Depreciation and Capital Allowances explained#AskAMS

Depreciation: Is an accounting term for spreading the value of a fixed asset (vehicle or equipment etc.) over its useful life. Spreading the cost is fairer and more accurate than deducting it all from the Business’s Profit in the year of purchase i.e. Depreciation for a car costing £10,000 (and worthless in say 5 years), could be £2,000/year for 5 years rather than reducing profit by £10,000 in year 1.

Capital allowances: HMRC ignore the depreciation figures from the business and give tax relief on their version, called Capital Allowances. These are generally calculated as 100% on new fixed assets in the year of purchase (currently, up to £1m in a year) - except for cars/assets used partly for private purposes. This can mean there is a big difference between the Profit figure in the accounts, and Profit for calculating tax.

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