Hi
Sole trader. 4.5 years of self employment. Regular income/turnover £20-25k.
In loading up my SA this time I've come unstuck and need some information on the implications of creating a Loss. (Figures are rounded to keep simple).
Based on Business Income and allowable business expenses the SA summary shows a Profit of £14k. However, when I input £18k as an AIA against my new van and equipment it then generated a -£4k loss. (I can do the maths but wasn't expecting this 1-1 mapping and had it in mind it acted like a tax relief %)...
So, I need to understand if it's best to go with carrying forward this level of loss - which I assume I can offset against anticipated future/next year(s) profit(s) ? If so, is this a simple matter in the SA process - is there a section where I would include this year's loss into the calculations ?
Is there any down side to this approach ? ie. am I losing the use of my Personal Allowance of £7k against Income/Profit for this year ? In which case am I best to reduce the amount of the AIA to a level where I can employ the Personal Allowance ? e.g. I tried a figure of £14k as the sum for AIA and got a summary of £10 to pay in tax... Does this imply I used up my £7k PA ? I can't fathom the maths/formula of this.
If I used this lesser AIA amount what would happen to the other £4k of unclaimed AIA ? The rules indicate AIA is claimable in the year of purchase of the asset(s) so would I lose this additional amount or do I need to look at other means (such as WDA - which I don't understand either) ?
Things were quite reasonably straightforward until I needed to make use of the AIA and while I thought I had a handle on it, I suddenly find myself a bit lost !
Motto: start looking for an accountant for next year ! A bit late in the day now....
Hope you can shed some light on things.
Many thanks
Rog
Replies (21)
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AIA
You can claim as little of the AIA as you want, to make sure you have enough profits left over to use your personal allowance. The part that you do not claim gets added to the general capital allowances pool and you then get writing down allowance on that balance. The rate of WDA will depend on your year-end, but in this case it probably doesn't matter. Because if you've manipulated the AIA to give you the taxable profit you need, you will not want to claim WDA - that can be disclamed as well (in full or in part). So what you are left with is a balance on the capital allowances pool to carry forward to next year - you will only get WDA on that, AIA only being available in the year of purchase.
Your new accountant will then be able to take over ;)
Don't forget to adjust AIA and/or WDA for any personal use of the assets. The adjustment is after you've decided how much to claim. So, for example, if you need AIA of £8k to reduce your profits to the desired level, and private use is 20%, you would need to claim AIA of £10k, and 'throw away' £2k. The other £8k of expenditure (£18k) would, as noted above, be added to the pool to carry forward.
If you also want to avoid Class 4 NIC you have to reduce the profit lower than the personal allowance figure
Use the PA!
If there's £10k left to carry forward then, assuming no further additions or disposals, next year's WDA will be £1,800 (18%) to set against profits. The following year you will have £8,200 to write down, giving an 18% WDA of £1,476 (again assuming no further additions/disposals). And so on and so on.
(And again WDAs are subject to private use adjustments.)
If you were to claim the full AIA then, based on your figures above, you would have a loss of £3k to immediately set against future profits. So, next year you might be £1,200 better off in terms of taxable profits (difference between loss c/fwd of £3k and WDA of £1.8k). But that would be it - you'd have thrown away £7k of deduction, ie non-use of your personal allowance.
Why has no-one mentioned a carry back of the loss under ITA07/S64(2)(b))?
Presuming last year assessable profits less PA were greater than £4k claiming all the AIA this year would result in an immediate tax refund of £800.
Correct (and incorrect)
There is no 'expiry date' - the 18% continues each year on what is known as the reducing balance basis (remembering that you don't need to claim the full WDA if you don't need it). In theory, you would never get to zero this way, but there is a provision to claim the full balance of the pool once it gets to below £1k.
But as for future purchases, of course you can make subsequent additions. Forgetting about AIA for a second, as you buy qualifying equipment etc the cost is simply added to the pool. Likewise, if you sell anything, the proceeds are deducted from the pool. So the pool grows and diminishes as assets are bought, sold and written down. Note that individual assets are generally not written down individually - one considers only the balance left on the pool of expenditure.
Please note that this advice is a very simple explanation of how capital allowances work in general. It can be considerably more complex - there are different rates of WDA for certain assets (requiring special pools), some assets have to kept separate (out of the pools) etc. I do think you need to follow your own advice and engage an accountant/tax adviser ASAP.
EDIT - certain words highlighted in case anyone missed them.
I haven't mentioned the loss carry-back, because ....
(a) it would add further confusion, and
(b) an immediate refund is all very well, but at a cost of wasted personal allowance - tax cost approximately £1,400
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(a) it would add further confusion, and
(b) an immediate refund is all very well, but at a cost of wasted personal allowance - tax cost approximately £1,400
a. Fair enough
b. Cash in the bank v a possible future saving strung out over many years which may be reduced, withdrawn, lost?
Tax is difficult isn't it?
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b. Cash in the bank v a possible future saving strung out over many years which may be reduced, withdrawn, lost?
Tax is difficult isn't it?
Fair enough - but we're talking about relatively small amounts, and I have an instinctive dislike of throwing away allowances. If we were talking about a loss carry-back of £50k, with a loss of £7k allowances, well that may be a different story.
If the van has a private usage element (HMR&C will expect this) then the van will be in its own pool separate from all other assets. Future expenditure will not affect the currently owned van pool.
And
A compelling reason to be wary of the cash accounting option to be introduced from 2013/2014.
Whilst the profits over the lifetime of a business may be broadly similar under both methods, the tax payable may not.
Me too
"A compelling reason to be wary of the cash accounting option to be introduced from 2013/2014." I was thinking of this as well.
Expansion and clarification and more
http://www.hmrc.gov.uk/budget-updates/11dec12/cash-basis-tech-note.pdf This is the new system proposed. What do you mean by "offset"? Interest charges are an allowable expense but they are not included as part of purchases of fixed assets.
Normal business expenditure - not much more to say other than you should make an adjustment to the amount deductible would be needed to reflect private use of the vehicle.
And just so you know there's more than one way to work out the amount of HP interest deductible. Typically the rule of 78 is used - see HMRC explanation
http://www.hmrc.gov.uk/manuals/blmmanual/blm15055.htm
Rogh
It's a relatively simple concept.
Profits before capital allowances and personal allowance - say £8K.
Capital allowances (AIA and/or WDA) available say £16K.
If the full £16K is claimed (or even hypothetically £8K) the personal allowance is wasted which at a marginal rate of tax of say 30% (including N.I.) results in an extra tax bill of £2,400.
I accept that the capital allowance relief will be spread over many years but you could argue that this situation could occur more than once.
Planning around capital allowances and the personal allowance is one of the few bits of excitement I get these days!
Capital Allowances
In your case you've made £14K of profits before CAs.
If you claim £7,250 of AIAs, you'll be entitled to a deduction of 90% of this i.e. £6,525. The calculation doesn't go on the SA return, merely what you're claiming. You therefore need to keep a record of the calculation so that you have a "written down value" to start next year.
Your taxable profits will be £14,000 minus £6,525 = £7,475 giving a NIL tax liability. You will have a small class 4 national insurance liability since the threshold for 2011/2012 was set at £7,225 so I guess you'll have a liability of £22.50.