write-down

[Cheshire Cat]

can anyone point me to a decent explanation of "write-down" / depreciation of capital assets wrt ltd companies?
My fuddled understanding is something like this:
YourCo buys item for £1000, which devalues over 3 years to a negligible amount (effectively reducing in value by £333 each year).
HMRC treat this devaluation as a loss of £333 each year, and so YourCo has £333 less in company profits on which it must pay CT.

Coupled with the fact that the initial purchase reduces company profits by £1k, and so the CT bill by about £200, and each year you save the CT on this (about £67) the overall "saving" is about £400.
So the net cost to YourCo is approx £600 rather than £1000.
Does that sound right? Or have I missed something obvious?

[where did my id go?]

Or have I missed something obvious?

Yes.

For a start, buying something does not reduce your profit so forget that. You merely swap the asset of £1000 cash for the asset of 1 purple widget. ie its a capital transaction, not a P&L.

What you need to do is apply a capital allowance - rates depend on what the item is. Capital allowance rates are defined by HMRC and are not necessarily the same as the depreciation rates that you want to use. So you need balancing charges.

HTH ?!

Somewhere there is a very good explanation by 'Roger Rabbit', a specialist tax advisor who used to frequent this board. It was in reply to a question I asked - almost certainly under an old ID - about capital allowances.

I did successfully argue for a two year write off on a load of sun kit once.

[Cheshire Cat]

Ah ok, thanks.
Actually I just found something on t'interweb about a 100% annual investment allowance up to £50,000 which is supposed to replace capital allowances from April 2008. Still figuring out what this actually means, but seems to suggest a better deal that the current situation.

[ladymuck]

I seem to recall that depreciation, although a P&L charge, does not reduce your CT bill. It's not a true expense to the business, more a journal entry that slowly reduces the value of the assets on your balance sheet.

I'm not sure if this works the other way too - if you make a profit on disposal (that is you sell the item for more than it is valued in your books after depreciation), this should also not be a factor in CT calculations as it is not a true business profit and is just a number recorded in the P&L. However, Hector being a fair minded sort, may view this differently.

Ususal disclaimers about not being an accountant apply.

[dude69]

I seem to recall that depreciation, although a P&L charge, does not reduce your CT bill. It's not a true expense to the business, more a journal entry that slowly reduces the value of the assets on your balance sheet.

I'm not sure if this works the other way too - if you make a profit on disposal (that is you sell the item for more than it is valued in your books after depreciation), this should also not be a factor in CT calculations as it is not a true business profit and is just a number recorded in the P&L. However, Hector being a fair minded sort, may view this differently.

Ususal disclaimers about not being an accountant apply.

This is correct.

On your P+L, buying an asset does not cost you anything. Depreciation is what is charged to your profits.

Depreciation is not allowable for profits though. If for example you depreciate 25% per year (how you do this is up to you, HMRC don't are), and buy stuff for £4k, on p+l you add back the £1k for depreciation. The first year capital allowance for small companies is 50%, so you take off £2k for capita allowances. The end result of which is your profits for CT purposes are £1k LOWER (hence less tax) than for your own accounts. As of April, you get 100% capital allowance.

You need to keep track of assets in asset pools on your accounts taking into account depreciation in year, to date, and the initial cost.

When you dispose of an asset you will have a balancing charge if the disposal is for more than the balance after the amount relieved by the allowance received to date. If it is for less than the remaining balance, or it is zero, then you write off the difference at that point against both CT (against the initial cost - capital allowances to date) and profits (against the depreciated amount in your accounts).