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bigduckontax
bigduckontax, Accountant
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Renting, leasing, bying a truck or van - deprecation,

Customer Question

Renting, leasing, bying a truck or van - deprecation, capital allowances, writing down allowances rules how to deduct these expenses from limited company profits and claim vat.
Submitted: 2 months ago.
Category: Tax
Expert:  bigduckontax replied 2 months ago.

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

Let us get rid of the easy one first, VAT. Every time the company receives a VAT invoice pass it through the books of account and reclaim any input tax thereon, it is as simple as that.

Depreciation does not come into the Corporation Tax (CT) computation. Personally I prefer the straight line method of writing off such assets over five years.

For a truck or van the capital allowance system allows you to write off up to 200K of plant and machinery, which embraces trucks or vans, as Annual Investment Allowance (AIA). Thus the company should receive 100% relief in the year of acquisition unless it has huge purchases of equipment elsewhere. These days Writing Down Allowances simply do not come into the frame save for purchases in earlier years under older capital allowance regimes.

I do hope that I have simplified the position for your company.

Customer: replied 2 months ago.
Is there any other way to spread the cost of the purchase over the years?
Expert:  bigduckontax replied 2 months ago.

Yes, the company does not have to claim Capital Allowances all at once and can thus spread their effects over a number of years if desired.

Customer: replied 2 months ago.
How about claiming vat for purchasing a truck, if the company is registered for VAT flat rate scheme?
Customer: replied 2 months ago.
You said: "Personally I prefer the straight line method of writing off such assets over five years" - you mean deprecation, right, which do not affect the corporation tax to pay, is that correct?
Expert:  bigduckontax replied 2 months ago.

Here is the guidance from the UK Gov UK web site:

'you can’t reclaim the VAT on your purchases - except for certain capital assets over £2,000'

I think it can be safely assumed that an acquisition as intended will involve expenditure over that limit.

Yes, I was referring to depreciation which is ignored in the CT computation.

Customer: replied 2 months ago.
However in the company accounts I can see that deprecation decreases profits
Expert:  bigduckontax replied 2 months ago.

Yes, but in the CT computation depreciation is added back. It is the first thing that happens.

Customer: replied 2 months ago.
if the only possibility to deduct the purchase of the truck is by using AIA (no costs can be spread over the years) in which circumstances we use depreciation?
Expert:  bigduckontax replied 2 months ago.

You appear to have misunderstood my answer. What I said in my follow up response was 'the company does not have to claim Capital Allowances [AIA] all at once and can thus spread their effects over a number of years if desired.'

Depreciation is an accounting tool designed to spread the asset over its probable life. The standard CT computation runs Profits as per accounts, add back depreciation, deduct capital allowance to derive the figure which is subject to CT.

Customer: replied 2 months ago.
I see, so to sum up there are two options:- AIA can be claimed for the truck (one off tax deduction)
or alternatively we can spread the costs of the purchase over for example five yearsThe question is how? You said it cannot be done "under the current Capital Allowance system which is considered to be very generous."
Expert:  bigduckontax replied 2 months ago.

I am at a loss to understand from whence you found 'You said it cannot be done "under the current Capital Allowance system which is considered to be very generous.' This is not in my responses.

Customer: replied 2 months ago.
Thats what I see.So I understand it can be done. How?
Expert:  bigduckontax replied 2 months ago.

I edited that out having made an error before any comment was made thereon.

Customer: replied 2 months ago.
No problem, so let's say we have a truck for 60K.OPTION 1. We claim as AIA 60K
OPTION 2. We claim 12K for every year. Is it as capital allowance?
Expert:  bigduckontax replied 2 months ago.

The AIA is a capital allowance. Both options are available. They are merely a method of using the allowance to the best advantage of the organisation.

Customer: replied 2 months ago.
12K needs to be entered as capital allowance
and deprectation at 12, right if I use second option?
Expert:  bigduckontax replied 2 months ago.

If you use Option 2, yes. As it happens in that case both the figures for capital allowances and depreciation are identical. Needless to say, that very rarely occurs.

Customer: replied 2 months ago.
how to do it correctly when I need to do accounts? Precisely.
Expert:  bigduckontax replied 2 months ago.

You include depreciation in the normal accounts.

The CT computation is a separate exercise where the depreciation is ignored. The final figure subject to tax at the current rate of 20% would be a creditor in the balance sheet.

Customer: replied 2 months ago.
Im sorry, im not sure if I understand.I need to put 12 K as depreciation (60 k /5 years), after that is added back and I need to deduct it from profits as a capital allowance. Is that right?
Customer: replied 2 months ago.
its all the same for the next 5 years
Expert:  bigduckontax replied 2 months ago.

It is only added back in the CT computation which is entirely separate from the Balance Sheet (BS) and the Profit and Loss Account (P&L). It is in the CT computation where the capital allowance are used to reduce the liability.

Once the liability is computed it can be inserted into the BS as a creditor and the P&L to reduce the profit.

This has to be done every year.

Customer: replied 2 months ago.
Thank you. Last clarification. Renting and leasing I can treat as cost of raw materials and get 100% tax relief if its used only for business?
Expert:  bigduckontax replied 2 months ago.

Yes, you can, but remember to adjust for stocks held at the end of an accounting period..

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