Bit of a technical one...
Heard the terms capital allowance, annual investment allowance, capital expenditure, depreciation, tangible assets? Wonder what it all means?
Well assets are things of value that you own. For example a car or a house.
For businesses and sole-traders they can also be simply a printer or a computer or tools that you use in your trade.
Assets are not something something you replace every year so this is what we class as capital expenditure. They are treated differently in your accounts and tax return to normal expenses.
Stripping away the jargon as much as possible: rather than the cost of a £300 computer being taken off your profit in the year you buy it, we estimate it will last you 3 years and so the expense is slit between 3 years. This is where we see the term tangible asset in your accounts on the balance sheet and the £100 per year will be seen as an expense against your profit and called depreciation.
This gives you a more realistic view of the profit you make each year. Obviously taking the hit of £300 in year 1 would show that you haven't made much in that year, distorting the ability to compare your profits year on year.
Hopefully that makes a little sense.
I hear you - but you spent the money you want it against your tax bill. The good news at the moment is that the Tax-Man thinks that this is fair too, so you get something called the Annual Investment Allowance - meaning on your tax return you get 100% allowance for this capital expenditure in year one (up to a preset limit). Anything above this limit is then written off over what the Revenue feel is a reasonable time and this is usually by applying a percentage that they set.
If you are not confused yet, I am impressed!
If you are, don't worry, it's your accountants job to understand and advise you and sort it all out for you. That's what we are here for!
KFH Accounts can help from advising the best way to deal with expenditure, whether it is capital or not and even the timing of capital expenditure you have in mind to take the best advantage of the HMRC annual investment allowance limits that may change each year.
Want further help? Give us a call, lets see how we can help you.
0800 978 8241
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