Expense vs asset, is there a difference?
An expense is something that you use or consume in the running of your business. It costs your business and usually after a year there isn’t anything to show for that purchase. Examples of these expenses might be rent, travel expenses, printer ink, monthly software subscriptions and office supplies.
Cost of Sales expenses – just a side point to expenses. There are certain expenses that are classed as “Cost of Sales” or “Cost of Goods Sold”. These are raw materials that are consumed in the production or providing of the product. As an example, as a coffee shop, the coffee beans, milk, chocolate topping and marshmallows can be counted as the “Cost of Sales” expenses. The other costs like staff wages, heat & light costs and coffee machine cost would be normal expenses.
All expenses above are claimed back to reduce your tax liability against any income!
An asset is usually a costlier item and will be useful to your business for more than a year. Examples of assets include vehicles, buildings, machinery or tools and computer systems (there are other regulations around vehicles also, so be sure to check into these). For small businesses, who will spend far less on assets than big businesses, limited or otherwise, expenses and assets reduce your tax liability. The government set a limit on how much you spend on assets can be used to reduce your tax liability this is called your Annual Investment Allowance (AIA). Our normal policy when dealing with smaller businesses is to treat anything over £100 with a long life as an asset. But all companies are different.
Assets can be claimed back to reduce your tax liability by claiming the amount you paid for them under the “Annual Investment Allowance” (AIA), BUT ONLY up to the allowance amount.
But do not fret, wait until you see what the allowance is… HMRC list previous years allowances, the most recent allowance – HMRC’s website says up to 31st December 2020 but doesn’t give any more recent amounts – is £1 million. The previous years allowance was £200,000. This is for 1 year or accounting period!
The AIA is pro rata, so if your accounting period for filing was 9 months, your AIA would be 9/12 x £1 million = £750,000.
If you sell any item that you claimed AIA on, you may have to pay tax.
The No No’s:
-You cannot claim AIA if you are part of a partnership where one of the partners is a company or another partnership.
-You cannot claim ANY AIA for your businesses final accounting period (when it closes). So, make sure that if your business is closing, you do not use any leftover cash to purchase lots of assets!
-Cars, items you owned for another reason before using in your business & items given or gifted to you or your business cannot be claimed under AIA. For these you again claim the "writing down allowance" instead (see below).
-You also cannot claim the full amount of any items you partly use for outside your business. You will have to calculate the cost of the item to your business.
What if you are fortunate enough to have bought enough assets to go over the AIA, what do I do then? This will be discussed in another blog post next week all about “Writing down allowances”.
Woohoo I hear you say?! L O L!
The final word… depreciation!
Assets are shown in your balance sheet, this is a reflection of how much your company is worth as a whole, taking into account: money in the bank, stock on hand, assets worth as well as loans outstanding. This means as your assets lose value, you need to depreciate them. This is a whole other kettle of fish, but basically your accountant, or us 😉, will be able to help you with it!
I know this is all a bit complicated, very sorry!
But moral of the story is, if something costs a lot and is going to be useful to your company for more than a year… talk to your accountant, or us 😉, about how to record it properly.
Stay safe everyone!