Asset vs Expense question on >£2k invoice

[TheCyclingProgrammer]

Right. Not thrilled about that change, though I suppose one good side is that it won't be necessary to mess around trying to aggregate such purchases onto one invoice in order to deduct VAT. I can't see that it will change anything with the scenario I originally described, though?

Well you won't have to worry about whether it's an asset or an expense either.

[EinsteinTax]

On the FRS scheme. Considering purchasing a phone and laptop as part of one invoice, which would be over £2k.

I will almost certainly upgrade the phone (but not the laptop) before three years has elapsed.

Does this cause any difficulties for example with reclaiming the VAT, given that one part of the invoice should be classed as an asset and depreciated, while the other is probably better classed as an expense?

I suppose they could both be classed as assets and if I sell the phone, I just make an appropriate repayment of VAT and corp tax...

If you are on the FRS VAT scheme you can claim the VAT back on capital expenditure where the amount of expenditure (including VAT) is more than £2,000.

In your scenario it sounds like you may have bought a "package" of IT equipment, and it would be best to treat the phone purchase as a capital expense.

There are more details on reclaiming VAT on capital expenditure when on the FRS scheme here:

https://www.gov.uk/government/public...enditure-goods

[dagenheis]

My accountant always recommendated to use smart phone as expense (Opex) but it should be ok to package this with Laptop as capital asset.

I seem to recall there was some exception that the capital asset can't be amortised (like 1/3 or 1/2 of laptop cost) against the capital allowance (AIA) if the Ltd stops trading at the year-end. Is that correct?

Could the Ltd still reclaim VAT in the FRS resturn regardless of whether, or not, the capital asset is amortised at the year-end meaning paying full CT and no savings through capital allowance?

Also, if the capital asset treatment is not possible, is it reasonable to treat this purchase as revenue expense? e.g. 1/2 or 1/3 of the cost. But I suppose the business can't reclaim input VAT (ca 333) on the next FRS return.

Will be good to weigh options if the Ltd stops trading at the year-end

[EinsteinTax]

I seem to recall there was some exception that the capital asset can't be amortised (like 1/3 or 1/2 of laptop cost) against the capital allowance (AIA) if the Ltd stops trading at the year-end. Is that correct?

It is correct that AIA cannot be claimed for items bought in the final accounting period.

Amortisation is for intangible assets and depreciation is for tangible assets, so laptops would be depreciated rather than amortised. (This is just terminology though and doesn't affect the logic.)

It's also worth noting that the AIA would normally cover the full cost of the asset (except in final accounting period), so the depreciation is not as relevant from a tax perspective. Assuming AIA is available, the Corporation Tax would be reclaimed in the year of purchase, and the book value of the asset would be depreciated over it's useful lifetime.

Could the Ltd still reclaim VAT in the FRS resturn regardless of whether, or not, the capital asset is amortised at the year-end meaning paying full CT and no savings through capital allowance?

Yes

Also, if the capital asset treatment is not possible, is it reasonable to treat this purchase as revenue expense? e.g. 1/2 or 1/3 of the cost. But I suppose the business can't reclaim input VAT (ca 333) on the next FRS return.

If it was treated as a revenue expense you would claim the full cost against CT, but would not be able to reclaim input VAT.

[zerosum]

It is correct that AIA cannot be claimed for items bought in the final accounting period.

Amortisation is for intangible assets and depreciation is for tangible assets, so laptops would be depreciated rather than amortised. (This is just terminology though and doesn't affect the logic.)

It's also worth noting that the AIA would normally cover the full cost of the asset (except in final accounting period), so the depreciation is not as relevant from a tax perspective. Assuming AIA is available, the Corporation Tax would be reclaimed in the year of purchase, and the book value of the asset would be depreciated over it's useful lifetime.


Yes

If it was treated as a revenue expense you would claim the full cost against CT, but would not be able to reclaim input VAT.

So trying to compile all of that into some kind of best practise; don't expect to get full CT relief / VAT reclamation on such an invoice if you wind the company up within a year of purchase?

[EinsteinTax]

So trying to compile all of that into some kind of best practise; don't expect to get full CT relief / VAT reclamation on such an invoice if you wind the company up within a year of purchase.

I think technically it is only the final accounting period where the AIA is not available. This is not necessarily the same as winding the company up "within a year of purchase".

If there is a significant amount of AIA that would be unavailable, it might make sense to keep trading into a new accounting period (if only for a few weeks), so that the capital expenditure occurred in the penultimate accounting period and is allowable.

There may be additional costs for trading into a new accounting period, so you would need to check with your accountant that these do not outweigh the AIA tax saving.