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• # 113912
• Thu 06 Oct 2016 03:05 PM

Hi All

I'm currently studying for the Self Assessment Tax Exam and now know that depreciation is not an allowable expense for tax purposes. I am now trying to understand what use depreciation will be for accounting purposes if it has no effect on the amount of tax payable. Pardon me if I have missed the obvious, but any explanations will be very much appreciated.

Harriet

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• # 113916
• Thu 06 Oct 2016 05:01 PM

Depreciation is not allowable for tax purposes because there are so many different ways that it can be worked out. For example on a reducing balance basis or a straight line basis and the percentage rate used can vary enormously. HMRC will not allow the depreciation figure we use for the accounts because the method of calculation can be so varied.

Instead HMRC have their own version of depreciation called Capital Allowances. It is supposedly a simpler and more consistent method of working out the allowable expense. Of course in reality it is far from simple and,certainly for our larger clients, some of the rules can become quite complex. For the vast majority of our small and micro business clients the rules are fairly simple in so far as there is the Annual Investment Allowance (AIA) which from 1st January 2016 is £200K. There are special rules for how much can be claimed when the allowance changes part of the way through a tax year so be careful for 2015-16. If there are unused allowances carried forward into the next tax year there is the Writing Down Allowance (WDA) which is currently 18% on a reducing balance basis.

I suggest you have a read through the pages on Gov.uk relating to Capital Allowances.

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• # 113920
• Fri 07 Oct 2016 10:32 AM

Thanks a lot Chris. So why will a bookkeeper ever need to work out depreciation on an asset when he/she can just work out the Capital Allowance which is relevant for tax purposes. Is depreciation now redundant?

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• # 113963
• Fri 14 Oct 2016 04:13 PM

Accounts are supposed to show a true and fair view of the trading position of a business. So if a business buys an asset that has an expected life of 10 years then it is appropriate to charge depreciation at 10%pa. If the expected life is 4 years then a depreciation charge of 25% would be relevant. Both those examples assume that the asset is worth nothing at the end of the time.

If you spent say £20K on an aseet and depreciate it at £5K for 4 years that will appear in the trading accounts over the 4 years and represents the true trading position. If you put in the Annual Investment Allowance of £20K in the accounts for year 1 and nothing in the remaining 3 years of accounts that would show a very distorted view of the business.

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• # 113967
• Sun 16 Oct 2016 02:49 PM

Thanks Chris for your excellent explanation. I got a bit confused after reading up on capital allowance etc and started wondering why the need for depreciation if the tax man isn't even interested, but it all makes sense now with the above explanation.

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