While a potential difficult area for the non accountant
capital allowances reduce the net tax payable. The
difficulty in this section of the tax return form is that
it is an area which many start up businesses may not have
come across before. It is an area which affects not just
the calculation of the tax allowances and knowledge of the
tax rates but also how an item becomes considered for such
tax allowances.
100% of the purchase price of the majority of items is
deducted from income as business expenditure to produce a
net taxable profit. Purchases of certain items where that
item is not consumed by the business in a single year but
may be used by the business in both the current year and
future years are not expensed in the year of purchase but
classified as fixed assets. It is these items which are not
written off in the tax year but are subject to capital
allowances.
A fixed asset includes not just the original cost of the
item but also the cost of alterations, improvements and
extensions of the asset. The fixed asset cost does not
include the repairs and maintenance of that asset which may
be treated as a normal business expense and written off
against income when incurred. Accounting records need to be
kept of fixed asset purchases in order for the capital
allowances to be calculated and included in the self
assessment tax return.
Having identified certain items as fixed assets the normal
accounting practise is to use a technique called
depreciation to write off the cost of the asset against
profits over the expected life of that asset. The scale of
the write off being a management decision as all
depreciation calculations are ignored for tax purposes.
Depreciation is entered on the self assessment tax return
and subsequently deducted in an adjustment section.
When calculating the net taxable profit of a business the
tax system add back to the profit shown in the business
accounts any depreciation charges the business has made in
the preparation of the accounts. The tax system then
deducts the capital allowances from the net profit made by
the business and shown on the self assessment tax return
form to arrive at the actual net taxable profit, those tax
allowances being according to a fixed set of rules
applicable for the tax year.
Completing the self assessment tax return form also
includes calculating the capital allowances which
compromise of two elements. Capital allowances being a
first year allowance which can be claimed on some types of
fixed asset and writing down allowance on the net asset
value in subsequent years until the total value of the
fixed assets has been claimed against profits earned.
The rate of first year allowance for small businesses has
changed each year from 2004-05 to 2007-08 starting in
2004-05 at 40%, rising to 50% the next year and then back
to 40% in 2006-07 before returning to 50% in 2007-08. The
first year allowance can be claimed on most assets except
vehicles were special rules are applied.
Generally first year allowances can not be claimed on
vehicles except if that vehicle is deemed to be a
commercial vehicle. The inland revenue website contains a
list of vehicles it considers to be vans and commercial
vehicles and first year allowances can be claimed. Cars and
commercial vehicles not on the approved list are not
subject to a first year allowance except new vehicles with
low CO2 emissions below 120gm per km driven.
The writing down allowance is 25% of the net written down
value for tax purposes and is the amount of capital
allowance claimed on fixed assets after the first year and
in the case of motor vehicles used for business purposes in
the first year. Capital allowances on motor vehicles being
restricted to a maximum of 3,000 pounds per vehicle and
vehicles costing over 12,000 pounds being in a separate
section of the tax return to those under 12,000 pounds
The capital allowance section of the self assessment tax
return form also includes the term balancing charges. A
balancing charge arises when an asset is sold or disposed
of and is the difference between the amount received and
the net written down value for tax purposes. Net written
down value is the original cost less capital allowances
that have already been claimed against the net taxable
profit.
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Terry Cartwright, qualified accountant and CEO of DIY
Accounting, designs accounting software that automates the
Self Assessment Tax Return
http://www.diyaccounting.co.uk/selfemployed.htm producing
an excel copy of the Tax Return at
http://www.diyaccounting.co.uk/Selfemployed/selfassessment.h
tm
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