Fixed Assets

[lightsource]

Hi all,

 

Financial year end 31st of March for us, and over the year(s) have gained a lot of 'fixed assets' from what started out as raw materials, or expenses.

 

This includes cables and connectors forming leads, Wood, glue, paint and fittings forming flightcases etc.....

 

Just wondering how others transform basic expenses to fixed assets. (from an accounting point of view).

 

Edit typo's.

[drsound]

Just make a charge from your P&L account to balance sheet to reflect the cost of the assets. It's the same as when you make your depreciation charges. I'm not sure if you can also charge the cost of the labour as this sometimes ends up being more significant. Your accountant will advise on that one.

 

Do you really want to do this though? Surely it's more tax efficient to write down the whole sum this year (unless you're making a loss in which case there are benefits to spreading the costs).

[paulears]

I'm not sure you can - most of the items you mention are considered consumable items, and don't meet the requirements for an 'asset'. My accountant doesn't treat anything under £1000 as a fixed asset - the rule, as I understand it being something held by the department on a continual basis, that has a physical identity (but not computer software) and has a expected economic life of more than one year. It also must have a value of at least £1000. This usually means second hand kit can also be a fixed asset, as long as you look at the original 'new' date, and it's still got lifespan left.

 

I'm pretty sure that you cannot have a hundred mic cables considered as one to make up the £1000 limit - but I'm not certain of that one.

 

Looks like you just have materials and stock to me. It does occur to me that converting materials and consumables to fixed assets, even if possible is a bad move anyway - as if you then dispose of them before their lifespan is up, you're liable for tax on them.

[Bobbsy]

My experience is very much like Paulears except that, as we were technically a US registered company, our fixed asset limit was $1000 instead of £1000. However, there was a very marked reluctance on the part of the accountants to "capitalise" things unless they had to and a fairly big preference to expense things out of consumables or maintenance.

 

Bob

[drsound]

Interesting, I've never come across the £1000 rule, must ask my accountant about this one. Does this still apply if you're pooling assets for the purposes of WDA? I thought that the lower limit on assets was normally agreed by companies to allow them to omit small value goods from their asset registers but wasn't a requirement. The only threshold I was aware of was the £100k short-life/long-life asset for WDA.

 

Way back when I started the company I tried it on with HMRC by claiming that since a lot of our hire stock was replaced annually it could be charged to P&L but they were having none of it, they insisted on having it on the balance sheet. That obviously included a lot of small items under the £1k mark - leads, mics, stands. Pretty much everything except desks and the larger speakers.

 

Now if those consumables were used to maintain existing equipment you could transfer them to your balance sheet by taking the charge for the consumables on your P&L but then offsetting the cost by reducing the depreciation charge accordingly. You are effectively extending the life of the asset. You'd still obviously want to write down the largest allowable value against tax though, it rarely makes sense to do anything else.

 

I'd be interested to know why you want to capitalise these, could you fill us in? Unless you're trying to boost the book value of your company or otherwise massage the accounts to show a particular state of affairs then it's almost always better to put these things on P&L and see the immediate tax benefit.

[Jivemaster]

I'm surprised that your accountant isn't pushing for the maximum P&L and the minimum of things being put as fixed assets. You have asked your accountant haven't you?!?

[lightsource]

Surely it's more tax efficient to write down the whole sum this year (unless you're making a loss in which case there are benefits to spreading the costs).

 

Hit the nail on the head there! Not making a loss, but 'spreading the load' as it were, due to the massive investments on new gear, there is little sense in writing the whole lot off as an expense this year if it can be avoided. And, as you also mentioned in your other post, it would also increase the book value of the company.

 

The main reason I asked the question, was that in the last year, I built a mass of flightcases (I'm sure they're having kids), and ideally in the future these will be sold off second hand. The same goes for the 4 computers, which all sterted life as parts from various suppliers.

 

Paul, I've also never heard of £1000 rule, can you enlighten? In the past, I've put items as low as a £ 29 Printer into Fixed assets, and no-one has raised the issue.

 

Jivemaster, In the process of changing accountants at the moment, so, the answer there is 'Not yet'

[paulears]

No specific guide I have, apart from my accountant - putting red lines through purchases I'd included as fixed assets, moving them elsewhere with "<£1000 comment. Sifting through the HMRC site, a did find that Her Majesties own Customs and Revenue have their own internal documents and policies available online at their website.

[drsound]

I'm sure there must be a way. I count flightcases, even second hand ones, as fixed assets as their economic life is significantly more than 12 months. The easiest way might be to buy the parts yourself then sell the completed assets to the company at market value but then your personal tax might get messy.

 

Remember you can carry over losses from one tax period to the next to write off against profits in that period so from that point of view it probably doesn't make much difference to your tax position which method you choose.

 

You could try ringing HMRC. I've always found them to be very helpful indeed and not at all the draconian Nazis they're made out to be. Even when I cocked things up in the early days Before Accountant they were very patient in telling me what I'd done wrong. They even let me off paying a couple of fines!

 

Alternatively you could look up all your local accountants who offer a free first consultation. Visit them on the pretext of pitching for your work and slip in a seemingly innnocuous question. A bit cheeky but a free way of getting expert advice.

 

A concurrent post has been automatically merged from this point on.

 

No specific guide I have, apart from my accountant - putting red lines through purchases I'd included as fixed assets, moving them elsewhere with "<£1000 comment. Sifting through the HMRC site, a did find that Her Majesties own Customs and Revenue have their own internal documents and policies available online at their website.

I wonder if this is due to HMRC allowing any asset under £1k to be written down in a single year to avoid major companies having to list silly quantities of things like 8,000 telephones. This has obvious benefits for smaller organisations like most of ours since a good many of our assets will fall into this category.

[Paul J Need]

Just a quickie as about to go and eat:

 

Why do you want to load your fixed assets up rather than write them off direct from the P&L?

 

Fixed assets are shown on your balance sheet so loading this up with glue etc as fixed assets would only have any real benefit if you're trying to raise money or are trying to sell the business?

 

Just write them off against your profits surely?

Good plan - chat to your accountant also :unsure:

[Dave]

I once had a discussion about the treatment of small items as capital assets with an accountant. He said it was perfectly acceptable to set a threshold below which an item is considered an expense and could therefore be written-off against tax in a single year.

 

There doesn't seem to be any explicit guidance on this from HMRC and I reckon it is more of an accepted practice (to make bookkeeping more managable) than a specific rule. The figure of £1000 does seem far too high, though. I have a vague memory of reading about this topic and I'm sure something costing a lot less (like a filing cabinet) was used as a worked example.

 

I was in the situation where I wanted to build up a pool of fixed assets and when I pressed the accountant, he said anything that lasts for more than a year and has an enduring value could be treated as a capital item. (IMO this includes cables). I would guess it's up to you, your accountant, and HMRC to agree the policy of your company, and, of course, you're quite entitled to choose the one that gets you the most favourable result. If a £1000 threshold is accepted by HMRC then it could be very beneficial as David R said.

[drsound]

Perhaps the threshold would be viewed in relation to turnover. Clearly if you're a multinational with a group turnover of several billion quid then a piffling £1k expense is almost irrelevant.

 

On the other hand a freelance sound engineer with a few bits of kit who turns over £50k might be beaten to death by HMRC for attempting this with items of over £100 (an arbitrary figure for comparison).

 

I must run this one past our accountant as we could probably benefit hugely from setting a threshold as high as £1k to write off purchases to P&L.

[lightsource]

Just to update this topic a little,

 

One of the main reasons I asked this question in the OP, was because over the last year I have transformed about £600 worth of raw materials (Wood, Glue, Castors, Extrusions and a serious amount of black paint) into about £2000 of Flightcases.

 

Now, usually they are all used within the company.......but occasionally some are used by us, then sold off to customers. So need a financial value.

 

So a little "dual pupose" here

 

Also, with Profit / Loss accouting, I'd rather class such products as assetts, and devalue on a yearly basis.

 

For info...I'm classed as a sole trader, rather than a limited company or PLC.

 

Fixed assets are shown on your balance sheet so loading this up with glue etc as fixed assets would only have any real benefit if you're trying to raise money or are trying to sell the business?

 

I hope what I've said above explains Paul.

[zonino]

You'd be best referring to an accountant who'll be able to tell you what the best method is to do this.

[paulears]

I'm more confused now than ever. They can't be an assett when you've used them, as they are not available, cannot be stock, and cannot be shown to a representative from HMRC. In this context, they are simply consumable raw material, and having them in the profit and loss makes sense, because you take the sale value, deduct the construction costs and what is left, is really what is left. I honestly think you are overcomplicating this for not just no financial sense, but it might even work against you as at the time of sale, when you would have to work out the percentage of each asset you have claimed it is, and deduct it off the total. So if you have £100 worth of glue as an asset (even though some of it is rock solid, and in the innards of a case), then you might have to knock £15 off, and then another £15 when you sell another. God knows what you'd do if a client returned one and swapped it for a bigger one. This makes a real mess out of your asset list. I still cannot see any point whatsoever in building up your assets like this. There are obvious ones such as building up your net 'worth' - but anyone inspecting the books would spot what you've done straight away. So would HMRC and wonder what is going on. Getting rid of consumable costs is normally a goal - they clutter up the books, and are a devil to keep track of. Do you really want to count pop rivets?