Simple for some I guess but…!
Just bbought a van. I;m a sole trader. I understand that it is fully tax deductable. How do I record this so it is reflected in the tax summary of quickfile.
Thanks.
Actually, no it isnt simple.
Answer: You don’t.
Van purchases are a capital asset, and as such, are not recorded on the profit and loss account as an expense. They are not fully tax deductible, unless certain criteria is met.
You can record it on the balance sheet as an asset which depreciates, but for tax purposes, they are either an Annual Investment allowance, or a Capital Allowance, or a mixture of both, which are calculated after taxable profits. And therefore do not show in your accounts on Quickfile.
You would need to calculate AIA or CA’s after you produce your accounts and include these calculations on your Tax Return.
The only thing you should record in Quickfile (apart from the asset on the balance sheet, and its depreciation) is the actual tax after the allowances have been calculated.
If you are unsure about any of the above, id advise you seek a paid professional who will help you to understand how this is calculated.
Hi [oompedoomp]
The way I handle “Capital Allowances” is with a Journal entry.
Assets which are claimed on a tax return as capital allowances are not directly shown on accounts so I use the Tax summary report to get the normal corporation tax fig and enter that on a single journal dated for the end of the year.
Then I add the items like the van to that journal which then shows at the bottom of the P&L as tax owed.
I amend it monthly with the correct C/tax amout from the “Tax Summary”
Here is a template for that journal entry
Hi
Well I took a bunch of hours to read up on this fully. It would appear that my van (100% business use) qualifies under AIA and I can claim the total £12000 cost against income tax. As this would take my icome tax due into negative (refund territory?) I could carry this forward to the following year. Or I could claim say £6000 under AIA and then use WDA at 18% each year thereafter using pooling. Or…I’m wrong! Lol
Yes you can, and the other £6,000 goes into an asset pool which you take the WDA of 18% from each year.
Or you could claim the full amount, and carry forward the loss, onto your next year’s profits.
Just to be clear. If you claim the full cost of AIA you can carry forward the loss it creates. If you claim part of the AIA you can carry forward the balance as a capital allowance. What you can’t do, is claim part of the AIA and carry that forward.
If that makes sense.
This is the kind of place where professional advice can really help - there’s usually no point claiming the full AIA if that gives you a book loss, unless you have income from other sources that uses up your £12,500 personal allowance. If this business is your sole income then an accountant would probably claim just enough AIA to get your total taxable profit for the year down to the magic number of £12,500 (so you pay no actual income tax) and treat the rest as normal writing down allowances over the next few years. If you claim the full AIA and end up with a loss then you can carry that loss forward but you’ve wasted the £12,500 tax free allowance for this year in the process and will probably end up paying more tax overall (quite possibly more than you’ve saved by not paying an accountant).
1 Like
8632 is where you’d want the profit to arrive at after AIA if you have no other income.
That’s the threshold for paying Class 4 Ni.
This means all you pay is £159ish quid in Class 2 Ni towards your state pension contribution and pay nothing else.
Also if you are planning to obtain a loan /mortgage in the next two years. You would prob want to not use any as AIA. The downside to that is next year its treated as CA only, because AIA can’t be carried forward.
And this even impacts future loans /mortgage applications if you did consider carrying forward a loss, because losses have to be used up each year and carry forward any balances left over. You can’t chose not to use the loss. So you really need to think about future plans first, as well as tax implications now.
Hi all,
Thank you for the replies. Ian_roberts I take your point. Have worked out a plan and I will generalise on the figures as its the journal entries that I need help on… I bought my van for £12600 with money in my business account. My average annual income tax bill is £7000. So what I want to do is log the van purchase in the ledgers at £12600, claim £7000 as an expense in the current tax year (thus kinda wiping out my tax) and then spreading the remaining balance of £5600 over the next 5 years. To this end I figured the following (with a big gap!).
Log the Purchase in full from current account:
Debit Motor Vehicles (0050) £12600
Creidt Current account (1200) £12600
So far so good I think But I now need to journal a partial ‘purchase’ of £7000 to reduce my tax and I don’t know how to write this part of the journaling!
Once that unknown is sorted I propose the following entries for 5 years:
Credit Motor Depreciation (0051) @18% of residual main pool value
Debit Motor Vehicles (0050) @ 18% of residual main pool value
I think I’m on the right track but would very much appreciate further input into my dilemma. I’m a stubborn sod and am determined to get this into my head!
Thank you.
Simon
That’s not how it works. Claiming £7000 of capital allowance reduces your taxable profit by £7000, which (all other things being equal) would reduce your tax bill by somewhere between 20% and 40% of £7000 depending which tax bracket you’re in. The capital allowance isn’t offset against your tax bill, but against the income on which you pay tax.
If you’re normally paying £7000 a year in tax then your overall profit must be close to if not above the 40% threshold, so you can afford to pay for professional help.
1 Like
Hi Ian
Yes, I do understand that. It’s the taxable profit I want to reduce, it’s normally around £42000. I just need to know how to journal things correctly in QF so my balance sheet stays correct.
Thanks
Si
Capital allowances per se aren’t something you record in your accounts, you’d record the van purchase in QuickFile as an asset and the annual depreciation as normal over a suitable number of years as for any other asset (straight line, reducing balance, whatever makes sense).
Capital allowances only come into play when you take the figures out of QuickFile to do your tax return - you add back the depreciation (which is not allowable) and deduct capital allowances instead, to work out your taxable profit and in turn the tax due, but none of that affects your records in QuickFile. Self Assessment income tax isn’t a business expense, so the only thing you’d need to record is that if you use money from the business bank account to pay your personal tax bill then that “money out” should be treated as drawings.
1 Like
I think you may be getting a little confused.
With a pre tax profit of £42,000 even if you ran the full cost of the van £12,600 you would still have a pre tax profit of £29,400 so you still pay tax.
Leave the van as an asset in QuickFile, then at the end of your trading financial year, on the last day, then deal with the asset, deciding on how much to AIA or set into a pool for future years of WDA can then be assessed, based on your profits.
If you have paid outright for the van, great, it’s easier, if you got a loan, then you need to set up a loan account to show the payments.
Please seek paid professional advice, you can afford it. And you will need it as this is gonna get complicated for you now
Yay! Got my head round it today. All good. Said I was a stubborn s@d. Happy days.
1 Like
This isn’t really the correct treatment though, as it means you are entering capital allowances in your accounts. They are not an accounting entry, they are merely an adjustment for tax purposes and shouldn’t be entered anywhere in your accounting records.
1 Like
So how have you done it in the end? Your journal entry for the purchase of the van was correct, although your depreciation is not. If you are using 18% reducing balance (which is in line with tax writing down allowances) you need to Dr. the profit and loss account with the 18% each year (8000) and Cr. Motor Vehicles Depreciation in the Balance Sheet (0051 as you had). Your depreciation rate does not have to be in line with WDA though - it should reflect how long you think the van will last you, and what value it will have at the end of its life. You can also write it off on a straight line basis - so 20% each year if you think it’s going to last 5 years. If you think it will be worth say £500 then, you would charge 20% of (12,600-500) each year, i.e. £2,420.
If you have a profit of £42,000, I would claim the whole £12,600 as AIA - although as others have pointed out, this does not go as an entry in your accounts.
Hey
Thank you for the reply. I noted the correction to DR the P&L acc instead. I assume that the reason you suggest. Reckon van has 10 yr life so will straight line it. I assume you suggest claiming the full purchase price under AIA because it won’t have a negative affect on on my personal annual allowance ?
You still don’t seem to have understood the fundamental point here - capital allowances don’t deduct from the amount of tax you pay, they deduct from the amount of profit on which you pay tax.
If you would normally be paying tax on overall profits of £42,000 a year (which works out at just under £9k for the combined income tax, class 2 & class 4 NI) and you claim £12,600 AIA then that means you’re working out your tax based on profits of 42,000 - 12,600 = £29,400 instead (which works out at around £5,300 tax+NI).
1 Like
Hi Ian. Thanks but I do understand that. It’s just I’m not very good at explaining myself.
1 Like