Capital Allowances
Discussion
I'm sitting here doing some calculations in relation to capital allowances, and having an argument with my business partner 
just wok with this example (and i know the figures are simplified, but the principle will work)
say your profits for one year are £10k and you are taxed at 22% so you pay £2200. If you buy a piece of machinery for £1000 that happens to attract 100% capital allowances do you then pay:
a) £1200 based on taxabale profits of £2200 less capital allowances of £1000
or
b) £1980 based on your taxable profits being 22% of £10,000 less £1000 capital allowances, therefore taxed on 22% of £9000.
also he won't beleive me that you receive 100% on relief on the interest payments (if you hire purchase it- or just take a loan out) but NOT on the total repayment.
it's a really really basic question i know, but we have tied ourselves in knots arguing about it and the accountant has gone home for the day!
just wok with this example (and i know the figures are simplified, but the principle will work)
say your profits for one year are £10k and you are taxed at 22% so you pay £2200. If you buy a piece of machinery for £1000 that happens to attract 100% capital allowances do you then pay:
a) £1200 based on taxabale profits of £2200 less capital allowances of £1000
or
b) £1980 based on your taxable profits being 22% of £10,000 less £1000 capital allowances, therefore taxed on 22% of £9000.
also he won't beleive me that you receive 100% on relief on the interest payments (if you hire purchase it- or just take a loan out) but NOT on the total repayment.
it's a really really basic question i know, but we have tied ourselves in knots arguing about it and the accountant has gone home for the day!
The correct calculation is:
Trading Profit - £10,000
Capital Allowances claimed - £1,000
Taxable Profits - £9,000
Tax at 22% - £1,980
As you say, the real calculations are more complicated in that the £9,000 profit is split between the two partners and they pay Income Tax and Class 4 National Insurance at the tax and NI rates applicable to their circumstances.
The number and type of assets currently claimable at 100% is extremely limited. The highest initial allowance on most plant and machinery normally claimable is currently 50%. The normal annual rate is 25%.
Regarding interest, interest on borrowings for the purchase of a business asset is fully claimable against thr profits of the business. The full LOAN REPAYMENTS are not allowable. Why should they be? After all, the business wasn't taxed when the loan was granted to the business.
Trading Profit - £10,000
Capital Allowances claimed - £1,000
Taxable Profits - £9,000
Tax at 22% - £1,980
As you say, the real calculations are more complicated in that the £9,000 profit is split between the two partners and they pay Income Tax and Class 4 National Insurance at the tax and NI rates applicable to their circumstances.
The number and type of assets currently claimable at 100% is extremely limited. The highest initial allowance on most plant and machinery normally claimable is currently 50%. The normal annual rate is 25%.
Regarding interest, interest on borrowings for the purchase of a business asset is fully claimable against thr profits of the business. The full LOAN REPAYMENTS are not allowable. Why should they be? After all, the business wasn't taxed when the loan was granted to the business.
Edited by Eric Mc on Tuesday 13th February 00:15
hey eric
thanks for the reply, and my apologies for not getting back to you earlier- been head in the sand trying to get a bit of paperwork done!
All very useful and it is as i thought which is nice. It's one of these things that you can get the wrong way round and it really skews your calculations!
thanks for the reply, and my apologies for not getting back to you earlier- been head in the sand trying to get a bit of paperwork done!
All very useful and it is as i thought which is nice. It's one of these things that you can get the wrong way round and it really skews your calculations!
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