Depreciation in P&L?

Question asked by Nel Hargrave 10 years ago

This question may be just because I am not an accountant, but can anyone explain to me why the tax estimate at the bottom of the P&L report obviously includes the annual depreciation of capital assets (which is included in the expenses categories), while HMRC guidance clearly states that depreciation can only be shown as a business expense if it is against an item which has been sold or written off.

I do understand that this is an estimate, and not to base my annual return on it - but it could easily make the difference between planning for NICs being payable or not, even if income is below the threshold.

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3 Replies

Hi Nel - Unless you are an unincorporated business, and qualifying for cash basis accounting, accounts are prepared on an accruals basis (invoices & bills) and are subject to accounting standards and "generally accepted accounting principles".

One key one is that long term (fixed) assets like properties, equipment, vehicles etc are written off as an expense (depreciation) over their estimated useful life. So if you think it will last 5 years the cost of the asset is drip fed in as an expense over 5 years.

Hope that explains?

Best answer
10 years ago

Hi Nel - you are absolutely right, there is, as yet, no specific tax adjustment feature for this function and so you have to take the estimate with a pinch of salt.

These days most small businesses end up with the ability to write off the entire purchase cost in year one (as Capital Allowances) and so it's a case of doing the calculation yourself, ie profit plus depreciation, less assets purchased. Having said that not all assets will qualify for immediate Capital Allowances (eg cars) so you have to do a bit of research https://www.gov.uk/business-tax/capital-allowances

This sort of complication is the reason why a more sophisticated estimate has not yet been developed, but it has been requested by several users and is on the list for longer term consideration.

10 years ago

Thanks Paul - that explains, and cash basis does help with writing off the entire costs in Y1

  • but I'm at a loss as to why a P&L report shows depreciation as an expense in the first place?
10 years ago

Hi Nel - Unless you are an unincorporated business, and qualifying for cash basis accounting, accounts are prepared on an accruals basis (invoices & bills) and are subject to accounting standards and "generally accepted accounting principles".

One key one is that long term (fixed) assets like properties, equipment, vehicles etc are written off as an expense (depreciation) over their estimated useful life. So if you think it will last 5 years the cost of the asset is drip fed in as an expense over 5 years.

Hope that explains?

Best answer
10 years ago

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