What's the point of AIA? (in relation to corporation tax)

crazyITman

So if i run a small LTD, 

We turnover 200k in the year, profit of 50k. 
if we buy an item worth 100k it goes into the AIA and it's offset for tax purposes. 
Lets say we depreciate it over 5 years, 20k a year. 

in year 1 I have 50k profit, +20k non allowable depreciation, then 100k of AIA, so -30k for tax purposes which I can carry forward. 
Year 2 - 50k +20k with 30k brought forward, 40k taxable, 
Year 3 - 50k +20k = 70k taxable 
Year 4 - 50k +20k = 70k taxable 
Year 5 - 50k +20k = 70k taxable 

In total we pay CT on 250, but, with the way the tax is paid we pay more than if we didn't purchase the item at all, as 50k/year would be at 19%. 

This doesn't seem very good to me as a small business owner. not buying and no AIA is a flat 9500/year in CT, totaling 47500 c.tax, 0/40/70/70/70 would be 52000 in CT over the 5 years. 

What am i missing here as this seems a bum deal. 

MyRealNameToo

crazyITman said:

in year 1 I have 50k profit, +20k non allowable depreciation, then 100k of AIA, so -30k for tax purposes which I can carry forward. 

Why are you adding £20k to the profit?

crazyITman

MyRealNameToo said:

crazyITman said:

in year 1 I have 50k profit, +20k non allowable depreciation, then 100k of AIA, so -30k for tax purposes which I can carry forward. 

Why are you adding £20k to the profit?

Does depreciation not get added back as it's a non allowable expense? Or should I not be depreciating things in the AIA category? 

uknick

I haven't looked at your numbers in detail, but capital allowances only replace depreciation in your corporation tax calculation.  They do not replace the depreciation figure in your published financial accounts.  Because the capital allowance annual amount is usually different to your actual accounting depreciation amount what you are getting is a timing difference.

At the end of the asset's life cycle you should end up with the same amount of CT paid using depreciation or capital allowances, taking into account any end of life balancing adjustment required for the capital allowance.

The benefit of using capital allowances such as AIA, is that you reduce your taxable profits in year of purchase by talking the full 100% of the allowance.  However, your example indicates this might not be such a good idea as you don't have enough profits to make full use of the allowance in year of purchase.  Therefore you have to carry forward a CT loss.  This may suit you or not.

You are then into tax planning and you need to decide what is the best strategy for you; take AIA in year of purchase or spread the allowances over the life of the asset using a pool of assets.
 

MyRealNameToo

crazyITman said:

MyRealNameToo said:

crazyITman said:

in year 1 I have 50k profit, +20k non allowable depreciation, then 100k of AIA, so -30k for tax purposes which I can carry forward. 

Why are you adding £20k to the profit?

Does depreciation not get added back as it's a non allowable expense? Or should I not be depreciating things in the AIA category? 

Would really need to see all the numbers and what you've included to go from revenue to profit but if you were...

£100k revenue
£30k cost of sale
£20k payroll
£50k profit

Then no, you dont add the £20k of depreciation on because its not been in your calculations at all

However if you are saying...

£120k revenue
£30k cost of sales
£20k payroll
£20k depreciation
£50k profit

Then yes you would need to reverse the depreciation because it wasnt an allowable expense but then I'd have said from the outset you had a £70k profit