Poole Office: 01202 678555

Wimborne Office: 01202 849169

  • slider-1.jpg
  • slider-2.jpg
  • slider-3.jpg
  • slider-4.jpg

Request a Call Back

Please enter your name and phone number

Latest News

Changes to tax treatment of termination payments
29/07/2020 - More...
The government has published draft...

New redundancy protections for furloughed employees
29/07/2020 - More...
The government has unveiled an important...

How elastic is demand for your products?
28/07/2020 - More...
Many will remember the empty shelves in...

Search News

Newsletter

With our newsletter, you automatically receive our latest news by e-mail and get access to the archive including advanced search options!

»Sign up for the Newsletter
» Login

 


Depreciation
29/06/2020

Literally, the word depreciation means a reduction in the value of an asset over time. It recognises the fact that if you buy assets for your business – cars, plant, computers etc – as time marches on the value of those assets will decrease.

In double entry bookkeeping terms, the value of an asset is reduced by the amount depreciated and charged against profits, like an expense.

Another way of looking at depreciation is that it accumulates an amount of profits to replace the asset when it eventually ceases to function. This is why accountants need to determine the useful life of an asset as this quantifies the annual rate of depreciation to charge against profits. A useful life of 10 years would require a rate of 10%, 4 years 25%.

Interestingly, HMRC will not accept depreciation as a valid deduction against your profits when working out how much tax you should pay. They insist that it is written back.

In its place, HMRC allow a deduction called a capital allowance. These range from 2% to 100% of the cost of qualifying assets purchased.

This substitution of depreciation with a capital allowance does present a problem. If you depreciate a plant by 10% a year, but in the first year HMRC allow you to write off the total cost, when you come to dispose of the asset any proceeds would possibly create a tax charge. This would happen because the full cost had been allowed as a deduction when the assets was purchased.

It is worth keeping a record of your business assets to compare the original cost with current valuations (what the assets could be expected to fetch if sold second-hand), and comparing these figures with the written down values in your accounts and the tax written down values as far as HMRC are concerned.

In this way you can see how decisions to replace assets will affect your profits and tax payments.


Contact Us

Poole Office

Tower House, Parkstone Road
Poole, Dorset
BH15 2JH
Tel: 01202 678555

This email address is being protected from spambots. You need JavaScript enabled to view it.

Company Registration No: O7430971
VAT Registration No.107585703

Wimborne Office

Beaufort House, 2 Cornmarket Court
Wimborne
BH21 1JL
Tel: 01202 849169

Membership

ICAEW-White

Save