Tax return time yay! But... Depreciation as an expense?

[Nakatomi]

I know the basics of doing my own tax return. I was one of the fortunate (HA!) few in 1997 randomly selected guineapigs to do self-assessment. At the time I had two jobs (as now, except BOTH were PAYE) so I ended up being due a rather fat refund from Mr Revenue due to my running costs.

Now, as both full-time & self-employed I have to declare what I make again, as would be the right thing to do being all above board. So far, so good.

We all know the basics - Profit equals income minus expenditure. You're allowed to claim a certain amount for using your home for business, mileage etc.. all very clear.

When it comes to assets, I've encountered some conflicting information. Lots of articles (HMRC included) seems to suggest I can simply put all my equipment purchases down in my AIA & those come straight out of my income (profit = income minus money out on the very simplest level). So earnings liable to be taxed equals income minus expenses, right? Simples.

However, somebody I know gave me a worksheet an accountant friend made up for them which is deducting both the purchase price AND depreciation as capital. E.g. If £1000 of gear was bought (this is in a separate area to consumables), this is deducted from income as an expense but so is 20% depreciation in its first year. For the sake of this example, this would result in £1200 being deducted from income as opposed to just £1000. I'm pretty sure this is completely wrong. The revenue wouldn't dare dream of letting you claim an allowance twice now would they?

An example calculation:

April 2015 to April 2016 income: £10,000
Spend on equipment: £3000
Other expenses (mileage @ £0.45/mile, home office etc) £1000

Profit = £10000 - £3000 - £1000 = £6000, so I'd have to pay tax on the £6000 profit I'd made.

However, if I wanted to spread the cost of gear purchases (say a nice expensive brand new van) I might be more sensible to split the cost of the asset over a nominal figure of its working life (say 5 years at 20% per year - £10,000 van first year's deduction would be £2000, next year's would be £1600 etc etc etc).

I know a lot of you are going to yell "go to an accountant" but I don't think this is really rocket sciencey enough to warrant it.

Is it as simple (in basic terms) as I think.. or can I indeed claim for depreciation too?

[mattydj50]

I know the basics of doing my own tax return. I was one of the fortunate (HA!) few in 1997 randomly selected guineapigs to do self-assessment. At the time I had two jobs (as now, except BOTH were PAYE) so I ended up being due a rather fat refund from Mr Revenue due to my running costs.

Now, as both full-time & self-employed I have to declare what I make again, as would be the right thing to do being all above board. So far, so good.

We all know the basics - Profit equals income minus expenditure. You're allowed to claim a certain amount for using your home for business, mileage etc.. all very clear.

When it comes to assets, I've encountered some conflicting information. Lots of articles (HMRC included) seems to suggest I can simply put all my equipment purchases down in my AIA & those come straight out of my income (profit = income minus money out on the very simplest level). So earnings liable to be taxed equals income minus expenses, right? Simples.

However, somebody I know gave me a worksheet an accountant friend made up for them which is deducting both the purchase price AND depreciation as capital. E.g. If £1000 of gear was bought (this is in a separate area to consumables), this is deducted from income as an expense but so is 20% depreciation in its first year. For the sake of this example, this would result in £1200 being deducted from income as opposed to just £1000. I'm pretty sure this is completely wrong. The revenue wouldn't dare dream of letting you claim an allowance twice now would they?

An example calculation:

April 2015 to April 2016 income: £10,000
Spend on equipment: £3000
Other expenses (mileage @ £0.45/mile, home office etc) £1000

Profit = £10000 - £3000 - £1000 = £6000, so I'd have to pay tax on the £6000 profit I'd made.

However, if I wanted to spread the cost of gear purchases (say a nice expensive brand new van) I might be more sensible to split the cost of the asset over a nominal figure of its working life (say 5 years at 20% per year - £10,000 van first year's deduction would be £2000, next year's would be £1600 etc etc etc).

I know a lot of you are going to yell "go to an accountant" but I don't think this is really rocket sciencey enough to warrant it.

Is it as simple (in basic terms) as I think.. or can I indeed claim for depreciation too?

Spot on. Its not only sensible, its good accountancy practice for larger businesses. But its not quite straightforward.

Depreciation can be counted as a business expense. You initially account for your purchase (van) as Capital Expenditure, then you take the depreciation figure to your Profit & Loss each year. You don't take the full purchase price if the asset out in year 1, only what you have decided will be the loss in value of that asset.

The way you have suggested is the reducing balance method whioch assumes there is always some residual value to your asset for ever. By your calculation, I make the residual value of the van after the fifth year to be £3,276. If you sell it for £4,000, you then have to account for a profit of £724.

The other method is the straight line method which assumes that, after the designated period of time, the item is worthless and scrapped at nil value. So, five years at £2,000 per annum. End value nil. Sale for £4,000, profit £4,000. Eeek. This method is only recommended for say fast moving items that would be obsolete after 3-5 years (laptop say) which are simply scrapped for zero.

That's the simple explanation anyway. As long as you adopt and keep to a single accounting policy, you'll be fine. HMRC do say that, forsmall businesses, use the simple "expenses" accounting, but I can see why a large expense (e.g. a van) would be better spread across several years.

For guidance have a look at HMRC Capital Allowances here (https://www.gov.uk/capital-allowances)

My accountancy qualifications have lapsed and I'm not fully up to date, but generally, things haven't changed much. Hope this helps.

[Nakatomi]

Thanks for that. It basically verifies what I thought to be the case. All the info is on the HMRC site.

That wasn't the only thing wrong with the spreadsheet btw. I hope nobody comes a cropper using it.

With the AIA being over 200 grand now it might not be unrealistic to plonk every asset purchase in it (not cars though). Maybe van number two eh? It's swings & roundabouts really isn't it... Pay later or pay now.

[mattydj50]

Glad to help. I designed my own spreadsheet, its what I do for a living! I do mine, my wife's and stepdaughter's accounts. Hopefully all OK!!

Some places (HMRC, councils, Business Advice Centres) where they exist also run small business taxation courses, often in the evenings. Anyone need some help, its worth checking these out (the cost is tax deductable too)!

[Shaun]

Tax time? Am I the only one that leaves it until the final day in January. :ph34r:

[Nakatomi]

Tax time? Am I the only one that leaves it until the final day in January. :ph34r:

I have til the end of october to file my return apparently but I've been keeping books as I go along. Email receipts & scans turned to PDF, numbered & recorded in the books. Saves rushing about trying to find everything last minute. Been doing okay so far I reckon.

One thing of note though... When you use that Teutonic seller of gear all their invoices are in Euro. Grr. Not that I'll be using them again if I can help it!

[Excalibur]

Tax time? Am I the only one that leaves it until the final day in January. :ph34r:

Of course not, you stupid boy. ;) :o:o

[Benny Smyth]

Am I the only one concerned that you guys are constantly misspelling 'Taxi'?

I mean c'mon - it's not like tax is a real thing.

[CRAZY K]

I have til the end of october to file my return apparently but I've been keeping books as I go along. Email receipts & scans turned to PDF, numbered & recorded in the books. Saves rushing about trying to find everything last minute. Been doing okay so far I reckon.

One thing of note though... When you use that Teutonic seller of gear all their invoices are in Euro. Grr. Not that I'll be using them again if I can help it!

YES BUT YOUR CREDIT CARD STATEMENT SHOWS IN UK STERLING.

Incidentally dont forget for small businesses under a certain turnover you can show expenses as a block figure, up to 30 per cent is usually not a problem as long as you have the records to back it up.

Dont you get to January to submit on line, UNLESS you want the tax on DJ earnings to be deducted from your PAYE earnings and get a change of tax code.

I have done that for some years from my PAYE pension, but after a while it got messy and confusing so I just pay it off anyway.

Alternatively its a good way of deferring tax---a tax deferred is a tax saved

[Nakatomi]

YES BUT YOUR CREDIT CARD STATEMENT SHOWS IN UK STERLING.

Incidentally dont forget for small businesses under a certain turnover you can show expenses as a block figure, up to 30 per cent is usually not a problem as long as you have the records to back it up.

Dont you get to January to submit on line, UNLESS you want the tax on DJ earnings to be deducted from your PAYE earnings and get a change of tax code.

I have done that for some years from my PAYE pension, but after a while it got messy and confusing so I just pay it off anyway.

Alternatively its a good way of deferring tax---a tax deferred is a tax saved

Ahh but in my first year there's been a lot of spends so I can't do that.

[CRAZY K]

Ahh but in my first year there's been a lot of spends so I can't do that.

Cant do what Justin?

ALAN

[Nakatomi]

Cant do what Justin?

ALAN

About half my turnover has been spent so I doubt I'd get away with just having a blob of expenses. Better to itemise it all anyway I think. I know HMRC aren't immediately interested in breakdowns of expenses but for completeness sakes I've got everything.

[DJ Jules]

About half my turnover has been spent so I doubt I'd get away with just having a blob of expenses.

Yup, you would. We're small fry.

Julian

[CRAZY K]

Yup, you would. We're small fry.

Julian

Exactly very small fry--long as you can back it up no worries--but if you want to spend time on it its up to you.

I havent bothered for 25 years:rolleyes:

[Nakatomi]

Exactly very small fry--long as you can back it up no worries--but if you want to spend time on it its up to you.

I havent bothered for 25 years:rolleyes:

You said 30%. My spend has been a fair way over that. Anyway, my approach is belt & braces.. it doesn't take long as I'm doing cash basis accounting.. the majority of my receipts are electronic (even ones from the local DJ dealer) - no boxes full of dog-eared receipts here.

As I understand it, HMRC will give me a box to put my expenditure into, and that's what I'll be doing. They'd only be interested in knowing the exact ins & outs if I was selected to be investigated - and since I've got everything documented already there won't be any panic knocking it into shape because it already is :)

Back when I was a bar DJ I knew 2 DJs who got absolutely reamed for not keeping tight enough records. One of them almost lost his house & the other had to sell a yacht. One of them got more sympathy from me than the other - can you guess which? ;) Not being able to pay your mortgage because your bank account has been frozen is probably about as much fun as it sounds - even less so when you have a family. Better to spend half an hour every week recording everything than not, I say.

[Benny Smyth]

Better to spend half an hour every week recording everything than not, I say.

Bravo. I tend to itemise monthly as opposed to weekly. :approve:

[yourdj]

I had a falling out with my accountant today, whom basically was having a strop and blaming all of his shortcomings on me.
I sent him a very concise and detailed professional email and am in the market for a new bookkeeper.

He soon apologised LOL. Too late. I am a laid back guy. but don't appreciate rude people, especially as i am a client. :p

With regards to the small fry comment, all sorts of people are investigated, me and my former accountant spent some time going over figures and making thing look as normal as possible as thats what he thinks gets you singled out. I have always paid my taxes mind you in full, but some expenses have been questionable though. :)

I am probably using a nice lady who lives down the road, so hopefully she is as good.

[CRAZY K]

You said 30%. My spend has been a fair way over that. Anyway, my approach is belt & braces.. it doesn't take long as I'm doing cash basis accounting.. the majority of my receipts are electronic (even ones from the local DJ dealer) - no boxes full of dog-eared receipts here.

As I understand it, HMRC will give me a box to put my expenditure into, and that's what I'll be doing. They'd only be interested in knowing the exact ins & outs if I was selected to be investigated - and since I've got everything documented already there won't be any panic knocking it into shape because it already is :)

Back when I was a bar DJ I knew 2 DJs who got absolutely reamed for not keeping tight enough records. One of them almost lost his house & the other had to sell a yacht. One of them got more sympathy from me than the other - can you guess which? ;) Not being able to pay your mortgage because your bank account has been frozen is probably about as much fun as it sounds - even less so when you have a family. Better to spend half an hour every week recording everything than not, I say.


No problems, however if you are going to be running at a loss for the first few years due to large capital expenditure you may need to be aware that you can offset previous tax paid in your PAYE work, my son did this a few years ago and got a large cash refund immediately through the ACCOUNTANT.

Might be worth getting an Accountant to oversee that--the Inland Revenue wont be helping you with that I GUARANTEE :D:D:D

Then you can get free advice on the other issues:D:D:D

[Nakatomi]

No problems, however if you are going to be running at a loss for the first few years due to large capital expenditure you may need to be aware that you can offset previous tax paid in your PAYE work, my son did this a few years ago and got a large cash refund immediately through the ACCOUNTANT.

Might be worth getting an Accountant to oversee that--the Inland Revenue wont be helping you with that I GUARANTEE :D:D:D

Then you can get free advice on the other issues:D:D:D


Oooo I'm not making a loss. Far from it. This return, I'm gonna owe HMRC a good sum. Next one's gonna sting!

[yourdj]

Oooo I'm not making a loss. Far from it. This return, I'm gonna owe HMRC a good sum. Next one's gonna sting!

i don't mind that, if i was not paying much then i would be wondering why I was not earning much.
I think I paid about 7-8k this year?? Could be double that for all I know. :)

Accounting is not my forte, I like marketing.

[Nakatomi]

i don't mind that, if i was not paying much then i would be wondering why I was not earning much.
I think I paid about 7-8k this year?? Could be double that for all I know. :)

Accounting is not my forte, I like marketing.

Yeah well when it's your only job that kind of figure is realistic. I know where all my spending has gone & very little of it has been wasted so far so I'm doing fairly well. It's tempting to go out & buy new toys but since I turned a certain age I'm much more careful with my money.

[Excalibur]

Bravo. I tend to itemise monthly as opposed to weekly. :approve:
I tend to do it annually, around the end of January. :o:o


It's tempting to go out & buy new toys but since I turned a certain age I'm much more careful with my money.

I know whereof you speak. I became like that when I turned twelve as well. :)