Depreciation and Capital Allowances

Posted 14/06/2019

Most companies show an expense called 'depreciation’, but many people misunderstand what this means and assume that this figure affects their overall taxable profit for the year. The profit figure shown on the annual accounts is not the taxable profit. The two, in some cases, may match but the profit figure must undergo a few calculations for the taxable profit to be reached. These include adding disallowable expenses to the accounts profit figure and removing capital allowances.

Depreciation reflects the reduction of an asset's value over the accounting period, and so it reduces the profit as shown on a set of annual accounts to show an accurate representation of the business in the year. Before the tax itself is calculated, the amount of depreciation is added back to the profit figure on a Tax Return. The tax relief of an asset against taxable profit is known as capital allowances. Here the full cost of the asset when it was purchased, provided the items together do not exceed £1,000,000 which is the Annual Investment Allowance (AIA). If they do exceed this amount, the remaining items will need to be itemized into a Main Rate Pool at which 18% per year of the carrying value can be claimed.

Cars are exempt from the AIA treatment. These instead must be put in to the Main Rate Pool or Special Rate Pool (8% of the carrying value per year instead of 18%) depending on the CO2 emissions and if it is a new/unused car:
• Second-hand cars with emissions of 160g/km or second-hand electric cars go into the Main Rate Pool and have the capital allowance calculated at 18%.
• Second-hand cars with emissions over 160g/km go into the Special Rate Pool and have the capital allowance calculated at 8%.
• New cars with less than 110g/km emissions or new electric cars can have their full cost claimed against taxable profits.
• New cars with emissions between 110g/km and 160g/km go into the Main Rate Pool and have the capital allowance calculated at 18%.
• New cars with emissions above 160g/km go into the Special Rate Pool and have the capital allowance calculated at 8%.
The split between the use of the car for personal and business purposes will influence the 18%/8% figure calculated. If you used your car 50:50 for personal and business use, then only 50% of the calculated allowance would be allowed in the year as a deduction.

To expand on carrying value, this is the amount of the car less capital allowances already claimed. For example, If you purchased a new car for £8,000 with emissions of 150g/km, you would claim £1,440 maximum in the first year. This means that £6,560 would be the balance carried forward for calculating capital allowances in the next year.

Please note that ‘cars’ does not include motorbikes (only purchased after 6th April 2009), vans, trucks or lorries. These vehicles can have their full cost claimed in the first year.



Tags: depreciation, assets, tax calculation, self assessment tax, personal tax, corporation tax


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