First Year allowance on Car (Tax vs GAAP)

[iclamp]

Hello

I have just started trading and recently bought a Toyota Prius for my LLP, in order to benefit from the 100% first year allowance. I'm now doing my returns for companies house and the inland revenue.

It seems that accounting practice diverges though - It looks like in terms of the company accounts I can depreciate it by 20% (giving me a profit of 6k) but in terms of the Inland Revenue I claim 100% as expenses (allowances) to give a loss of 10k.

That's okay, but what happens next year? Is the car valued at 80% for accounting purposes (which will allow me to depreciate it again, from Co House point of view) but 0 for the revenue? I don't think I will be allowed to depreciate it any more (to reduce my profits) again.

Can you help please?
Thanks
Iain

[pawncob]

"Timing differences" arise where tax and accounting treatments differ and these are shown in the taxation provisions made in the accounts. The treatment outlined by you is correct. Next year the WDV is depreciated by 20% on the accounts, but no further capital allowances are due.

[Incredulum]

You therefore need to set up a deferred tax liability in your accounts - to reflect the fact that in future years you will make a loss on the vehicle, but you won't get a tax deduction for the loss.

Assume: Buy car for 100. Tax rate 20%.

Year 1. Depreciation 20, Tax deduction 100. NBV c/fwd = 80; TWDV c/fwd = 0. Comparing these, the Deferred tax liability on the balance sheet ((80-0)*20%)=£16 so you book a deferred tax charge of 16.

Year 2. Depreciation 20, Tax deduction nil. NBV c/fwd = 60; TWDV c/fwd = 0. Comparing these, the Deferred tax liability on the balance sheet ((60-0)*20%)=£12 so you book a deferred tax credit of 4.

Year 3. Depreciation 20, Tax deduction nil. NBV c/fwd = 40; TWDV c/fwd = 0. Comparing these, the Deferred tax liability on the balance sheet ((40-0)*20%)=£8 so you book a deferred tax credit of 4.

Year 4 you sell it for 50. So (if we assume this gives you a balancing charge) you get a tax charge of 10 after bringing the proceeds into . You also have a deferred tax liability already on the balance sheet of 8 which you write back a credit for, giving you a net tax charge of 2 attached to an accounting profit of 10.