How to value machinery gifted to a sole trader business and enter into business accounts correctly for VAT and Tax

How to value machinery gifted to a sole trader...

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Im a UK sole trader and have been gifted machinery with a second hand market value of between £5k and £7k. As I don't have an invoice and didn't part with any money, how do I enter this transaction into my business accounts? And once that is done, what effect does this asset have on capital allowances and my annual Income tax? AIA cannot be claimed on this machine as it is 'gifted' but are there other capital allowances that could be correctly claimed?

And finally, does VAT get handled in the same way as any other asset purchase? bearing in mind I would have to self generate paperwork if a I have to value the equipment based on market value.

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By eastangliantaxadvisor
10th Mar 2013 16:26

Who has the property been gifted to you by? And what are the circumstances?

 

If we have more info, we may be able to help.

 

 

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Replying to D V Fields:
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By axiomatrix
10th Mar 2013 17:32

One piece of equipment was given by a private individual and a second was disposed of as scrap by a limited company which I was able to pick up for no charge, but with no paperwork either, and other than the cost of me hiring a truck to get it. Both items have market value of some description and would be an asset to me if I had purchased them. I'm not sure what other circumstances there are really?

They evidently have added value into the business, I've just no idea how to document it and apply in the accounts, or even if I should, or have to, especially with regard to tax and VAT compliance, and of course best tax efficiency as a VAT registered sole trader under self assessment.

(Using standard invoiced based VAT accounting)

On the one hand its like the equipment is a payment value received and should go in Accounts Receivable, but on the other hand I have clearly acquired some form of capital asset????

 

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By pawncob
10th Mar 2013 21:49

It's a zero.

It cost you nothing, so you can't claim CAs, or even enter it into your records. Until you sell it, (and make a profit on which you will pay tax) it doesn't exist.

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By Davie0512
10th Mar 2013 23:37

It would initially be recorded at historic cost, therefore zero so no need to bring it into account just enter onto fixed asset register. I suppose you could revalue to market value and create a reserve but no cap allowances could be charged.

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By Roxanne Wralls
11th Mar 2013 00:10
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Replying to aburt01:
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By axiomatrix
11th Mar 2013 13:50

Roxanne, thank you, this HMRC paragraph is exactly why I'm asking the question. Im not an accountant and while I'm perfectly capable of doing my own accounts with a yearly audit of them by my accountant, there is no obvious method (to me at least) on how this would be entered into an accounts system.

If I have aquired an asset even without parting with cash but that has a 'market value' is that not a gain and subject to income tax (and VAT) although as the HMRC para states could be offset with a capital allowance?

Also, as far as VAT is concerned, that would surely equate to an output where VAT is due? I understand the implications if I sold the asset but how do I document it's entry into the company for Tax and VAT purposes? Do I raise an Invoice and if so to whom? if I add it to an asset account in say Quickbooks is it just a journal entry or what?

I'm asking this here as for the last 6 months I have not got an answer from my accountant on this (and several other questions I might add......)

 

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By Steve Kesby
11th Mar 2013 11:13

For accounts purposes...

... these should be recognised as fixed assets at cost (being the fair value of the consideration provided - which looks like nil - plus any costs that are directly attributable to bringing the asset into working condition for its intended use - the truck hire for collecting one of the items).

For VAT purposes, do nothing as you haven't incurred any input VAT, other than on the truck hire. That input VAT can be recovered assuming that you are VAT registered and fully taxable. If you ever sell the machinery, you will need to charge output VAT though.

For capital allowances purposes, assuming that they were acquired from unconnected people, the machinery can be added into the main pool (on which annual writing down allowances are given at 18% on a reducing balance basis) at their market value when they are brought into use.

You will have to make your best estimate of the market value, which HMRC might challenge. Penalties will be charged if you haven't taken reasonable care, so you will need some evidence (adverts selling similar items in trade magazines, for example) to support your estimate.

Alternatively, use a valuation that you are sure is below market value (nil if you're at all unsure), as there can't then be a penalty, because there will be no potential lost revenue to which to apply the percentage penalty when you have undervalued.

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