When you purchase a capital asset, (see yesterday’s post on capital allowances for an overview on capital costs versus expenses,) your accountant will reduce the value of the asset from the original purchase price to £nil over a number of years depending on how long it is expected to be used in the business. Some software may only have a working life of two years whereas other equipment may have a useful life to your business of 10 years. The amount your accountant reduces the value of your asset by each year is called depreciation. This adjustment is required to produce correct accounts (see leter A for accounting and accruals).
This is something HM Revenue & Customs offer to make record keeping easier if you have employees. Under the benefits-in-kind legislation (see letter B for more information) any purchase made by an employee that is reimbursed by the company should be disclosed at the end of the income tax year in a P11D. If the expense was a genuine business expense then your employee can claim a deduction for the amount shown on the P11D. It is easy to miss this reporting requirement. To simplify record keeping the employer can apply for a dispensation; this does what it says on the tin, and the expenses listed in the dispensation will no longer have to be reported on the P11D. A dispensation will not apply to the self-employed.
One of the ways you, as a shareholder, can take money out of a company. A dividend is paid out of after tax profits in an amount per share; remember to complete your paperwork everytime you pay a dividend. See our blog on dividends if you need some help.
Image courtesy of Boians Cho Joo Young / FreeDigitalPhotos.net