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

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.

[Nakatomi]

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

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.

Of course not, you stupid boy.

[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.