30th March 2021
What’s the one thing a project manager, a web designer, or even an electrician has in common? They all use some sort of equipment to help with their work. These are called assets and usually represent a higher value. Such purchases are treated a bit differently in the accounts, so let us explain in plain English where they go in the accounts and how tax savings are applied to your business.
What is a fixed asset (capital expenditure)?
As the name suggests, these are “capital” items or investments introduced into the business with the aim of a longer-term benefit. The purpose of a computer, a van, and a monitor is to help the business operate profitably and efficiently for at least a few years.
Why are they different from other business expenses?
Well, there are two main reasons: cost and useful life. Buying a laptop, a projector, a printer, a mobile phone will be more expensive and last a while longer than your average day-to-day business expense like stationery, for example.
But how do you tell if an item is a capital asset?
Your accountant can help with this, but it usually depends on the size of your business. A £300 monitor may be a capital purchase for a web designer working on his own, whereas a large organisation might treat it as a daily expenditure.
The Balance Sheet
Because these items will likely last a few years, they will sit on the balance sheet in the accounts and become part of the business’ capital.
As with everything, assets lose value over time, so an adjustment is made in the accounts called “depreciation”, which is then deducted from the business profits.
Depreciation is not tax-deductible, but that’s ok because savings are calculated differently when it comes to capital assets.
Can I bring assets I already own into my business?
Yes. If you already own an asset that you plan to use only in the business going forward, it can buy it from you at the market price at the time of purchase.
It must be noted, however, that once you’ve introduced the item to the business, it can only be used for business purposes.
Assets and tax
Let’s stick with IT equipment for simplicity and say you purchased a laptop for £1,500. In the year of purchase, your accountant will deduct the £1,500 from the business’s profits before working out the tax on those profits.
This is called “Annual Investment Allowance”, and it is available for most assets apart from a few exceptions, like cars, items used in another business (AIA already claimed) or things given to the business (no cost), just to name a few.
What happens if an asset breaks/gets sold or the business closes?
If the equipment breaks before the end of its useful life, your accountant will write it off as a loss, which will go through the accounts—no tax savings on the loss is due to the full allowance claimed in the year of purchase.
Similarly, if you decide to sell it, the proceeds of the sale will have to be accounted for and taxed as part of the business income. Don’t forget to charge 20% VAT if your business is VAT registered!
Should you close the business, all of its assets must be either sold to a third party or transferred to the director/employees at their current value at the time, with losses and proceeds treated as above.
Talk to your accountant
If you are considering buying equipment for your business for the first time, especially if you are purchasing something costly, it’s always worth running it by your accountant. They can tell you what to look out for and give you useful advice to maximise tax savings.