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bigduckontax
bigduckontax, Accountant
Category: Tax
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I run a small business and have £5000 in depreciation on my

Customer Question

I run a small business and have £5000 in depreciation on my tangible fixed assets. Does this depreciation form part of my profits?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.

Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.

In traditional accounting depreciation is applied to accounts to spread the cost of an asset against the trading income over the anticipated life of the item(s). In fact it reduces your profits.

So far so good. HMRC does not recognise depreciation in taxation computations so having derived your annual profit the first thing that happems in the computation is that it is added back to your profit thus increasing the sum liable to tax. Welcome to the Alice in Womderland world of capital allowances (CAs)!

In place of depreciation in a tax computation you have CAs. These are relatively complex depending on the period(s) in which the expenditure on purchasing the asset occurred, but can be as high as 100% as Iniitial Investment Allowance.

Much further I cannot go without more detail on the matter. Whenever I do a tax computation I have a capital allowance block at the bottom to calculate the various pools, writing down allowances (currently 18% per annum), Initial Investment Allowances etc. The final total of CAs available is applied to the profits from the normal accouning process after addition of the depreciation figure to derive the profit liable to tax.

Simple, as the Meerkat in the TV advert would say.

I do hope that I have been able to shed some light on your question. I suspect that you may have to come back to me on this one.

Customer: replied 2 years ago.

Thank you for this and it is precisely what happened. So when completing the capital allowances section it asks whether the business has expensive cars - no is the answer - it says nothing about vans -what is the method for adding this?

Expert:  bigduckontax replied 2 years ago.

Vans are not cars. Indeed you may be surprised to know that camper vans are not classified as cars, but as vans (I did say it was Alice in Wonderland, did i not). Cars are yet another complexity within the CA regime.

Vans are easy, however. They are part of your plant and machinery and within certain limits the total cost of the van will be allowed as an Initial Investment Allowance at 100%.

You merely enter that you have acquired a new item of plant and machinery costing whatever the relevant acquisition price was and it will be allowed at 100%, for now that is. CAs are a bit of a political football at present; who knows what will happen next week.

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Expert:  bigduckontax replied 2 years ago.
Thank you for your support

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