Depreciation and Disposals
13.1 Capital Allowances:
One can claim capital allowances, if one is running a limited company or if you’re self-employed.
The accountant would deal with these when he prepares the final accounts for the year. Only general comments are made to explain the terms.
Buying an asset, for example, a car, tools, machinery or other equipment for use in business, one cannot deduct the expenditure on that asset from trading profits. Instead, one may be able to claim a capital allowance for that expenditure. If one has chosen to use the cash basis to calculate the profits one can only claim capital allowances on cars.
Capital allowances are also available for certain building-related capital expenditure, for qualifying capital expenditure on qualifying research and development, for donations of used business assets to charity, and certain other capital expenditure.
The aim is to give tax relief for the reduction in value of qualifying assets that one buys and own for business use by letting one write off their cost against the taxable income of the business.
If the business is a partnership, one needs to claim capital allowances on assets owned by the partnership collectively in the Partnership Tax Return, not in the returns for individual partners. The most commonly claimed allowances are for plant and machinery. Note: That special rule applies on plant and machinery that is owned by one of the partners but used in the partnership’s business.
Claims should be made on the Partnership Return. These should be made within 12 months after the 31 January filing deadline for the return.
First-year tax credits:
There are also some special rules that allow companies to surrender losses attributable to allowances claimed on expenditure on certain, specific energy saving or environmentally beneficial plant or machinery in return for a cash payment.
Find out more about first-year tax credits from the web site.
Writing-down allowances (WDA):
WDA are annual allowances that one can claim to reduce or ‘write down’ any remaining balance of capital expenditure on plant and machinery that one has not already claimed a capital allowance for, referred to as a ‘pool’ of ‘unrelieved’ expenditure. There are two rates of WDA for plant and machinery, the rate for the main pool, 18%, and for the special rate pool, 8%.
Small Pools Allowance (SPA):
The WDA for small pools, sometimes referred to as the ‘SPA’, allows one to write off either the main or special rate pool or both of them if the balance in that pool is £1,000 or less.
Time limits if you haven’t made a claim
If one discovers that a claim has been missed, after one has sent in Company Tax, Income Tax or Partnership Return then, one can request an amendment. However, there are certain time limits on this.
Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets. Depreciation is a process of allocation.
Cost to be allocated = acquisition cost – salvage value
Allocated over the estimated useful life of assets.
Allocation method should be systematic and rational.
Depreciation methods based on time:
- Straight-line method
- Declining balance method
- Sum-of-the-years’-digits method (not normally used in small GP surgeries)
Depreciation based on use (activity)
Depreciation = (Cost – Residual value) / Useful life.
In a GP Partnership practice, the items bought are of small amounts running to less than £ 10000; computer and communication equipment may be far less and the useful life is about 3 years, for telephone equipment 5 years. So the depreciation to be applied would be 33 1/3 % for 3 years and 20% for 5 years.
Distinguish between depreciation from capital allowances. Depreciation is an accountancy concept, used to spread the cost of an asset over its useful life in the business. The rate used will depend therefore on an estimate of that useful life, so computers might be depreciated at 25% or 33%, or at a lower rate if their useful life is expected to be longer. This might be on a straight-line basis (same amount each year) or reducing balance (25% of 100%, then 25% of 75% and so on). It depends on the asset, and there is an element of choice and subjectivity.
Because of that subjectivity, depreciation is not allowable for tax purposes, and is replaced by capital allowance. First year allowance for plant & machinery in 2006-7 (small businesses) is 50% – was 40% last year – and 25% thereafter, on the reducing balance basis. Other rates apply for various different assets.
Fixtures and Fittings
Generally a fixture is understood to be any item that is bolted to the floor or walls, and a fitting to be any item that is free standing or hung by a nail or hook. The accountant would deal with the complicated computations for depreciation.
The mileage rate is only available for journeys, or any identifiable part or proportion of a journey, that are wholly and exclusively for business purposes. It is not available for private journeys, such as travel from home to work, or for journeys that serve both a business and a private purpose.
If a GP keeps a mileage log of car expenses, the maximum he can claim is 45p per mile (for the first 10000miles and 25p for over 1000 miles). No other allowances can be claimed including fuel costs, insurance and road tax. The mileage rate does not include incidental expenses incurred in connection with a particular journey, such as tolls, congestion charges and parking fees. These will be allowable as a deduction where they are incurred solely for business purposes.
Capital allowances on cars are available and HMRC site does give details for the current year.
All motor vehicles used for the surgery, vans and even GPs personal cars are all to be included in the accounts.
“Disposal” means to relinquish ownership of an asset in a conclusive manner by sale, exchange, transfer, involuntary conversion, abandonment, or donation.
When items like communication equipment is sold or disposed off the final value would be in double-digit figures. For sale of used cars the value would be higher and this affect the computation of Depreciation; usually the accountant would be able to deal with these quite easily when preparing final year accounts.