Capital Allowances - The Book-keepers Forum (UK)

Leger · Master Book-keeper

Capital Allowances

Rachel19 · Veteran Member

Forgive me if this is a daft question, but I'm just curious as to why would you claim written down allowance when you can claim 100% annual investment allowance?

Leger · Master Book-keeper

Hi Rachel

My musings are primarily hypothetical, but was reminded when a similar example has cropped up in some accounts I will be working on shortly.

In my case there isn't enough profit to justify AIA, but it could be that it's a car for example. The problem still remains the same though.

AIA in year one £5000 tax reduction but 1000 added back via depreciation (assuming 5 years) For the sake of example, FA bought at start of first year and sold after end of 5th year.

after 5 years you have "paid back" the original tax deduction via depreciation but if you then sell the vehicle (say £9000) you have to pay £1800 of the AIA tax allowance originally claimed.

From what I can see, with cash accounting you benefit from the £5000 tax reduction in the first year and pay back £1800 after year 5, but are not penalised by depreciation.

Artois · Guru

Leger wrote:
Hi Rachel
My musings are primarily hypothetical, but was reminded when a similar example has cropped up in some accounts I will be working on shortly.
In my case there isn't enough profit to justify AIA, but it could be that it's a car for example. The problem still remains the same though.
AIA in year one £5000 tax reduction but 1000 added back via depreciation (assuming 5 years) For the sake of example, FA bought at start of first year and sold after end of 5th year.
after 5 years you have "paid back" the original tax deduction via depreciation but if you then sell the vehicle (say £9000) you have to pay £1800 of the AIA tax allowance originally claimed.
From what I can see, with cash accounting you benefit from the £5000 tax reduction in the first year and pay back £1800 after year 5, but are not penalised by depreciation.

Hi John

Not entirely sure I understand what you are saying, you can not compare depreciation which is not allowed for tax relief with CA which are, there can be no comparison, in your example you say that 1000 is added back but it has already been taken off so all it does is cancel out the depreciation allowed in the accounts, how are you penalised by depreciation?

With cash accounting what would happen if you paid £25k for a van but there was not enough profit to justify it? the same as you say for AIA

And also cash accounting is unavailable to Ltd Co

Leger · Master Book-keeper

Thanks Doug.

That's the bit I was missing.

The depreciation reduces the profit in the accounts and then is disallowed for tax purposes, so say the profit is 25k and depreciation takes it down to 20k, the profit is still 25k in reality. I was fixated on the profit after depreciation, not before.

Cheshire · Master Book-keeper

Hi John
Only thing to add really - you take each client based on existing circumstances whilst having a weather eye for future plans.

Always worth doing the calculations but bear in mind a fair few businesses will find that the cash basis is not appropriate for a number of reasons and if turnover gets to the exit threshold then you have to make adjustments in the accounts for capex expenditure as well as income and expenses.

I recently had one that was in business a very short term over a couple of years, classic for cash basis in normal circumstances but accruals made more sense on a couple of points, not least the sideways loss relief.

Leger · Master Book-keeper

Cheshire wrote:
Hi John
Only thing to add really - you take each client based on existing circumstances whilst having a weather eye for future plans.

Hi Joanne

Foe some stupid reason I had it in my head that a having a cash accounting fixed asset would be more beneficial than one using AIA or cap ex. The penny dropped last night when Doug answered but generally I use accrual unless I believe cash accounting would suit that business.