CapEx and instalments

[DJ Jules]

Interesting problem I've been trying to work out. The short version of the story is that I've earned too much this year in the disco business and it looks like a big chunk of my earnings are going to go to the Tax man (only fair).

Personally, I'd prefer to bring forward some of my CapEx items from next year and reduce that liability a bit, so I've been trying to work out what to buy (that's the fun bit! :D) In my searching I found a supplier (DJKit) who offer payment in instalments over 12 months, so my ideal situation would be to buy the kit now (which would reduce my tax liability), and then pay for it over the next 12 months.

However - I was trying to work out what the rules are around paying for CapEx items in instalments - as it didn't sound to me like I'd be able to get the benefit now, and pay for it later. I found this (http://www.hmrc.gov.uk/manuals/camanual/ca11800.htm) on the HMRC website, but I don't know if anyone on here could help me clarify the rules?

The way I read this was that if I buy something now on instalments, the payment becomes unconditional at the point I receive the goods, and I can then claim any payments made within the next 4 months as part of this tax year, and the remainder will fall into the next tax year. So for example, if I bought a pair of moving heads for £1k and paid £200 deposit and then 6 instalments of £133, I could offset the deposit of £200 and £533 of the instalments (4 months worth) against my profits for tax calculation purposes.

Is this right?

Julian

[Vectis]

That's my understanding.

Additionally, any interest charges are deductible but only in the relevant tax period.

[SC Events]

Don't know enough about this sort of stuff to help you out.

But, kit-wise, i've used http://www.djfinancedirect.co.uk/ to buy Pioneer CDJ's and everything is 0% interest.

Most products are generally the same price as if you bought them from anywhere else and you're not paying 2/3% interest.

[mattydj50]

Not quite.

Capital Expenditure accounting allows you to write down the value of a purchase over several years. So if you but say a new playout system for say £1,000, you can for example treat the first £500 as an expense in year one, £250 in year twoi and £250 in year three, thus spreading the cost over the life expectancy of the asset.

Though the short shelf life of most electronic kit these days make this a short period, it is often just as easy to write off the whole cost of a piece of kit as a cost of sale.

What you are proposing to do is to bring forward purchases from the next tax year into this but spread some of the cost back into the next tax year. All perfectly legal and quite normal.

So, you but the kit for £1,000 as you say. Deposit of £200 and 4 monthly payments of £133, totalling £733, this can be treated as cost of sales in the current tax year with the remaining £266 accounted for in year 2. So, yes, you are right.

This example assumes an interest rate of zero percent. If any interest is charged, you can still account for the interest as you pay it (probably by increased monthly repayments).

Credit Card interest can also be treated as an expense too as can any late payment fees (though not recommended)!

[DJ Jules]

Not quite.

Capital Expenditure accounting allows you to write down the value of a purchase over several years. So if you but say a new playout system for say £1,000, you can for example treat the first £500 as an expense in year one, £250 in year twoi and £250 in year three, thus spreading the cost over the life expectancy of the asset.

Now I had a chat with my accountant about this yesterday as you used to HAVE to do this (the max claim in Yr1 used to be 50%), but apparently you can now claim up to 100% in year one for purchases up to £100k. The option is still there though to spread the tax gain over the life of the asset (e.g. 20% per year for 5yrs).

Given the small size, cost and lifespan of my assets (ooer) I don't see the point in paying out for them in year one and then only getting the benefit in tax relief in years 2/3/4/5.

Julian

[Vectis]

Annual Investment Allowance was designed for things like plant and machinery but does equally apply to the tools of the trade for DJs - i.e. gear - and does allow you to write down a significant (for a mobile DJ) amount in the same year.

There are some exceptions - IIRC vehicle purchase must still be written down conventionally over a period of time unless you intend to sell within the year, etc., and I'm sure there are others such as ?software? - if unsure then check with a pro.