power tools and the taxman

[dexteria]

Hi all,

I'm doing my first tax return myself as its only for a couple of months and mostly seems pretty straightforward once past the gobble de gook and the online self assesment return which automatically works out the tax.

A question I have tho that I have is: Do I allocate power hand tools as an asset or an expense? Currently I have all my machinery listed as an asset and hand tools etc as an expense.

Thot I'd ask here before I called the IR.

TIA

Cheers

Mark

[dom]

I'm pretty sure it's an asset

[dirtydeeds]

dex

i talked about this to clare my accountant when i first started up directly on my own. i list all tools over £350 as assets

all other other tools are listed under cost of sales (expense)



the reasoning behind this it is to keep things sensible.

when you first start up you have huge outlays on tools (mainly power tools) and you buy them as you need them on a job by job basis. and you cant afford to pay a lot of tax in your first year




the perfect examples for NOT listing smaller power tools as assests is impact drills (or other battery drills) and small disc cutters

if your impact drill gets stolen it costs £300 to replace it, you cant work without it. so you have to buy another immediatly.

you simply cant afford to list expensive "desirable" items as assets and the fact is that in hard daily use you will kill an impact driver in 3 years anyway, long before you have got the tax return from the asset


i kill 2 or 3 small disc grinders a year, so it isnt an asset its a consumable


do it this way and the tools (under £350) are paid for as a job cost in the tax year you buy them and if they last longer then you pay tax because you arnt replacing them


tools over £350 are by and large, bigger, less easily moved, used less often. you keep them under lock and key so are less likely to get lost, stolen or damaged

they dont wear out quickly and have a longer payback time so keeping them as assets is sensible

[dexteria]

Hi,

That sounds like good sound advice and the way for me to go. Thanks also for listing all the reasoning. I was thinking that it would be a burden to list and keep track of all power tools as an asset. The way you describe is much simpler.

Thanks

Mark

[engineerone]

hi, there is something else to think about, something called depreciation.

this is basically a load of accounting bullshit, but relates to how you can write down the value of an asset over a period. somethings can be written down more quickly than others.
it goes back to the time when you had what was called a sinking fund for the replacement of goods.

you really need to check the rules, but you can do accelerated depreciation for things that have a short life, for instance your computer, or in this case portable drills etc.

so called fixed or assets can be written down more slowly for instance at the rate of 10-20% per annum. what this means is that say you buy a machine for 2000 quid in may, at the end of the year, you could say that the tool was no worth 200-400 quid less. this means that you can offset the 400 quid against the tax due.

for more short life items you can write them down over say 2-3 years, and again offset part or all of this against your profit, since basically you have to keep this amount seperate for buying the new tools..


just one other thought though in year two you only depreciate the new value, not the original value, so that actually you never write off the item until you dispose of it.

don't forget you can also offset some home expenses against tax if for instance you receive phone calls late, or use the computer at home for work, etc.

hth
but as always just check, and try not to push them too far, better to pay a little more tax rather than have an audit. anyway in the first year at least they rarely expect you to make a profit.


if you buy an item specifically for a job, you can offset up to half against the profit from that job.

however in principle given the present values, i think that fixed assets should actually be valued over 500 quid, and floating or consumables under 500 .
paul

[cnc paul]

One other thing is small items like a drill (claimed as an asset) has a good chance of being stolen.... If that happens and you declare the theft, the taxman will void any written down value remaining.

[dirtydeeds]

engineerone. please explain your penultimate sentance a bit more

the taxman doesnt give a flying ** about how profitable any single job is or what you spend on tools

all the taxman is interested in is total income and total costs which including writing down assets and what profit you make

[davyowen]

Firstly, don't expect to get a definate answer even if you phone HMRC. I've spoken to 3 different people who have given me 3 different answers.

I eventually gave up and went with the answer that seemed to make most sense. My method was based upon the usable life of the item. Anything that I expect to still be working in 2 years goes down as a capital allowance and anything less goes down as an expense.

[jfc]

Why should any tools be listed as assets ? You need them to do work so they are an expense .

[engineerone]

deeds, some jobs pass over a tax year, so it can have an impact.

what people tend not to understand is that the tax offices are overworked, so they tend to work on the basis of a specific relationship between turnover and expenditure. as long as you are within their ratios, then they tend to pass your accounts without any real problems. so when you finish off a specific job their can be an advantage to offset the basic profit against what you bought.

let's understand in principle your work is labour plus materials, very few self employed people tend to put their equipment costs into the equation, however in the same way as which you quote for a job with an allowance for things like screws, glue paint/varnish etc you should also consider what tools you are likely to use on the job, and what you are doing to the life of that tool in this specific job. it will therefore reduce the profit on the specific jobs.


jason, the whole thing about balance sheets is that it reflects two things, your income and expenditure, plus what you are left with at the end of the year. if you are aiming to run your business on what the accountantc call an ongoing basis, then part of what you are doing is increasing the value of your business. should you at some stage in the future want to sell it on to someone else, then they will buy mainly your assets rather than necessarily the turnover and customers. you can never guarantee that customers will stay when ownership changes, but equipment has a finite and defined value, which is why you end up with assets.

jason you have recently bought a spindle moulder, although you bought it relatively cheaply, you still have used it on all your jobs, so from a logical point of view, it is an asset not an expense since you have not aligned it to a specific job, rather it has made it easier for you to produce more turnover because you can mould more quickly and efficiently.

remember that in real terms accountancy is a specialised kind of b*****it. as the old jokes go there are numbers, statistics, lies and accountancy rules. as a tradesman, you are looking to minimise the money you give the government out of your profit, without opening yourself to an inspection. in the last 10 years our friend mr brown has reduced the ways in which you can minimise what you pay him and hmrc, but there are still ways in which particularly in the first couple of years reduce your profit in legit ways. putting income back, increasing necessary expenses, increasing stock levels buying slightly better tools or more of them. all these things are legal and sensible, but try not to get
too carried away.

remember you don't need an accountant, for a turnover of below about 1.5 million, even as a limited company, but by 2009, many small businesses will need to start posting their accounts over the internet. to do this you need a decent accounting package.
sage is in my mind a pita, whereas mind your own business is decent and easy to learn. it is also an expense.

now i am not an accountant, but the last 10 years have increased my knowledge and ability to understand some of the things.

paul

[dirtydeeds]

i think it comes down to consistancy with the taxman. make a reasoned descision and stick with it until the descision needs to be altered and then have good reason to alter the original descision

my descision of the £350 cut off was also based also on my work, im first and foremost a carpenter not a shop based joiner

1 hand tools are unlikely to exceed 350 each, they go on site so are laible to all sorts and theft

2 all my power tools go out on site at some time, they also have an above average risk of damage and theft and very few power tools exeed 350

3 most shop machinery exceeds 350 and doesnt go on site so is under lock and key

my portable bench saw (well over 350) is the only asset that goes out on site

cnc paul's point about theft voiding write down value confirms to me that my descison for my buiness as an on site carpenter is valid. power tools such as a skill saw may have a potential life of more than 2 years BUT they arnt bolted to the floor and arnt under lock and key.


if i was a shop based joiner my view might well tend more towards davyowen

[dirtydeeds]

i suppose i could also say that the arbitatary figure of 350 is less than a weeks wages so i dont regard such a sum as an asset investment.

most tools in the range up to £350 pay for themselves very quickly in reduced labour time so even themselves out even in a single tax year


and as i do my accounts as cash accounting if i dont pay tax this year i will pay tax next year on all my income. the taxman doesnt loose out and the longer it stays working the more the taxman gains

[jfc]

I disagree Paul , a GOOD accountant is worth every penny , i also disagree with this ............

jason you have recently bought a spindle moulder, although you bought it relatively cheaply, you still have used it on all your jobs, so from a logical point of view, it is an asset not an expense since you have not aligned it to a specific job, rather it has made it easier for you to produce more turnover because you can mould more quickly and efficiently.

as most jobs i do i need new tooling for it costing sometimes more than the machine itself .

[engineerone]

one thing on which we both agree jason, a GOOD accountant, sadly my experience is that they are few and far between

as for the other idea, you have the spindle moulder as an asset, and the tooling as expenses ;D

deeds, i thought maybe others might also buy festo ;D

but you are right about consistency.

paul

[jfc]

Ok so no more talk about my assets then as the thieving b*st*rd might be reading this ;D and i will edit you posts if you continue ;D

[dirtydeeds]

jfc said:

Ok so no more talk about editing my posts or i'll delete your assets if you continue ;D

[dirtydeeds]

sorry

i couldnt help it ;D

[jfc]

Now you sound like the tax man

[dirtydeeds]

tax isnt taxing