UK 100% capital allowances / full expensing

[Jay2]

Hello all
At moment if we buy IT equipment , if the value is under £500 I simply put it against an expense code in the Trial Balance, just a normal running cost, and so reduces profit. If value is above £500 it goes into fixed assets so only impacts balance sheet but there is a depreciation charge that will hit the TB costs codes (depreciated over 3 years ) and so reduces profit .
However I have read that in the UK following the budget , you can now get 100% capital allowances (fully expense ) all IT equipment you purchase and offset it against your taxable profits .
I’m unsure how this works and how I would do it . Using IT spend of £10k as an example ?
Thank you for any help with this it is appreciated .
Jay

 

[Fidget]

Depreciation is a non-cash transaction, so it's added back to net profit as part of the adjustments to net profit to get to taxable profit. Once you have the taxable profit figure, any allowances - such as capital allowances, are a 'tax reducer', so you deduct them to get to the figure that you have to pay tax on.

The tax calculation is outside of your normal P&L, so you'll still depreciate the asset - over 3 years in this case. All that's happening is that you're getting 100% tax allowance in year 1. So in years 2 & 3 the depreciation will still be added back to net profit as part of the taxable profits calculation and you have no further capital allowances to claim because you've got it all in year 1.

 

[Jay2]

Thank you for taking time to reply .
So as an example
Say an IT hardware we buy is 9k and we depreciate it at 3k a year , 3 years.
Net profit is 100k
Less 3 k depn = 97k

and our audit team then go calculate the corporation tax due , Will they then take off the 9k IT asset off when calculating the tax , is that the allowance , so only pay tax on 88k? Is that how it works ?

IF it is , what about IT equipment you buy but are not capitalised (we only capitalise equipment over £1k value ), at moment they just hit normal running costs account codes ?

thank you for any assistance
Jay

 

[Fidget]

Not quite. Net profit includes depreciation (ie depreciation has been charged as an expense - which reduces profit). So in your example, the net profit of £100k includes the depreciation charge. Because depreciation is a non-cash item, it needs added back to get to the taxable profit figure - £100k + £3k. So adjusted net profit is £103k.

If the asset qualifies for 100% first year capital allowance, then the amount - £9k in this case, is deducted from adjusted net profit to give taxable profit of £94k in year 1. Then there's no capital allowance available in years 2 & 3. Assuming all years are the same:

 

[Shcoll]

Hello all
At moment if we buy IT equipment , if the value is under £500 I simply put it against an expense code in the Trial Balance, just a normal running cost, and so reduces profit. If value is above £500 it goes into fixed assets so only impacts balance sheet but there is a depreciation charge that will hit the TB costs codes (depreciated over 3 years ) and so reduces profit .
However I have read that in the UK following the budget , you can now get 100% capital allowances (fully expense ) all IT equipment you purchase and offset it against your taxable profits .
I’m unsure how this works and how I would do it . Using IT spend of £10k as an example ?
Thank you for any help with this it is appreciated .
Jay

The way to keep the books of regular business activities and for tax purposes, normally, we keep the books by the requirements of GAAP, complete the accounting cycle, close the books before annual audit, use the Trial Balance before audit adjustments, to expensed the asset account on the tax return. This will make the taxable P/L different or lower from the GAAP P/L. If the tax return is completed before an annual audit, tax liability is credited and tax expense is debited in the current year. If the audit is done before the tax return, an accuals could be recorded before the books closed. If not the tax will be recorded in the next year books.