Reply to: Claiming VAT back on flat rate scheme. (£2k+ purchases)

[Greg@CapitalCity]

Any profit or loss made on the disposal of an asset is reported in the company P&L account.

Say after 5 years the book value of your asset is £0. Then, if in the sixth year you sell it for £500, then a £500 profit is realised in the P&L under Other Income.

[northernladuk]

Yep, ASB is on the right track here. Assets are treated in two different ways;
(1) In your accounts, generally the asset becomes part of the main Plant & Machinery pool - which is usually depreciated at 20% per annum straight-line, so after 5 years, the carrying value of the asset is nil;
(2) Corporation tax - Depreciation is not an allowable expense for corporation tax purposes, so any depreciation deducted in the accounts needs to be added back to the Net Profit figure for the corporation tax calculation. For corporation tax purposes you use capital allowances - so the full cost of a £5,000 asset would be tax deductible in the year of purchase under the current rules. If you sell the asset after 2 years for £1,000, then a balancing charge (think of it as a reverse capital allowance) of £1,000 is made in the corporation tax calculation - the overall result being you have enjoyed tax relief on £4,000.

Make sense? And by the way, congratulations on your CUK award!

It does and thank you very much

What happens to the item after the full depreciation period but it still has a value? Written off to the company but can still be sold of £x.xx

[northernladuk]

Of course it does. It's what ELSE it's used for that might stop it being wholly and exclusively.

And I thought I was the pedant!!

[Greg@CapitalCity]

Question for the accountants on this...

Yep, ASB is on the right track here. Assets are treated in two different ways;
(1) In your accounts, generally the asset becomes part of the main Plant & Machinery pool - which is usually depreciated at 20% per annum straight-line, so after 5 years, the carrying value of the asset is nil;
(2) Corporation tax - Depreciation is not an allowable expense for corporation tax purposes, so any depreciation deducted in the accounts needs to be added back to the Net Profit figure for the corporation tax calculation. For corporation tax purposes you use capital allowances - so the full cost of a £5,000 asset would be tax deductible in the year of purchase under the current rules. If you sell the asset after 2 years for £1,000, then a balancing charge (think of it as a reverse capital allowance) of £1,000 is made in the corporation tax calculation - the overall result being you have enjoyed tax relief on £4,000.

Make sense? And by the way, congratulations on your CUK award!

[ASB]

and taking notes on an Ipad does not meet the wholly and exclusively.

Of course it does. It's what ELSE it's used for that might stop it being wholly and exclusively. Depends if that use is other than incidental (granted it might be tricky but HMRC have specific guidance on that). Also depends on whether or not any other uses, if not incidental is outwith any exemptions.

I do agree however that a nice hand made mont blanc and individually watermarked papyrus might be an easier bet to demonstrate there is no non business use.

[ASB]

Say it's £5,000 plant. Say you get 100% capital allowance in year one (this will depend on individual situation). At this point you get the capital allowance and you CT reduces by your marginal rate by 5k (since your profit is reduced).

The asset is worth zero in the books (actually doesn't have to be it could still have a carrying value, you can depreciate things at a different rate if you want to but it's a bit of a pain and you obviously don't get the capital allowance at other than the proscribed rate).

Now some time in year 2 you sell the asset. You get, say, £1,500 back on it. This is a gain on asset disposal, and it's chargeable to tax.

So, what actually happens is that over the lifetime of asset ownership you get capital allowances equivalent to the actual depreciation. The rate at which they are claimed could well be different and it is ultimately balanced out on disposal.

BUT, there have been cases (and no doubt still are and no doubt will be more) where different sorts of assets get a "special treatment" in order to try and encourage that sector.

ISTR that years ago low emission vehicles and electric vehicles got a bit fouled up in that respect in that it was possible to claim capital allowance on depreciation that hadn't been suffered and with no balancing charge.

An accountant will be along to clarify the above no doubt.

[northernladuk]

Question for the accountants on this...

When buying assets be they 2k computers, push irons cars or motorbike for example, which go in to the company as an asset and depreciated over 3 years (not on expenses). How is the residual dealt with at the end? A bike or car is a better example. It will last longer than the 3 years it is depreciated and will have a reasonable value at the end. Do we just ignore this or should a residual be factored in. Would you put this back in to the Ltd once you sell it or is it fully written off according to your accounts?

Edit : and if that makes no sense could someone correct me?

[northernladuk]

No upset at all....and I for one think your risk averse approach is correct.

I just wonder if anyone who's been investigated was told the reason why? It's a bit like the minimum salary discussion, do you need to take £11.5K or is £7,465 or whatever it is enough....

No reasons needed for 20,000 of us this year. Down from 50k though..
HMRC target small business tax errors | The Economic Voice

As for the cycle to work - not a scheme more an entitlement we all have. Where as most companies will limit the amount available to £1K, that's purely down to the fact that there's legislation around giving credit to employees above this level. For ltd man companies where it's just a company asset you have the right to use and there is no transfer of ownership, then there's no limit - so carbon a-go-go.

Indeed, 2k just seems excessive to someone who doesn't cycle.. maybe I should look in to a motorbike instead.

[Notascooby]

No upset at all....and I for one think your risk averse approach is correct.

I just wonder if anyone who's been investigated was told the reason why? It's a bit like the minimum salary discussion, do you need to take £11.5K or is £7,465 or whatever it is enough....

As for the cycle to work - not a scheme more an entitlement we all have. Where as most companies will limit the amount available to £1K, that's purely down to the fact that there's legislation around giving credit to employees above this level. For ltd man companies where it's just a company asset you have the right to use and there is no transfer of ownership, then there's no limit - so carbon a-go-go.

[northernladuk]

So if I decide I'd like to minute meetings on a ipad rather than a notepad and pen...so be it.
Similarly if I deem that I'd like to use a top end carbon bicycle as my cycle to work bike I may.

Indeed and you will probably never get caught but you know I like to err on the side of caution and taking notes on an Ipad does not meet the wholly and exclusively. It isn't really up for discussion but it is your choice to risk. Oddly I do agree the risk of getting caught is stupidly low but we are talking theory here.

You got your bike through a cycle to work scheme?

So again - it's down to a hunch - not being picky but having lurked and posted here a lot of people assume, rightly or wrongly, that people like yourself know what you're talking about and will make judgement calls based upon answers given here.

I know what I see other posters put on here and what they try and put through the business becuase they don't know any better so I don't see a problem discussing each post. If you don't like it don't respond?

So my question still remains- is there any "known" flags that would trigger an investigation (not that I've anything to hide I'd like to add) or is it just chance?

I am not aware there are so your risk may pay off.

Anyway, wasn't meant to upset you so will shut up now.

[Notascooby]

Maybe it is more my attitude to risk and not paying stupid prices for stuff but an iPad, unless you are developing apps' is not a valid business expense (cue argument) and claiming a 2K bike through work?? Sorry but that is taking the piss.. within the rules maybe, but taking the piss none the less.

A large majority of one man LTD's do not need to spend 2k on stuff and doing it multiple times must be worth a sniff IMO.

Maybe I am being overly pedantic but there you go.

There was a good thread on the fact that buying something stupid and over-priced was not what is at question, it was the whether or not it was a legitimate expense.

So if I decide I'd like to minute meetings on a ipad rather than a notepad and pen...so be it.
Similarly if I deem that I'd like to use a top end carbon bicycle as my cycle to work bike I may.

Does it make business sense? Probably not. Does Tony Blair's office furniture need to cost £1/2M when he could go to Ikea - nope.

So again - it's down to a hunch - not being picky but having lurked and posted here a lot of people assume, rightly or wrongly, that people like yourself know what you're talking about and will make judgement calls based upon answers given here.

So my question still remains- is there any "known" flags that would trigger an investigation (not that I've anything to hide I'd like to add) or is it just chance?

[malvolio]

aaah and this explains Mal's £50 difference.

Tum-ti-tum-ti-tum....

[northernladuk]

Think we're x-purpose here...

A new bicycle for me will be in excess of £2K, as would say a MBPro and iPad on same order.

So together the total would be >£5K made up of 2 seperate invoices of >£2K each.

What I was quering was your statement that having multiple entries on your accounts for greater than £2K would be frowned upon by Hector - and if so how / why?

Maybe it is more my attitude to risk and not paying stupid prices for stuff but an iPad, unless you are developing apps' is not a valid business expense (cue argument) and claiming a 2K bike through work?? Sorry but that is taking the piss.. within the rules maybe, but taking the piss none the less.

A large majority of one man LTD's do not need to spend 2k on stuff and doing it multiple times must be worth a sniff IMO.

Maybe I am being overly pedantic but there you go.

[Notascooby]

There are some rules. I believe one of them is not on items to be used for only a year but obviously got that covered. Anyway.. Does this example from HMRC site help??

Example
A business has gross sales of £94,000 (including output VAT at 17.5% of £14,000), and expenses of £58,750 (including irrecoverable VAT). The flat rate VAT @ 6% is £5,640. A new machine is purchased (qualifying for capital allowances) at a cost of £2,350 including VAT of £350.

The accounts will show:

Turnover £88,360 (£94,000 less £5,640 flat rate VAT)
Expenses £58,750
Profit £29,610

If VAT is not reclaimed on the asset the cost for capital allowances purposes will be £2,350. If VAT is reclaimed the cost will be £2,000.

aaah and this explains Mal's £50 difference.

[Notascooby]

Are you sure you understand the 2K VAT rule???

Think we're x-purpose here...

A new bicycle for me will be in excess of £2K, as would say a MBPro and iPad on same order.

So together the total would be >£5K made up of 2 seperate invoices of >£2K each.

What I was quering was your statement that having multiple entries on your accounts for greater than £2K would be frowned upon by Hector - and if so how / why?