...
Just replying to myself - it seems according to HMRC I can choose to using WDAs (Writing Down Allowances) instead of AIA (Annual Investment Allowance) if my profits are small. As the instrument is a significant cost compared to my profits that I would much rather claim the relief over a number of years so that's what I'll do.
Also, another question for any tax advisors as it seems a grey area amongst musicians. Musical instruments, are they generally main pool (18%) or special pool (8%) given most will last 25+ years. I am inclined to think main as I tend to change instruments every few years as I get bored/try something new. Again, does it make any real difference in the long run? As long as the balancing charge when sold is the difference in sale price and the written down value it doesn't matter does it?
Also, another question for any tax advisors as it seems a grey area amongst musicians. Musical instruments, are they generally main pool (18%) or special pool (8%) given most will last 25+ years. I am inclined to think main as I tend to change instruments every few years as I get bored/try something new. Again, does it make any real difference in the long run? As long as the balancing charge when sold is the difference in sale price and the written down value it doesn't matter does it?
Thanks 
Totally different question why you're here
I have noticed I have a tiny "repayment supplement" from last Jan of less than £4 which I only spotted as it affected my July payment on account. What could that be from? I'm pretty sure I didn't pay early so I can't see why they would be giving me a credit...
Totally different question why you're here
I have noticed I have a tiny "repayment supplement" from last Jan of less than £4 which I only spotted as it affected my July payment on account. What could that be from? I'm pretty sure I didn't pay early so I can't see why they would be giving me a credit...This thread got me thinking about my own tax return for 2017/18.
Part time business from home. I fill out a short return each year, simple income/expenditure. I've never claimed any capital allowances, as I already had the expensive items before I started as a business (originally a hobby). Any extra tools and equipment that I've bought since have been relatively cheap, so I just put them down as regular expenditure, along with materials/consumables.
My ultrasonic cleaner died, so I bought a new one. £300. Would this be seen as capital expenditure and written down each year, or as a one-off expense?
Part time business from home. I fill out a short return each year, simple income/expenditure. I've never claimed any capital allowances, as I already had the expensive items before I started as a business (originally a hobby). Any extra tools and equipment that I've bought since have been relatively cheap, so I just put them down as regular expenditure, along with materials/consumables.
My ultrasonic cleaner died, so I bought a new one. £300. Would this be seen as capital expenditure and written down each year, or as a one-off expense?
clockworks said:
This thread got me thinking about my own tax return for 2017/18.
Part time business from home. I fill out a short return each year, simple income/expenditure. I've never claimed any capital allowances, as I already had the expensive items before I started as a business (originally a hobby). Any extra tools and equipment that I've bought since have been relatively cheap, so I just put them down as regular expenditure, along with materials/consumables.
My ultrasonic cleaner died, so I bought a new one. £300. Would this be seen as capital expenditure and written down each year, or as a one-off expense?
If I was preparing your sole trader accounts, I would treat that as the purchase of a Fixed Asset.Part time business from home. I fill out a short return each year, simple income/expenditure. I've never claimed any capital allowances, as I already had the expensive items before I started as a business (originally a hobby). Any extra tools and equipment that I've bought since have been relatively cheap, so I just put them down as regular expenditure, along with materials/consumables.
My ultrasonic cleaner died, so I bought a new one. £300. Would this be seen as capital expenditure and written down each year, or as a one-off expense?
In the accounts, it would be shown as an addition to Fixed Assets in the balance sheet and an annual Depreciation Charge would be allocated to the profit and loss account as an expense. The depreciation charge is effectively the business writing off the cost of the asset based on its expected useful life. So, if you expect that your ultrasonic cleaner has a useful life of 5 years, you would write it off each year at 20% depreciation per annum.
Note that the above relates to how assets are handled for ACCOUNTING purposes. This has NOTHING to do with the tax treatment, which is different and is based on what the Chancellor allows you to do.
For tax purposes, relief is given on the purchase of fixed assets based on the Capital Allowance rules, which vary from time to time depending on what the Chancellor of the day wants businesses to spend their money on or, sometimes, what he wants to discourage businesses from spending their money on.
At the moment, a business can claim capital allowances on plant and machinery in two ways, either by claiming an annual writing down alliance (which is similar to the accounting depreciation method although currently set at 18% irrespective of the expected useful life of the asset) or they can claim the Annual Investment Allowance. The AIA at the moment can be claimed at up to 100% of the costs of the asset, which allows the business to write off the full cost of the asset against its taxable business profits in the year of purchase IF IT WANTS TO. It is not compulsory and it may not always be the best thing to do.
Five years is often a reasonable assumption for the life of most fixed assets - apart from land and buildings.
You should NEVER write off the cost of an asset as an expense in the Profit and Loss Account. As I explained, accountants never do that.
You CAN write off the costs of the asset using the special Annual Investment Allowance claim which is NOT an accounting matter but a tax computation matter. That is why there is a special set of boxes on the tax return for Capital Allowance claims.
Don't forget that if you ever sell the asset for actual money, that income should be declared as income in the business accounts. Usually that income is shown as "profit on disposal of fixed assets". It is not part of general sales.
If the business is VAT registered and VAT was reclaimed when the asset was purchased, VAT must be declared on the sale price of the asset when it is eventually sold.
You should NEVER write off the cost of an asset as an expense in the Profit and Loss Account. As I explained, accountants never do that.
You CAN write off the costs of the asset using the special Annual Investment Allowance claim which is NOT an accounting matter but a tax computation matter. That is why there is a special set of boxes on the tax return for Capital Allowance claims.
Don't forget that if you ever sell the asset for actual money, that income should be declared as income in the business accounts. Usually that income is shown as "profit on disposal of fixed assets". It is not part of general sales.
If the business is VAT registered and VAT was reclaimed when the asset was purchased, VAT must be declared on the sale price of the asset when it is eventually sold.
clockworks said:
This thread got me thinking about my own tax return for 2017/18.
Part time business from home. I fill out a short return each year, simple income/expenditure. I've never claimed any capital allowances, as I already had the expensive items before I started as a business (originally a hobby). Any extra tools and equipment that I've bought since have been relatively cheap, so I just put them down as regular expenditure, along with materials/consumables.
My ultrasonic cleaner died, so I bought a new one. £300. Would this be seen as capital expenditure and written down each year, or as a one-off expense?
I'd write that off in a oner personallyPart time business from home. I fill out a short return each year, simple income/expenditure. I've never claimed any capital allowances, as I already had the expensive items before I started as a business (originally a hobby). Any extra tools and equipment that I've bought since have been relatively cheap, so I just put them down as regular expenditure, along with materials/consumables.
My ultrasonic cleaner died, so I bought a new one. £300. Would this be seen as capital expenditure and written down each year, or as a one-off expense?
2 sMoKiN bArReLs said:
I'd write that off in a oner personally
Using the Annual Investment Allowance form of Capital Allowance - that is completely acceptable.How it is treated in the formal accounts is down to the Fixed Assets policy adopted by the business. The accounts treatment is of no consequence to the tax relief claimed.
Eric Mc said:
2 sMoKiN bArReLs said:
The accounts treatment is of no consequence to the tax relief claimed.
It is though really. If it's just written of as an expense it's (usually) lost in with the other costs, so the tax treatment is exactly the same as the accounting treatment. All by default I grant you.No it's not.
HMRC could not give the proverbial monkey's what you do with the treatment in the accounts (even if it is similar to the tax treatment).
They expect people to apply the TAX REGULATIONS to their TAX RETURNS - not accounting treatment.
On occasions, the next effect of the accounting treatment and the tax treatment may be the same,. But that is often not the case.
There have been some massive tax cases where HMRC did not like one bit what a business was doing with the TAX TREATYMANT of an asset. They rarely complain about the accounts treatment.
HMRC could not give the proverbial monkey's what you do with the treatment in the accounts (even if it is similar to the tax treatment).
They expect people to apply the TAX REGULATIONS to their TAX RETURNS - not accounting treatment.
On occasions, the next effect of the accounting treatment and the tax treatment may be the same,. But that is often not the case.
There have been some massive tax cases where HMRC did not like one bit what a business was doing with the TAX TREATYMANT of an asset. They rarely complain about the accounts treatment.
Eric Mc said:
No it's not.
HMRC could not give the proverbial monkey's what you do with the treatment in the accounts (even if it is similar to the tax treatment).
They expect people to apply the TAX REGULATIONS to their TAX RETURNS - not accounting treatment.
On occasions, the next effect of the accounting treatment and the tax treatment may be the same,. But that is often not the case.
There have been some massive tax cases where HMRC did not like one bit what a business was doing with the TAX TREATYMANT of an asset. They rarely complain about the accounts treatment.
True, but for every one of those there's been several billion transactions lost in the mire. (or trillion...but I don't know what that is, other than a girl in Hitchhiker's Guide HMRC could not give the proverbial monkey's what you do with the treatment in the accounts (even if it is similar to the tax treatment).
They expect people to apply the TAX REGULATIONS to their TAX RETURNS - not accounting treatment.
On occasions, the next effect of the accounting treatment and the tax treatment may be the same,. But that is often not the case.
There have been some massive tax cases where HMRC did not like one bit what a business was doing with the TAX TREATYMANT of an asset. They rarely complain about the accounts treatment.
)2 sMoKiN bArReLs said:
True, but for every one of those there's been several billion transactions lost in the mire. (or trillion...but I don't know what that is, other than a girl in Hitchhiker's Guide )
That's why HMRC are killing Self Assessment - because they've been fed an awful lot of junk data over the past 20 odd years.)Eric Mc said:
2 sMoKiN bArReLs said:
True, but for every one of those there's been several billion transactions lost in the mire. (or trillion...but I don't know what that is, other than a girl in Hitchhiker's Guide )
That's why HMRC are killing Self Assessment - because they've been fed an awful lot of junk data over the past 20 odd years.)
far longer than that!MEC said:
Eric Mc said:
That's why HMRC are killing Self Assessment - because they've been fed an awful lot of junk data over the past 20 odd years.
And MTD will fix that! 
The old pre- self assessment system was far more interrogative from the Revenue's point of view - in that they, as a matter of routine, reviewed and assessed key information from actual sets of accounts. That process went out the window with the advent of self assessment. They hope that MTD will give them back that type of ability. I'm not convinced that it will although my main concerns about MTD are the frequency and tight limits associated with quarterly updates of data - and the related penalty regime that will be part of the system.
2 sMoKiN bArReLs said:
Eric Mc said:
2 sMoKiN bArReLs said:
True, but for every one of those there's been several billion transactions lost in the mire. (or trillion...but I don't know what that is, other than a girl in Hitchhiker's Guide )
That's why HMRC are killing Self Assessment - because they've been fed an awful lot of junk data over the past 20 odd years.) far longer than that!However, before Self Assessment fully came in in the year 1996/97, the system had been based on local Inspectors of Taxes reviewing and assessing actual sets of accounts. These Inspectors were trained to interpret accounts and had a good knowledge of the "norms" for various trading activities.
They even had guideline booklets called BENs (Business Enterprise Notes) which were a pretty good guide to what was expected from specific business activities. The BENs were very handy, and we used them as accountants to check on whether a traders figures actually made sense.
The other factor lost was with the advent of Self Assessment was "local knowledge" . When there was a system of local tax offices headed by well trained and knowledgeable Inspectors and staff, they had good knowledge of who the local traders were and also the local accountants They therefore could use this local knowledge to help draw a picture as to whether what they were receiving chimed with what they already knew about those businesses and their accountants.
All that ended with Self Assessment. Back in 1995 I was told by a tax inspector that the new SA system would be 100% dependent on advanced software and algorithms to assess whether accounts information showing in the SE1 and SE2 pages of the tax return "made sense" or not. That software never arrived. In the 20 odd years of Self Assessment I have, not once, had to deal with a tax enquiry based on questions arising due to accounting figures "not making sense" or not tying in with the "norms" for that business sector. Queries and investigations of that nature were very common pre-Self Assessment. In fact, they were, by far, the main reason why a taxpayer might have to deal with queries or a tax investigation.
Since Self Assessment, the only queries I have come across are when HMRC spots that some information they already now about has been omitted from a return - such as omitted bank interest or a one off taxable event that the taxpayer did not realise needed to be entered on the return.
Business trading related queries have been non-existent.
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