Reply to: When to Post Corp Tax Liability.....

[Martin at NixonWilliams]

Excellent thank you. I am glad that I understood it in my own convoluted way Much of my perceived confusion comes from the poor way it is explained on the HMRC site.

No problem, happy to help!

[tractor]

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Your understanding of AIA is correct. There is not a profit and loss entry for assets (other than depreciation). The only time you will see an asset in the profit and loss is when it is disposed of, assuming a profit or loss is realised (i.e. it was sold for a value other than its net book value in the accounts).

Before AIA was introduced in 2008 the rules were different but the process was very similar - If I recall correctly there were first year allowances at 40%/50% and the main pool and special rate pools existed as they do now, albeit with less favourable writing down percentages. I am not aware of anything being written back to the profit and loss, as you put it.

Taking into account what you have said at the end of your post - If you were to buy computer equipment for say, £2,000, you would receive AIA and £400 would be saved in CT. If you didn't use the computer until it was worthless and instead sold it for say, £500, you would have to pay a balancing charge on the £500 and so £100 CT would be payable. This ensures that you only receive relief on the asset in line with the value actually received from the asset, i.e. £1,500 (£2,000 - £500).

I hope this helps, let me know if I can help further.

Martin

Excellent thank you. I am glad that I understood it in my own convoluted way Much of my perceived confusion comes from the poor way it is explained on the HMRC site.

[Martin at NixonWilliams]

Clearly, I am not very good at explaining my potential misunderstanding

Prior to AIA, each year, you would depreciate your assets by their annual allowance or first year allowance and write the residual balance back into profits for that year, then compute CT.

My understanding is that using AIA, you are allowed 100% for qualifying purchases up to the pool limit of £500k, and for CT purposes, the asset value is not counted in your P & L for the current year and there is therefore no further tax to pay except for disposals in the year where the written down value is added back into P & L for that year?

This is important for me to understand because (probably typically) I never dispose of assets, I purchase a PC/Printer/Phone or whatever and run them into the ground. When I replace, I write them off as they are essentially of no value to anyone.

Perhaps I should go back to school

Your understanding of AIA is correct. There is not a profit and loss entry for assets (other than depreciation). The only time you will see an asset in the profit and loss is when it is disposed of, assuming a profit or loss is realised (i.e. it was sold for a value other than its net book value in the accounts).

Before AIA was introduced in 2008 the rules were different but the process was very similar - If I recall correctly there were first year allowances at 40%/50% and the main pool and special rate pools existed as they do now, albeit with less favourable writing down percentages. I am not aware of anything being written back to the profit and loss, as you put it.

Taking into account what you have said at the end of your post - If you were to buy computer equipment for say, £2,000, you would receive AIA and £400 would be saved in CT. If you didn't use the computer until it was worthless and instead sold it for say, £500, you would have to pay a balancing charge on the £500 and so £100 CT would be payable. This ensures that you only receive relief on the asset in line with the value actually received from the asset, i.e. £1,500 (£2,000 - £500).

I hope this helps, let me know if I can help further.

Martin

[tractor]

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I'm sorry but I'm not entirely sure what you are referring to.

Without AIA the remaining balance each year would receive an allowance on a reducing balance basis, generally at 18%/8% depending on the asset (previously 20%/10%).

Any relief allowed would not be written back into the accounting profits. It would simply reduce the tax payable (although in effect a reduction in tax is an increase in profit).

Note that the AIA is not a first year incentive, it is allowed each year although the limit changes sometimes.

If I have misunderstood please provide more information and I will try to answer.

Martin

Clearly, I am not very good at explaining my potential misunderstanding

Prior to AIA, each year, you would depreciate your assets by their annual allowance or first year allowance and write the residual balance back into profits for that year, then compute CT.

My understanding is that using AIA, you are allowed 100% for qualifying purchases up to the pool limit of £500k, and for CT purposes, the asset value is not counted in your P & L for the current year and there is therefore no further tax to pay except for disposals in the year where the written down value is added back into P & L for that year?

This is important for me to understand because (probably typically) I never dispose of assets, I purchase a PC/Printer/Phone or whatever and run them into the ground. When I replace, I write them off as they are essentially of no value to anyone.

Perhaps I should go back to school

[Martin at NixonWilliams]

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?

I'm sorry but I'm not entirely sure what you are referring to.

Without AIA the remaining balance each year would receive an allowance on a reducing balance basis, generally at 18%/8% depending on the asset (previously 20%/10%).

Any relief allowed would not be written back into the accounting profits. It would simply reduce the tax payable (although in effect a reduction in tax is an increase in profit).

Note that the AIA is not a first year incentive, it is allowed each year although the limit changes sometimes.

If I have misunderstood please provide more information and I will try to answer.

Martin

[ContrataxLtd]

Why would anyone do that?

Hi VectraMan

Normally it's in larger firms with separate accounts & tax departments. The accounts department would do the accounts and put in the estimation for corporation tax and then the tax department complete the CT600 at a later date. Or, it may happen more in big companies where there are a lot of more complex things effecting the corporation tax calculation that can often change once the accounts have been completed.

With the standard contractor setup I wouldn't think anyone would do it this way, although I've seen it in a couple of takeovers I've done but the standard of those accounts were pretty shocking anyway so I wouldn't use that as the norm!

Martin @ NW has covered the Capital Allowance question quite well so I won't go into detail on that other than to pick up on the point Tractor made that AIA isn't available on assets bought from a connected person (normally the director). So when buying assets make sure you are buying them on behalf of the company ideally invoiced to the company.

Also, the reason we have the capital allowance regime is to reduce the amount of manipulation in taxation surrounding assets. If we had the system where the depreciation was allowable for corporation tax relief you could easily manipulate profits and thus your corporation tax liability, the capital allowance regime brings in a fixed set of rules that have to be applied for corporation tax relief (although like everything, there are grey areas etc.)

Martin
Contratax Ltd

[tractor]

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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

[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.

[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

[tractor]

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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

[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.

[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.

[tractor]

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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.

[tractor]

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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.

[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.