Many digital and creative agencies have very little spend on fixed assets, this being a piece of kit or equipment that’s (theoretically) going to last for longer than 12 months.
However, when there is spend on assets there’s often a confusion as to how this works from a tax perspective.
In short, there’s nothing to worry about as you don’t ‘lose out’ on the tax benefits when buying a piece of equipment. Let’s dig deeper into what capital allowance is and how they affect your tax:
What is a capital allowance?
Spending money on fixed assets is also known as Capital Expenditure. When you do this you are effectively increasing the value on your company Balance Sheet rather than incurring a cost on the Profit & Loss account.
However, although the spend goes onto the Balance Sheet you can still offset this against your profit each year via a Capital Allowance claim.
Capital allowances are mostly claimed via the Annual Investment Allowance (AIA). Under current rules, this means that assets that qualify for AIA relief up to £200,000 a year can be offset against tax in the year of purchase.
So, in other words, you get the tax relief as soon as you buy the asset…it works just like any other cost in the business does in terms of tax relief.
Certain assets (such as cars) don’t qualify for the AIA and are claimed using writing down allowances. Effectively this means you deduct a percentage of the cost of the asset each year, giving you some tax relief.
If you or your agency own your own commercial building you may also be entitled to claim further Capital Allowances (Embedded Capital Allowances) which can again reduce the tax payable. Embedded Capital Allowances are also available on improvements made to leased premises. If this applies to you then get in touch with us.
When are capital allowances claimed?
Every year alongside submitting your statutory accounts to Companies House you also submit a Corporation Tax return to HMRC. Your Corporation Tax computation will show your accounting profit (i.e. matching the figure in your accounts) and then will show tax adjustments for certain spend that’s disallowable for tax.
It will also show a deduction from profit. For agencies you should see 2 main deductions; R&D Tax Relief and Capital Allowances. These will both reduce your taxable profits and therefore the final tax figure owed.
So, what’s this depreciation figure in my accounts all about then?
When you look at your Profit & Loss account you’ll likely see a figure in there for Depreciation in each period. Depreciation has nothing to do with tax.
If the assets that you’ve bought qualified for AIA you’ve already had the full tax relief when you bought them, so you can’t get any more! Depreciation, therefore, is 1 of the items of spending that’s disallowable for tax for the above reason.
Depreciation is an accounting adjustment which serves to ‘write off’ an asset over a period of time in the accounts so that it’s value on your Balance Sheet ends up at nil eventually. For example, if you purchase an Apple MacBook for £1,000 (exc VAT), your accountant will assume that this will last for a certain period of time e.g. 5 years. This will mean that each year they will write off £200 in the accounts, until at the end of year 5 when the full value has been depreciated. This figure appears under Depreciation in your Profit & Loss account.
The Next Steps
Unsure whether you’re being as tax efficient as you could be?
Give us a call on 0161 711 0810 to book a Tax Diagnostic session.