When to Post Corp Tax Liability.....

[VectraMan]

Personally, we do the corporation tax return at the same time as the accounts so that we have an accurate figure to put in the accounts, thus not needing to adjust year on year for any differences that could arise. However, I know quite a few firms will use an estimate for corporation tax for the accounts purposes and then adjust the following year if the CT600 produced a different figure.

Why would anyone do that?

[prozak]

Why would anyone do that?

So that you have the liability and tax "expense" / capital reduction in the year that it occurred.

It gives a more accurate view of the companies position at the close of that year.

[tractor]

...

Sorry you are totally off track.

The value of the asset is depreciated in the accounts.

However the capital allowances effecting your corp tax liability are totally different.

ESPECIALLY at present as you can currently - under the annual investment allowance - claim an allowance of up to 500k in one year.

To be clearer, the allowance is subject to a maximum total pot though of 500k. My understanding is that the residual value is only then notional and has no bearing on future CT calcs, but the asset value is written down annually so that the pot can be refreshed with new assets as time goes on and assets wear out.

I would be grateful if any of our regular professionals would confirm or put me right on my shaky understanding. I will amend the post if it is incorrect of course

Also, assets must be bought at market value and cannot be sold to the company by any connected person to be included in the AIA.

[tractor]

...

Why would anyone do that?

So that you have the liability and tax "expense" / capital reduction in the year that it occurred.

It gives a more accurate view of the companies position at the close of that year.

Some accounts packages calculate a provision that fluctuates during the course of the business year according to sales and capital purchases etc. Obv you need to provide some rules.

[Scruff]

Sorry you are totally off track.

The value of the asset is depreciated in the accounts.

However the capital allowances effecting your corp tax liability are totally different.

ESPECIALLY at present as you can currently - under the annual investment allowance - claim an allowance of up to 500k in one year.

Tosh. That's why you add back the depreciation and subtract the wear and tear.

[TheCyclingProgrammer]

I use FreeAgent to do my books which always posts a fairly accurate estimate of my CT liability at year end.

It's never 100% accurate due to lack of support to certain aspects of capital allowances, deferred taxation and rounding differences.

My accountant does the corporation tax return, enters the correct figure in the accounts which are done at the same time and then I post a journal dated to my year end date to adjust my books for the true figure so my books are correct.

[tractor]

...

Tosh. That's why you add back the depreciation and subtract the wear and tear.

Not how the Annual Investment Allowance is described now. My understanding is that it is a notional pool of assets that is depreciated every period, you can do it monthly if you wish. But the total may not exceeed £500k at any time. Once assets under this limit are purchased, they are revenue items and are not on the balance sheet. If they are sold, they go into P & L and tax is due on the residual value accordingly, this is why you continue to depreciate over their lifetime.

Please accountants, clear this up for us

[Martin at NixonWilliams]

I am not entirely sure what is being asked here but will offer a basic overview.

The way assets are written down in the accounts is very different to how they are written down for tax purposes. In the accounts, you will choose a depreciation method appropriate for a class of assets and then each year the assets are depreciated.

When preparing the tax computation you begin with the net profit and you add back any non allowable expenses, depreciation being one of them. This is because you receive capital allowances instead of the normal relief you receive for trade expenses.

Any capital assets that are bought will then get capital allowances in the tax computation. If the assets qualify for annual investment allowance (AIA), a deduction for 100% of the cost of the asset is allowed.

If the AIA is exceeded or the asset does not qualify for AIA it will go into a pool, the balance of the pool is then written down by 18% each year.

Note that this is very basic overview, there are lots of other pools, allowances etc.

I hope this helps.

Martin

[Martin at NixonWilliams]

I use FreeAgent to do my books which always posts a fairly accurate estimate of my CT liability at year end.

It's never 100% accurate due to lack of support to certain aspects of capital allowances, deferred taxation and rounding differences.

My accountant does the corporation tax return, enters the correct figure in the accounts which are done at the same time and then I post a journal dated to my year end date to adjust my books for the true figure so my books are correct.

Our online system operates in a similar way. It would be very difficult to factor capital allowances etc. into an online bookkeeping system so we make an adjusting journal for our clients at the end of the year to include the final corporation tax liability.

[tractor]

...

I am not entirely sure what is being asked here but will offer a basic overview.

The way assets are written down in the accounts is very different to how they are written down for tax purposes. In the accounts, you will choose a depreciation method appropriate for a class of assets and then each year the assets are depreciated.

When preparing the tax computation you begin with the net profit and you add back any non allowable expenses, depreciation being one of them. This is because you receive capital allowances instead of the normal relief you receive for trade expenses.

Any capital assets that are bought will then get capital allowances in the tax computation. If the assets qualify for annual investment allowance (AIA), a deduction for 100% of the cost of the asset is allowed.

If the AIA is exceeded or the asset does not qualify for AIA it will go into a pool, the balance of the pool is then written down by 18% each year.

Note that this is very basic overview, there are lots of other pools, allowances etc.

I hope this helps.

Martin

So compared with the old way where the residual balance after depreciation was written back into profits for the current year for CT computational purposes and you were taxed again and again over the lifetime of the asset, the net effect is now that 100% CT allowance is made for capital purchases in the first year provided the conditions are met?

and thanks BTW