Depreciation of a car in a LTD co
Discussion
Hi all,
Could someone explain in plain english what happens with the depreciation in a company accounts?
For example (simple maths). Company A has turnover of £10k, expenses of £5k, so in theory a profit of £5k.
I take it depreciation doesn't form an expense, but comes afterwards?
So if it buys a new electric car for say £20k, the rules say something about EVs can be written down 100% in year one. Obviously this isn't needed, so could it be depreciated at £5k in that year (i.e. to reduce the profit to zero) and then in year 2, same thing but the profit is now £7k, so can the depreciation be put at £7k for that year, again to make the profit zero? Until eventually after say 4-5 years, the £20k has all gone.
Or would it claim the full 100%, make a £15k loss in year one and be able to carry that loss forward to reduce future profits?
Or have I got it all wrong?
Could someone explain in plain english what happens with the depreciation in a company accounts?
For example (simple maths). Company A has turnover of £10k, expenses of £5k, so in theory a profit of £5k.
I take it depreciation doesn't form an expense, but comes afterwards?
So if it buys a new electric car for say £20k, the rules say something about EVs can be written down 100% in year one. Obviously this isn't needed, so could it be depreciated at £5k in that year (i.e. to reduce the profit to zero) and then in year 2, same thing but the profit is now £7k, so can the depreciation be put at £7k for that year, again to make the profit zero? Until eventually after say 4-5 years, the £20k has all gone.
Or would it claim the full 100%, make a £15k loss in year one and be able to carry that loss forward to reduce future profits?
Or have I got it all wrong?
Edited by audi321 on Tuesday 28th November 12:49
audi321 said:
Hi all,
Could someone explain in plain english what happens with the depreciation in a company accounts?
For example (simple maths). Company A has turnover of £10k, expenses of £5k, so in theory a profit of £5k.
I take it depreciation doesn't form an expense, but comes afterwards?
So if it buys a new electric car for say £20k, the rules say something about EVs can be written down 100% in year one. Obviously this isn't needed, so could it be depreciated at £5k in that year (i.e. to reduce the profit to zero) and then in year 2, same thing but the profit is now £7k, so can the depreciation be put at £7k for that year, again to make the profit zero? Until eventually after say 4-5 years, the £20k has all gone.
Or would it claim the full 100%, make a £15k loss in year one and be able to carry that loss forward to reduce future profits?
Or have I got it all wrong?
First of all, do not get confused between the concepts of "Depreciation" - which is an accounting concept, and "Capital Allowances", which is the method by which HMRC allows a business to get tax relief on some of its fixed assets.Could someone explain in plain english what happens with the depreciation in a company accounts?
For example (simple maths). Company A has turnover of £10k, expenses of £5k, so in theory a profit of £5k.
I take it depreciation doesn't form an expense, but comes afterwards?
So if it buys a new electric car for say £20k, the rules say something about EVs can be written down 100% in year one. Obviously this isn't needed, so could it be depreciated at £5k in that year (i.e. to reduce the profit to zero) and then in year 2, same thing but the profit is now £7k, so can the depreciation be put at £7k for that year, again to make the profit zero? Until eventually after say 4-5 years, the £20k has all gone.
Or would it claim the full 100%, make a £15k loss in year one and be able to carry that loss forward to reduce future profits?
Or have I got it all wrong?
Edited by audi321 on Tuesday 28th November 12:49
Your question is about "depreciation" so it most definitely is an "accounting" question rather than a tax question.
A very old principle in accounting is that the purchase cost of fixed assets (land, buildings, machinery, vehicles etc) is shown in the balance sheet as an "asset" and not charged directly to the profit and loss account as an expense. This is because it is assumed that these types of purchases have a useful economic life longer than one year, so therefore it would be unrealistic to write the entire cost of purchase to the profit and loss account in the year of purchase.
Instead, once you have decided what the economic life of the asset is going to be - typically somewhere between 5 and 20 years - you then APPORTION the cost of the asset to the profit and loss account, as an expense, over its useful economic life. In theory, by the time you get to year 5 ,10, 20 years etc - depending on the type of asset, the full cost of the asset will have been written off to the profit and loss account and the net book value as shown in the balance sheet will be effectively Nil.
Depreciation can be calculated in various ways. The simplest method is called "Straight Line" where an equal charge is made each year so that the balance at the end of the economic life will be Nil.
Alternatively, a "reducing balance" technique can be used which means that the annual charge actually gets smaller and smaller as the asset gets older so, the asset never completely reaches a Nil value. Its residual value just keeps getting smaller but never gets to Zero.
Depreciation is most definitely a business expense and the official profit or loss of the company will be AFTER depreciation has been deducted. However, the TAXABLE profit or loss will be based on Capital Allowances.
Capital Allowances are a different kettle of fish entirely. These are not based on accounting principles but on ever changing sets of tax rules as set out by successive chancellors over the decades. Much of the thinking behind Capital Allowances are about encouraging businesses to invest in certain types of assets and discouraging them from investing in others. That is why Capital Allowances rates for electric cars are very good whereas ICE cars have rubbish rates of allowances.
Some assets have no allowances available at all. So, if you are planning on buying an asset with a view to reducing taxable profits, it's the Capital Allowances rules you need to be looking at, not Depreciation.
Understood, and thanks Eric for the comprehensive reply!
So capital allowance then. 100% use in the above example would reduce the first years profit from £5k profit to £15k loss? Or can you choose to use say 25% capital allowance (£5k) to reduce the first year to zero and carry forward the 75% to future years?
So capital allowance then. 100% use in the above example would reduce the first years profit from £5k profit to £15k loss? Or can you choose to use say 25% capital allowance (£5k) to reduce the first year to zero and carry forward the 75% to future years?
Depends on the type of Capital Allowance you are claiming.
The most popular one is the Annual Investment Allowance (AIA) which can be any percentage up to 100%.
Capital Allowances are very complex. You need to know what allowances are available for different classes of assets (some attract none at all) and some are very restricted (ordinary motor cars, for example).
There are also clear rules about what happens when assets are eventually disposed of.
Some assets need to be tracked individually throughout their ownership and some can be lumped into a "General Pool".
The most popular one is the Annual Investment Allowance (AIA) which can be any percentage up to 100%.
Capital Allowances are very complex. You need to know what allowances are available for different classes of assets (some attract none at all) and some are very restricted (ordinary motor cars, for example).
There are also clear rules about what happens when assets are eventually disposed of.
Some assets need to be tracked individually throughout their ownership and some can be lumped into a "General Pool".
Eric Mc said:
Depreciation is most definitely a business expense and the official profit or loss of the company will be AFTER depreciation has been deducted. However, the TAXABLE profit or loss will be based on Capital Allowances.
Re-reading this, so in the above example, the £20k EV would benefit from 100% capital allowance (AIA) and therefore the depreciation (expense) would be an additional £20k? Thus reducing the £5k taxable profit to a £15k loss?Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
audi321 said:
Re-reading this, so in the above example, the £20k EV would benefit from 100% capital allowance (AIA) and therefore the depreciation (expense) would be an additional £20k? Thus reducing the £5k taxable profit to a £15k loss?
Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
And back. Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
audi321 said:
Re-reading this, so in the above example, the £20k EV would benefit from 100% capital allowance (AIA) and therefore the depreciation (expense) would be an additional £20k? Thus reducing the £5k taxable profit to a £15k loss?
Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
Depreciation is generally NOT allowed as a deduction when calculating the taxable profits of a business (there are a couple of exceptions). As a result the ACCOUNTING profit of the business (which is after the depreciation has been deducted) has to be adjusted back up to remove the depreciation charge and instead the relevant Capital Allowance claim is substituted. Depending on the class of asset, the Capital Allowance claim might be higher or lower than the depreciation charge.Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
It's a standard adjustment made by us accountants when calculating taxable business profits and it relates to all types of businesses whether they are sole traders, partnerships or limited companies.
Alpinestars said:
audi321 said:
Re-reading this, so in the above example, the £20k EV would benefit from 100% capital allowance (AIA) and therefore the depreciation (expense) would be an additional £20k? Thus reducing the £5k taxable profit to a £15k loss?
Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
And back. Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
Abdul Abulbul Amir said:
Alpinestars said:
audi321 said:
Re-reading this, so in the above example, the £20k EV would benefit from 100% capital allowance (AIA) and therefore the depreciation (expense) would be an additional £20k? Thus reducing the £5k taxable profit to a £15k loss?
Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
And back. Then this loss can be carried forward for future years, etc etc?
Think I'm getting it lol.......
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