What difference are the effects of allowable expenses and capital allowance?

evosy1978

Hello,

I understand that allowable exepenses are deducted from your total profit and so you dont have to pay tax on that portion of money.

Then AIA or capital allowance isnt this have exactly the same outcome, e.g this comes of your profit and you dont pay the tax?

or am i getting it wrong?

thanks

laticsforlife

You don't explain what you are asking very well, but yes CA's also come off profits and you pay tax on the rest.

Elaine_Wilson

If you claim all the AIA available then the effect is the same.

But you have the choice to claim any figure up to the maximum AIA and carry the balance forward in a capital allowances pool. If you do not claim trading expenses you cannot claim them in a future year.

morgani

Just looking at a different angle as the OP's question isn't clear. AIA and Capital allowances are available for capital expenditure such as computers, large machines, etc.

The expenses claimed against your profit in your accounts are those involved in the day to day running of your business such as materials, telephone, rent, etc. Part of this may be an amount for the depreciation of assets on which capital allowances or AIA are to be claimed. The depreciation is therefore added back in the tax computations and replaced by Capital allowances or AIA.

evosy1978

I agree Ive worded it terribly. Thanks for the answers. The first answer was what I was thinking myself.

So why have 2 different sections when ultimately they have the same effect on your profit.?

ALso what did you mean when you said cary the balance forward?

Thanks.

jimmo

You asked a very similar question a couple of weeks ago.
https://forums.moneysavingexpert.com/discussion/3158512=
Whilst this may seem like nit picking or the grammar police it will probably help you if you know the correct terms to use.
Your Gross Income
If you are a subcontractor in the construction industry it is the gross amount before any tax deductions made by your contractor. If you do private work it is the amount you charge your customers.
Your (net) Profit is your Gross Income less any expenses you have incurred.
Your Taxable Profit is your profit less capital allowances.
So, Gross Income
less expenses
=Profit
less capital Allowances
= Taxable Profit.
Looking firstly at the small tools there may be a technical argument about whether you should claim the costs as expenses or capital allowances but the certainty is that you can only claim them once. You haven't said how much you actually spent but as long as it is less than £1,000 you will be pretty safe putting them down as expenses.
If you have spent a lot of money on a single item that may be a different matter and we will need details.
When we look at the van, that is a very different matter.
When you are self-employed HMRC is quite happy for you to claim a mileage allowance as expenses. For 2001/11, the tax year just ended, it was 40 pence per mile for the first 10,000 business miles and 25 pence per mile for any further business miles. If you use that method you can also claim for any interest payable on any loan finance to buy the van but nothing else is allowable.
Alternatively you can claim your full costs, fuel, maintenance, MOT, road fund licence, insurance, loan interest etc. as expenses. In addition you can claim capital allowances in respect of the purchase cost of the van.
However your claims may need to be modified to reflect any private use of the van and private use includes normal commuting.
Quite frankly, no-one can tell you which method would be better for you without a lot more detailed information but I would suggest that if your van is an old banger you should go for the mileage rate and forget about all the complications. If it was brand new you would probably be better off getting professional advice than relying on a forum.
To me, that is a very simplified explanation full of potential holes but is the best I can do on the information you have provided. I think you have to decide for yourself whether you would be better off spending your time learning about tax issues or generating income from plastering and paying an accountant.

evosy1978

I think you`ll find my question on "this" thread was answered by the first poster....... and does not exactly equate to learning about tax issues.

jimmo

evosy1978 wrote: »

I think you`ll find my question on "this" thread was answered by the first poster....... and does not exactly equate to learning about tax issues.

Fair enough, I really was trying to help but if I have wasted your time then I am really sorry.

John_Pierpoint

The distinction between consumable expenses and capital investments, might be irrelevant to you and me in our modest self employed ventures, BUT I bet there are some statistics being compiled somewhere to give the government some idea if business is looking to the future and investing or just getting by on a "make do and mend" basis.

If the powers-that-be feel we have all lost our faith in the future, they might well increase the tax allowances for making capital investments (don't think there will be many grants as the government has run out of money:eek: and has been printing the stuff).

So there might be some point in getting the figures in the right box in the grand scheme of things - we don't want to end up looking like Greece and Italy, where fiddling the figures is a national sport.

Pennywise

evosy1978 wrote: »

So why have 2 different sections when ultimately they have the same effect on your profit.?

Because they're too different types of "expense". Exactly the same reason why you put your postage in the "stationery & postage" box instead of the "motor and travel" box - that, too, would have the same ultimate effect, but is clearly wrong.

Also remember that just because at the moment there is no difference in tax treatment because of 100% AIA for most business equipment, doesn't mean it will always be so (it never used to be the case!) - it's a fairly recent thing and looks set to be reduced/withdrawn again for the future. There are also "old" assets that didn't get written off fully in the past and are now being written off for tax year by year, and some classes of assets which aren't eligible for 100% write off and are written off over several years, In the last decade or so, more than ever, Govt has changed Cap Allow rules virtually every year, mostly for political purposes rather than common sense or logical reasons.

At the end of the day, there will almost always be a difference between "profits" as per accounts and "taxable profits" for tax purposes - that's because accounts and tax profits are subject to different rules made by different bodies. On a small scale, you may not need to understand the differences.