recording capital stuff on the tax returns

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recording capital stuff on the tax returns

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sally_in_wales
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Joined: 06 Mar 2005
Posts: 20809
Location: sunny wales

Posted: Wed Apr 11, 07 8:20 am Post subject: recording capital stuff on the tax returns

So far my accounts/tax returns have been very much based on consumable supplies in (wool etc) and saleable stuff out (hats etc) with nothing complicated. I'm about to buy another sock machine and I want to put that through the business, but I vaguely recall you can't put the whole sum down in one go if its something that will get used over a number of years. How do I do this, whats the usual way of recording this? We're only talking about ï¿½500 but its my single biggest business purchase so far so I may as well do it properly. Do I have a seperate column for things like this and count some of it towards the accounts this year and some next year, I've got a bit confused over this and I'm sure I used to know what I was supposed to do.

judith

Joined: 16 Dec 2004
Posts: 22789
Location: Montgomeryshire

Posted: Wed Apr 11, 07 8:46 am Post subject:
There is a whole section on the return (in the red? self-employed pages) for recording capital assets and calculating depreciation. It gives a couple of worked examples and is actually pretty straight-forward to calculate.

sally_in_wales
Downsizer Moderator

Joined: 06 Mar 2005
Posts: 20809
Location: sunny wales

Posted: Wed Apr 11, 07 9:13 am Post subject:
good, as long as its straightforwards, it probably will be next years return now it goes on, I just wanst sure how you depreciated something that was already over a hundred years old and still going strong

wellington womble

Joined: 08 Nov 2004
Posts: 15051
Location: East Midlands

Posted: Wed Apr 11, 07 9:57 am Post subject:
Ring up the taxman and ask him - if you're asking for help, they're generally quite good - it's only if they catch you trying to pull a fast one they get narsty!

Rob R

Joined: 28 Oct 2004
Posts: 31902
Location: York

Posted: Wed Apr 11, 07 10:13 am Post subject:

It depends on the nature of the purchase- there are different sections for capital allowances depending on the purchase, vehicles, buildings, etc. We pool machinery & depreciate the pool value at 20% for management purposes, yet I think the capital allowance (depreciation) is 25% pa.

Anyway, you add the depreciation back to profit for the forms, then calculate capital allowances as a deduction, as far as I understand.

guyandzoe

Joined: 12 Jan 2007
Posts: 78

Posted: Wed Apr 11, 07 10:24 am Post subject:

Up here the tax man does very informative half day courses for the selfemployed which deal with all things taxxxy.

Ring up and get on one quick - it saved me loads of dosh and alleviated a lot of my concerns about nasty taxmen knocking on the door at 6.30 in the morning.

Your self assessment will come with lots of tips and will tell you the maximum you can depreciate stuff. Its up to you to chose how much depreciation you use, There are different (or there were) different maxima for new and old stuff.

guy

Gervase

Joined: 17 Nov 2004
Posts: 8655

Posted: Wed Apr 11, 07 10:49 am Post subject:

I did a half-day course in Aberystwyth which covered depreciation - if I recall correctly, as a rule of thumb, if it's less than fifty quid, offset the total cost - if it's more, you give it a working lifespan of four years (I know, crazy in the case of something that's already last a century!) and claim a quarter of its value a year. If you sell it in that time it gets a little more complicated.
Seriously, give your local tax office a ring and stand back amazed at how helpful they are. Their advisors are some of the unsung heroes of the government machine, and are genuinely out to ensure that you don't overpay or get bogged down.

MarkS

Joined: 01 Aug 2006
Posts: 2626

Posted: Mon Apr 16, 07 8:19 am Post subject:

yep, talk to the helpline for info as to how they want you to show it on your books and return. Although if you are a sole trader you dont need to put in a balance sheet do you ?

In theory

you have an asset of 500 pound coins.
you swap your asset of ï¿½500 for a machine with value of ï¿½500

that is all capital transactions and has no impact on profit &loss or tax. That stuff only comes in when you want to depreciate the value of the machine or sell it on.
The only profit involved is that you have (presumably) made a profit of ï¿½500 from somewhere in order to have the ï¿½500 to start with.

The machine can usually be considered to loose value over time. You can choose to depreciate at whatever rate you want for your own accounting purposes. BUT for tax purposes you have to use a rate which is acceptable to the tax man.

So in your accounts you may depreciate at 50% per year. When you come to calculate tax the taxman may allow you to claim capital allowances at 20%/year. So in the tax forms you add back any depreciation that you have claimed to your profit then claim in the capital allowances for the rate the taxman allows. It saves paperwork if you use the same rate for your own purposes as the tax man allows - until the tax rules change. careful what you count it as because I think one category (plant & machinery?) is allowed over 25 years.

I agree with Gervase about treating small value stuff as a straight cost rather than an asset, but I have a higher threashold of ï¿½100 (also depends on what the thing is - lots of IT kit can be effectivly worthless after a year - or at least so I persuaded my tax office)

When/if you come to sell the machine you need to add a balancing charge to reflect the difference between what you get for the machine and what it is worth on your books (and the taxmans version of the books). In effect you have to pay back the taxman for the capital allowance you have claimed (or possibly claim additional allowance). Not having a form to hand but I think the balancing charge boxes are next to the cap. allowance boxes.

Oh - cheque will go in post today - been busy/away.
(the old ones are the best

Gervase

Joined: 17 Nov 2004
Posts: 8655

Posted: Tue Apr 17, 07 8:26 am Post subject:

Aha, found my notes...

Capital Allowances go into boxes 3.14 to 3.23 of your return.
The cost of buying significant plant and machinery can't be allowed as an expense - instead you claim capital allowances, which allow for wear and tear over time. They aren't given automatically and must be claimed each year.

If you buy some kit, the first claim you'll make is for the First year Allowance. FYA is allowed on the cost of assets for use in the business and bought in the period covered by your accounts.
For small and medium enterprises doing accounts to April 2007, the FYA is 50 per cent.

The second and subsequent claim is the Writing Down Allowance.
The WDA applies to any asses that have already been subject to FYA, and is also applicable to assets introduced to the business - stuff that you used privately before you started trading - in which case it is based on the market value at the time it was brought into the business (but if it's less than ï¿½100, just bung it down in full as an expense as a 'small tool' or similar).
The WDA is 25 per cent a year.

So...
Say you buy equipment at a cost of ï¿½8650. In the first year you'll claim 50 per cent of that - ï¿½4325 - as First Year Allowance. That leaves the other half - also ï¿½4325 - as the Written Down Value.

You'll enter ï¿½4325 in box 3.16 and again in 3.22 on your Self-Assessment return. You would also enter the total from box 3.22 in box 3.70 on page SE2 so that capital allowances can be deducted from net profit to arrive at the net business profit for taxation.

If you don't buy any more kit in the next accounting period you won't get a FYA. Instead you'll get Writing Down Allowances of 25 per cent of the written down value of the stuff you've already got.
Thus, if the WDV is ï¿½4325, the allowance is 25 per cent of that, which makes ï¿½1082, with the remaining WDV carried forward to the next year of ï¿½3243. And the year after, you'll claim 25 per cent of ï¿½3243 - ï¿½810 - and so on.

If you sell the kit, you have to deduct the selling cost from the remaining WDV. What's left is the Balancing Allowance, which must not be recorded as income. If the asset is sold for more than the remaning WDA, the remainder is called the Balancing Charge and goes in box 3.17.

And you don't have to claim your capital allowances if it isn't advantageous to do so. You can, though, use your allowances to generate a loss which can be set against the personal tax bill of the partners/directors. But do that for more than three years and you can expect a visit from the tax inspectors

I hope that's helped!

Last edited by Gervase on Tue Apr 17, 07 9:31 am; edited 1 time in total

Gervase

Joined: 17 Nov 2004
Posts: 8655

Posted: Tue Apr 17, 07 9:21 am Post subject:

...vehicles are another matter, however (for those with dodgy v ans kept alive with baler twine and swearing)...
There is no FYA for a car of van, and the maximum value is limited to ï¿½12,000 (so kiss goodbye to the Bentley).
Additionally, you can only claim that percentage of the WDA that is related to business use.
so....
Say you buy a van for ï¿½2400. The WDA for the first year (remember, no FYA) is 25 per cent - ï¿½600 - and the remaining WDV carried over is ï¿½1800.
You do 12,000 miles in that accounting period, of which 8,000 are for business. Thus your business use is 8/12 x ï¿½600 - which means your business allowance for the van for that year is ï¿½400. That's the figure you'll put inbox 3.16 on page SE2 of your tax return.

Thus, for most people buying old bangers, it's much easier and more lucrative to claim mileage at the 2006/7 Approved Mileage Allowance Payment rate of 40p a mile and not worry about bring the vehicle itself into the equations.
That way you don't have to save all your fuel and garage bills and work out what proportion is business and what private. If you do over 10,000 miles in the tax year, subsequent miles can be claimed at 25p a mile.
If you use a motorbike you can claim 24p a mile and (enlightened thinking from the taxperson), cyclists can claim 20p a mile. As far as I know there isn't a 10,000-mile rate for two-wheelers.

Gervase

Joined: 17 Nov 2004
Posts: 8655

Posted: Tue Apr 17, 07 9:35 am Post subject:
...which reminds me of the classic rag-trade accountancy exam (aplogies, Tahir! )... You run a dress factory. In the first year declared income is ï¿½10K and declared expenses are ï¿½11K. In the second year, expenditure exceeds income by ï¿½2K and in the third year it looks set to exceed declared income by ï¿½5K When is the fire?

MarkS

Joined: 01 Aug 2006
Posts: 2626

Posted: Tue Apr 17, 07 11:17 am Post subject:

but check with the revenue....

some government interweb thingy wrote:

First-year allowances of 40 per cent (50 per cent for small businesses) for most plant and machinery - except for cars, assets you lease out and some "long-life" assets (those that you would expect to last for more than 25 years when they are new).

would you call it a long life asset ?

sally_in_wales
Downsizer Moderator

Joined: 06 Mar 2005
Posts: 20809
Location: sunny wales

Posted: Tue Apr 17, 07 12:01 pm Post subject:
I think I'll have to all them, its a ï¿½450 purchase of an item already a hundred years old with no reason to believe it won't be in much the same condition in another hundred. It should be simple, I bet it isnt

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