New business making most of allowances.

[Dave R smith]

New business as a UK sole trader:
Tax year allowance £ profit £
2002/3 4615 -1000
2003/4 4615 -1000
2004/5 4745 +9000
2005/6 4895 ?

How do I make use of the 'unused' allowance in the first 2 years?
Whilst I can project the £2000 loss in first 2 years to 3rd year, I seem to be losing the benefit of £9230 in allowance.

I believe this must be a common problem for new businesses.

The only similar topic (which helps in a different way) that I could find is:
//www.taxationweb.co.uk/forum/discuss.php?id=919

Advice or links to helpful web-pages appreciated.
Dave.

[Instinctive]

Dave,

If you don't have any taxable income from other sources against which to set the personal allowances, they will be lost for ever. This is not that much unusual, especially with wives staying at home to look after children etc.

Keep losses to a minimum by not claiming capital allowances etc which you don't need to claim.

Ramnik

[Dave R smith]

Thanks Ramnik,

Excelent point about capital allowances.
I have read up on them on businesslink website, but doesn't say if capital allowances supplement depreceation or not.
E.g buy asset £1000 so get 50% allowance (if not computer).
So can deduct £500 from profit figure to calculate tax payable.

But, If asset was to be say depreciated at 20% p.a. over 5 years (ie £200 p.a. set against profits for tax),
does usage of the capital allowance mean that the depreceation can't still be written off in same way.
Perhaps as an allowance it is effectively 'double counted'?

Good point about housewives - but housewives can't have things like 'provision for bad debts'.

I am aware co's can make such provisions (like 'for bad debts') in good years, to reduce tax bill over longer term.
I was therefore hoping there was some kind of 'reverse provision' whereby I could take profit in early years and put back in later years.

Dave.

[Instinctive]

Depreciation is not an allowable expense for tax purposes. Instead you are able to clain capital allowances. These are first year allowances or writing down allowances. Capital allowances do not have to be claimed at all if not required, thereby preserving them for later years.

Some expenses are paid in advance. In that case, you should be able to transfer the proportion of the expense to later year.

There is no provision for artificial transfer of income and expenses between different years to maximise your tax savings.

Ramnik

[Dave R smith]

Hi Ramnik,

Your reply has thrown me.
If 'Depreciation is not an allowable expense for tax purposes.', then why show them on accounts?
I went on tax course and recall reducing asset value over 5 years before calculating profit and tax payable. I will have to re-visit my notes and read up on Capital allowances.

Thank-you for your help (on a Sunday as well).

Dave.

[Instinctive]

Accounts are primarily meant to be for commercial purposes. Depreciation is calculated and charged to profit and loss account so as to write off the total cost over the useful economic life of the asset, ie it is spread evenly over a number of years.

On the other hand, tax depreciation allowances (capital allowances) are calculated on the basis of encouraging capital expenditure. This often results in more relief in the early years and less in later years.

Accounts prepared on commercial basis form the starting point in calculating the profit for tax purposes. One adjustment is to replace the depreciation calculated on commercial basis with one calculated according to tax rules.

Ramnik

[AA UK]

There are several provisions aimed exactly at new business:

1. Carryback of losses to previous highly taxed years.

2. averaging for authors and market gardeners.

3. Deferment of NIC.

4. The personal allowances could be used better by choosing a much longer accounting period for tax purposes.

[Dave R smith]

Thank-you for your clarification Ramnik.
Thank-you also AA UK for your other possibilities for tax efficiency.
I have also read that Inland Revenue allows 'creative' businesses, that encounter lots of peaks/troughs in work flow to have good/bad years 'averaged out' - even restrospectivley - but excluding the first year of business.
I expect this relates to the same concession as AA UK points 1 and 2 (for authors read creative).

Thank-you again Ramnik and AA UK for your helpful responses.

Dave.