Capital vs Revenue expenditure question for small value capital items

katy123

I am aware that if a capital expenditure is of a low value, say a £100 monitor (no set limit by HMRC), the accountant can choose to treat it as an asset or treat it as an expense (directly to the P&L account). From a taxation perspective (Ltd company), what are the differences? My understanding is, if treated as an asset = you get Annual Investment Allowance at 100%. If treated as an expense you still get 100%. What am I missing? Thanks

00ec25

you miss nothing in tax terms
if the expenditure is less than the annual investment allowance, (capitalisation) tax relief is 100% in year 1. No difference

the "advantage" of capitalising is the impact it has on the company reserves and thus the amount available to take as dividends. This is what you pay your accountant to explain to you - change accountants by the sound of it.

katy123

00ec25 wrote: »

you miss nothing in tax terms
if the expenditure is less than the annual investment allowance, (capitalisation) tax relief is 100% in year 1. No difference

the "advantage" of capitalising is the impact it has on the company reserves and thus the amount available to take as dividends. This is what you pay your accountant to explain to you - change accountants by the sound of it.

Thank you. So by capitalising there is more dividends available. Are you able to expand? If I assume the £100 monitor is depreciated over 3 years, am I right in thinking that the profit for the period will be £67 more if capitalised? Thanks again.

secretdebt

The profit will be £100 more in year 1 if capitalised.

When working out tax, depreciation is added back anyway, so its a bit of a mute point.

Depending on whether you want to take out dividends or not, my personal view is its easier to just expense such a small item to the P&L. You can only take dividends to the point that you have available reserves, and expensing an item rather than capitalising it will remove those reserves by that amount, and so therefore mean you have £100 less availability to draw down dividends.

I am assuming the £667 you mention above is an error.

Pennywise

In the long run, the retained profit/dividend position is the same as the £100 will eventually be depreciated and reduce profits.

It's short term that matters. In the year of purchase, capitalising an asset means your £100 is only written off by £33 (assuming 3 years depn) so you have £67 more to pay out as dividends. But by the end of year 3, it's the same, so is more important in early years or in an unusually low profit year. Although you can't change policy year on year - your de-minimis limit for capitalising or writing off should be consistent.

katy123

secretdebt wrote: »

The profit will be £100 more in year 1 if capitalised.

When working out tax, depreciation is added back anyway, so its a bit of a mute point.

Depending on whether you want to take out dividends or not, my personal view is its easier to just expense such a small item to the P&L. You can only take dividends to the point that you have available reserves, and expensing an item rather than capitalising it will remove those reserves by that amount, and so therefore mean you have £100 less availability to draw down dividends.

I am assuming the £667 you mention above is an error.

Thank you for taking the time to explain this. Can you explain in a bit more detial why you would prefer to expense small items over capitalising them? If Corporation tax is the same whether you you capitalise or expense, but you have a higher reserve to extract more dividends, then surely capitalising is better?

katy123

Pennywise wrote: »

In the long run, the retained profit/dividend position is the same as the £100 will eventually be depreciated and reduce profits.

It's short term that matters. In the year of purchase, capitalising an asset means your £100 is only written off by £33 (assuming 3 years depn) so you have £67 more to pay out as dividends. But by the end of year 3, it's the same, so is more important in early years or in an unusually low profit year. Although you can't change policy year on year - your de-minimis limit for capitalising or writing off should be consistent.

Gotcha, thank you.....managed to piece it all together. I hope you all have a lovely day!

00ec25

secretdebt wrote: »

I am assuming the £667 you mention above is an error.

no, she was correct on the basis of 3 year life of £100 cost
£33 depreciation so £67 accounting (not the same as taxable) profit. so £67 higher reserves from which to take dividends. Year 2, £33 higher reserves. Year 3 no difference.

I agree with you however that the threshold should be high enough to avoid capitalising piddling sums. We stick with £500 unless the client makes a specific request to go lower.

secretdebt

The original post has been changed now, not a biggy, but makes the fact i questioned the £667 still relevant :rotfl: