The core business of my one man LTD company is the letting of properties. The company bought a couple of leasehold BTL properties back in 2016. This year during Year End accounting I queried with accountant why these leasehold properties, which are intangible assets, have never been amortised. He said they were mistakenly booked as investments and he will amortise them for this year’s accounting. I asked about the missing amortisation in prior years (2016-2023) and he said he could add amortisation in prior years but it would make no difference to tax bill. How can that be so? Any ideas?
Please be aware that the support team are not registered accountants and as such would not be able to answer your query. I would reccomend consulting your accountant for professional tailored advice.
I will leave this thread open for now as there are some accountant on the forum who may comment.
Amortisation is an accounting concept, to recognise that the leasehold property decreases in value the longer you have it (as the lease is running out and you’ll have to pay at some point in the future to renew it). This amortisation is a cost in the accounts and so reduces profit before tax.
However, HMRC work pretty much on a cash basis, so as part of the corporation tax calculation, you take the profit before tax and add back any depreciation / amortisation to get to taxable profit. HMRC give you capital allowances instead, but unfortunately leasehold property doesn’t qualify for those.
So your accountant was right in that any amortisation put through would be reversed for the tax computation, so the taxable profit figure doesn’t actually change.
Well, to get the accounting correct your accountants will put the amortisation in the accounts, and technically they should go back and correct prior years, but in reality if nobody else is going to be scrutinising the accounts (such as banks or credit reference agencies) then they may put everything though this year. As previously mentioned it makes no difference to the tax though.
I personally would put it through (and do) as it enables you to see the real profit of your operation.
To use an asset purchase as an example. You but a piece of machinery for a £1,000 and you are confident it will go on producing widgets for 20 years. In year one you make a before depreciation profit of £1,000. HMRC are likely at the time of writing to allow you a capital allowance of £1,000 and your taxable profit will be £0.
However, in your accounts you will enter a depreciation charge of £50 and your net profit will be £950.
It is good to get it right. In my opinion (I have run my own small business since 1991) accounts produced by the likes of QuickFile etc (QuickBooks, Xero) for small businesses as well fulfilling the statutory duty to maintain accurate records also full a management accounting role, which in a large business might be done by another piece of software.
I am interested in the real economic profit of the business not that based on the rules made up by HMRC from time to time, though these can influence purchasing decisions (i.e. if HMRC introduces a 130% capital allowance for IT spend I might buy that computer now rather than when I was expecting to need to in a couple of years, in case the rules change.
So, it is good to use sensible depreciation policies based on your business experience.