Asset Lives

Asset Lives… they matter

How long you plan to use an asset affects the Depreciation going through your accounts… which means asset lives matter to your Profits and your Balance Sheet.

Assets are depreciated over the period you expect to use them…

If you expect to use a £100,000 asset for 4 years… this year’s Depreciation could be £25,000

If you decide instead you’ll use it for 5 years… this year’s Depreciation could be £20,000

That’s £5,000 extra profits Tax Free… (because Depreciation of Tangible Assets has nothing to do with tax)… and at the end of the year the asset will be carried in your Balance Sheet as worth £80,000 instead of £75,000

Profits up… Balance Sheet strengthened… a win win

All about Judgement

How long you’ll be using the asset is down to you… it’s all a matter of judgement (or educated guesswork)… and you can review asset lives every year...

So when you buy, say, a £100,000 asset you may expect to use it for 4 years… the Depreciation cost each year for the next 4 years will be £25,000

After 2 years it is in your Balance Sheet as an asset of £50,000

BUT… you realise you can now get another 5 years out of it … (perhaps because of repairs you’ve done, or you were being too cautious when you made your original estimate)

… so the Depreciation in year 3 will drop from £25,000 to £10,000 … !

Asset Lives… Definitions

The Useful Life of an Asset is defined by FRS102 as either…

1  The Period over which an asset is expected to be available for use by an entity… or

2  The number of production or similar units expected to be obtained from the asset by an entity

If you bought a £200,000 lorry you may have a policy of selling all lorries after 4 years… in which case you are using definition 1. and will depreciate the lorry over 4 years… so in the first year Depreciation would be £50,000

If instead you have a policy of selling lorries after 100,000 miles, you’re using definition 2…. and if in the first year you clocked up 50,000 miles… then the first year’s depreciation charge would be £100,0000

FWIW

Repairs & Maintenance do not stop the need to Depreciate assets… but they may change the expected Useful Life of the asset and so will either impact the Residual Value.. or prolong the period that the company will use the asset (and so reduce the Depreciation charge each year)

Useful Life… An asset’s life in this context is not the total expected life of the asset… but the period that the company will get use from it… (“the period from which the entity expects to consume economic benefits from the asset”).

FRS 102 para 17.21 gives 4 points to consider when determining the Useful Life of an asset

 

 

 

 

 

Residual Value… there’s real value in there

Accounting rules mean your profits get hit by Depreciation… but you don’t have to take that lying down.

Ask your accountant how they handle the Residual Value of your assets… it could boost your Profits… tax free.

Residual Value… definitions

Your company’s depreciation policy is “the systematic allocation of the depreciable amount of an asset over its useful life”*…

… a few strange technical phrases in there.. but it’s the ‘depreciable amount’ that I’m interested in here… because that’s defined as “the cost of an asset… less its residual value“*

and ‘residual value’ is in turn defined as “the estimated amount that an entity would currently obtain from disposal of an asset… if the asset were already of the age and in the condition expected at the end of its useful life”*

What’s it mean?

You take the cost of your asset… and then deduct the expected value of that asset when you stop using it… before working out the annual Depreciation cost of using that asset

… say this year you bought a company Car that cost you £100,000… and you expect to use it for 4 years…

… some accountants would charge £25,000 Depreciation against this year’s profits for using the car… (£100,000 spread over 4 years)

BUT

… at the end of the 4 years the car still has Residual (second hand) Value… estimated today to be, say, £40,000

So the REAL cost of using the car this year should be…

Original Cost £100,000 – £40,00 Residual Cost … =  £60,000  spread over the 4 years you’ll be using it…

That would make this year’s Depreciation charge £15,000… instead of £25,000

So accounting for the Residual Value of your company car when you stop using it has generated an extra £10,000 Profit… tax free… and a stronger Balance Sheet too.

Who decides the Residual Values… & how?

You’re responsible for your accounts so it’s really up to you.. but best to get your accountant on board…

…  under the new FRS102 rules Residual Value is calculated by looking at the price your asset will fetch at your year end date… but making allowance for the age & condition it will be in when you stop using it…

(so… your £100,000 car may have been new this year … but at your year end you can figure out its Residual Value by looking at prices for a 4 year old version of the same car)

Objections?

How can there be?… rules is rules and the new FRS102 says Residual Values should be considered regularly to make sure they stay up to date… so you can revisit any old Residual Values your accountant’s been using…

… and if your accountant hasn’t been using Residual Values before… get them to start doing it… changing the way they depreciate your assets would be considered a change in an ‘estimate’ so needs no extra disclosure or any restating of old numbers…

FWIW

The old rules said Residual Values should be based on prices prevailing at the date of acquisition (or revaluation)….

The new rules say Residual Values should be based on prices prevailing at the Balance Sheet date*

*FRS102 Glossary of Terms

also FWIW…

A change in depreciation method is accounted for as a change in an estimate … IFRS 102 para 17.23

Dividends instead of Salary

Dividends instead of Salary… don’t do it !

There’s only one reason to pay yourself Dividends instead of Salary… to avoid a bit of tax / NI… but here’s 5 reasons not to…

Dividends are not ‘relevant earnings’ for pension purposes.. so payments into your pension can’t be deducted from any Dividend income… but they can be from any Salary

Salary makes your affairs simpler, clearer… with tax paid as you go along… minimising lumpy shocks & payments of extra tax in January & July

Funders don’t really get you paying out their money as Dividends… try telling some of them you’re paying yourselves that way to avoid paying some tax & see how they like it… particularly if you’re trying to raise new money… (I know a Bank Manager who absolutely hates it)… and if you’re looking to work with Venture Capitalists & Angels they’ll often put constraints on the company paying out Dividends

R&D tax reliefs are now so generous that companies will often forego a Grant to keep the tax relief… a Salary for someone working on R&D (that’ll be you too as the company Owner Manager) attracts a lot of relief… Dividends don’t count

Overdoing the Dividends can turn ‘Profits to Losses’… not strictly so… but taking out too many Dividends in any one year can shrink your Balance Sheet… making it look like your company made a loss… when it may have made a Profit… which’ll hurt your Credit Ratings

So… as the tax regime around Dividends gets tightened up… and the smell around some forms of avoidance gets stronger… maybe it’s time to have a word with your accountant… and make sure your Dividend payment policy still suits you…?

 

Source Documents & Calculators

New Dividend Tax Regime

Cracking Tax Calculators to play with

Simple explanation of Pension & Divs for tax year April 2017 and how the company can make tax deductible contributions to your pension… even if your low Salary means you can’t

The picture with this post comes from Salary Versus Dividends & Other Tax Efficient Profit Extraction Strategies: Written by Nick Braun

Capital Allowances

Capital Allowances… have you any waiting to be claimed?

If you’ve spent money on assets you have the right to Capital Allowances… which help reduce your tax bill… but are you claiming all that you can?

Sometimes keeping up with all the rules & wrinkles can be a tad too much for smaller accountancy practices… particularly the rules related to property…

e.g. did you know you can claim capital allowances for fixtures & features on buy to let properties?… without invoices for the work done?

There are specialist tax firms who’ll take a look at an Owner Managed Businesses assets to figure out :

1. if there are claims to be made… and

2. if claims are being made are they being maximised

And they bill on a no-gain-no-pain basis… so what have you got to lose?

Here’s a firm who’ve had a lot of success maximising Capital Allowance claims… Leeds Based

The C3 Group .  and here’s a flier introducing you to Peffs

Permanently Embedded Fixtures & Features (PEFFs) may be claimed on most types of commercial property, from retail or industrial units to offices and factories, to bars, hotels and restaurants. They can also be claimed on more specialised commercial properties such as nursing homes, doctor or dentists surgeries, sport centres and even data storage centres. PEFFs can also be claimed on residential buy to let properties that are let to more than one unrelated persons such as student accommodation.

Why not check it out & claim all the Capital Allowances you can?

R&D Tax Relief

R&D Tax Relief… use it to raise money?

R&D Tax Relief isn’t just a great way to get HMRC to help fund your Research and Development… you can use it to raise money

Already Claiming?

26% of declines by banks are because of affordability… which means your business plan & forecasts haven’t convinced them that you can afford the borrowing you’ve applied for …

So make sure your plan takes into account that you’ll be paying out less in tax every year you’re doing R&D… or even getting money in from HMRC… (because if you make a loss you can surrender your tax relief for cash from HMRC)

I’ve recently seen business plans from two companies that already claim R&D Relief… and will keep on claiming it year in year out… but their forecasts didn’t take that positive ‘cash-flow’ and profit effect into account…

Not Claimed R&D Tax Relief yet?

Why not? HMRC really are keen for you Owner Managed Businesses to do it.

So much so they’ve recently introduced ‘Advanced Assurance’ ...

If you’ve never claimed R&D Tax Relief before… have Turnover less than £2m… and less than 50 employees… you can go online and see if your R&D plans qualify for this cracking tax break…

… and they will give you a written confirmation that your plans will qualify for up to the next 3 years…

… so when you model your cash flow & profit forecasts you can take account of the reduced tax you’ll pay… or the tax that HMRC could actually end up paying you…

… that will make your plan more realistic… and any funding you’re trying to raise will look more affordable…

DIY

Like me, HMRC are aware that a lot of you have accountants / advisors who aren’t working the R&D wrinkle for you… so they’re happy for you to go DIY… take a look… the Advance Assurance is all done online…

 

 

 

 

 

Offshore

Offshore Furore

When I was a trainee accountant I sat in a meeting where a client asked one of our Partners to put some of his money Offshore…

The Partner thought about it… then stunned the room by waving at the door and saying “That’s the way Offshore… f*ck off”

Lord knows what that Partner would say to the Prime Minister…

Evading the discussion about Avoidance

Avoidance is legal, evasion is not… but one man’s avoidance is another man’s evasion… whatever the law actually says… and that’s the problem for the PM…

Punting money abroad to manage your tax liability seems tacky, dirty, or downright dishonest to a lot of Brits…

But do they feel the same about putting money into a pension & getting a tax break… or into an ISA where the income is tax free…

Or is it really all about availability… ?

If avoiding tax Offshore was available to all and pushed & promoted by the Chancellor as Pensions & ISAs are … would the PM be having such a tough time… ?

Who’s next in the firing line?

It’ll be interesting to see if this spills over into a more general look at other wrinkles that help some pay less tax… wrinkles that aren’t available to all…

e.g. you guys taking Dividends instead of Salary to avoid National Insurance

e.g the ‘Entrepreneurs-only’ 10% tax rate on Capital Gains made when selling your business…

Both completely indefensible in my book…

But like I say… one man’s ‘let’s do it’… is another Partner’s ‘f*ck off’

Bank Appeal

Bank turned you down?… Is Appealing Appealing?

If your company’s been turned down for funding by your bank is it worth appealing?

Yes !

Roughly a third of appeals succeed… and for some banks it’s higher…

There are a few reasons why appeals work… (e.g. you might supply more or better info on your company during the process)… but I suspect a fair bit of it is having someone else within the bank take a look at your application… someone at a higher pay grade and with greater authority & capacity to take a risk…

Who cares why… appealing works for a third of applicants

Simply follow your bank’s appeals process… or do it totally foc through Better Business Finance 

… but act quickly… there’s a 30 day limit from the day you’re turned down…

… and then within 30 days of your appeal you’ll know if you’re one of the one in three who get what they want…

… and if you’re not… the banks are now supposed to recommend you on to another funder who may well give you the money you need (something I’ll blog about soon)

So why do they turn down companies in the first place?

Bank Appealing reasons for refusal

The single biggest reason for refusal is a poor Credit Score…

… but frankly there’s no reason to let your Credit Score get in the way… if you ‘manage’ it in the month or so before you apply for funding you can get it up where you need it to be…

… it can be easily done (sign up in the sidebar for a free book on understanding UK Company Credit Ratings and boosting them)

… and nobody dies…

My 2p worth… Here’s Hoping the Successful Appeal Rate Falls ???

Professor Russell Griggs OBE  independently monitors and reports on the banking sectors’ appeals process…  and like him I’m hoping the % of successful appeals keeps falling as it has done for several years…

… because I’d take it as a sign that the banks’ appetite for lending to SMEs is improving… so fewer companies that should get funded don’t…

… and those SMEs that get refused & then appeal will increasingly only be those that don’t play the game when it comes to tidying up their Credit Score and fail to prove the affordability of the funding they’re seeking…

.. basic stuff to get right before you apply imo

Sources :

Better Business Finance 

 

website cost or not

Website… a Cost or an Asset?


Your own view doesn’t really matter… but what your accountant thinks does… because your website can be treated as an Asset and not a Cost…

… which means a boost to this year’s Profits… a strengthened Balance Sheet… and an improving credit rating…

Old Rules

For most of you, in the past when you bought or built a new website the cost was written off through the Profit & Loss…

A lucky few who built their own may have had an accountant prepared to use UITF Abstract 29 Wesbite Development Costs (issued in February 2001) to take those costs and put them into the Balance Sheet as a Tangible Asset…

… and a luckier few who paid for a site to be built for them had accountants happy to capitalise website costs as an Intangible Asset

New Rules

For year ends December 2015 & onwards there’s a new set of accounting rules FRS 102 replacing the old rules…

… if you’ve recently bought or are developing a new website for yourself you need to get your accountant to look carefully at how those costs get treated…

Because I see no reason for most of those costs to hurt your bottom line (unless you want them to!)… a bought website can be capitalised as an Intangible Asset… an internally built website can be Tangible or Intangible…

As the ACCA say … FRS 102 leaves it up to you and your accountant to ‘develop a suitable accounting policy’…

The Tax Man

So what does the tax-man make of your website…? well… here’s what they say

“The cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue”

So the Tax Man says the building or buying of your new website can be an Asset… later content & changes can be Costs…

But bear in mind that if you do choose to treat your new website as an Intangible Asset…

… your taxable Profits will go up (by moving costs out of the profit and loss)…

… and in future years they will be lowered by Amortisation (a fancy word the Depreciation of an Intangible Asset)

So… Website… a Cost or an Asset?

Up to you & your accountant really… but I guess that decision will be informed by whether or not you want boosted Profits & Balance Sheet this year?

Either way…

‘Nobody Dies’