I risk getting into an area that I don't know a huge amount about.
One thing that I was told at my small business course is that the investment you put into the business is then drawn out before profit is made, so if you invest 10k in tools, equipment etc, then you draw out 10k in earnings that is capital investment that you have recouped.
THAT IS WHAT I BELIEVE I WAS TOLD, so take that with a pinch of salt please! Others on here may have a different view.
This may exclude large capital items, like vehicles etc where the rules were 40% in the first year then 25% each year after that.
This is why I put a value on anything that I put into the business, including tools, materials etc. Even if I thought I may dispose of it soon after I started up I still put it in. Hence when it is disposed of at £0 and it was put in at £50 (drill etc) then that represents an expenditure of £50 that is offset against profit.
If you think about it, when you spend money on tools or items that don't represent capital (trowles, disposable drill bits etc, cheaper power tools) after you've set up then this represents expenditure, that you can offset against profit.
Furthermore, any expenditure that takes place before you start trading is deemed to have taken place in your first tax year of trading. So, if I start trading on the 1st of January, but buy my tools a week before, that expenditure is included in my first tax return.
Hence, that is why most small businesses don't make a profit in their first year.
Capital items are a little different. Depending on what the item is (vehicle for example) you are (IIRC) allowed 40% write down in the first year you have it, then 25% per year thereafter.
BUT, there is no point in claiming your 40% in the first year of ownership if there is no profit to offset it against. So in that situation you may defer the capital writedown until you have profit to offset it against. But if you only make profit in the year AFTER the purchase, you can only offset 25% of the value, However that is 25% of what it's initial value was.
So:
Option one Van costs £10k
You write down 40% - £4k
Year 2 you write down 25% of the remaining £6k - that's £1500
Year 3 you write down 25% of the remaining £4.5k - and so on.
But if you don't make any profit in year one, what is the point in writing the value of the assed down.
Option two Van costs £10k
You don't write down 40% in year 1 as you've not made any money in that year.
Year 2 you write down 25% of the remaining FULL £10k - that's £2.5k as opposed to £1.5k
Year 3 you write down 25% of the remaining £7.5k - and so on.
So you are writing the assets down in the years that the writedowns are of most benefit to you
If you dispose of a capital item before it is written down to £1, then it goes out of your business at the price you get for it minus the costs of selling it.
For example, my first van was valued at £800 when I set up the business, but as it suffered a major mechanical fault I sold it for £300, but it cost me £15 to sell it. Hence the £15 was entered as a deductable and the loss I made on it was entered as a capital loss of £500. This is a loss that I had to take that year. If I had kept it I could have written it down when it was tax efficient to do so. So if it suited me to write it down or sell it in year 4 I could have done, provided I still had it. This is why some companies tend to hang onto capital equipment or stock that is seemingly worth nothing - they want to dispose of it and claim the loss when they have the right profit to offset against. In that time they may have taken all, some or none of the write downs they would have been allowed.
On the other hand, a relative who was working for Hanson Aggregates was driving a van that had been written down to £1. The company had claimed all the writedowns it could over the years to offset against their profits, but would have had to declare a profit on it if they had sold it for more.
However, if Hanson decided to scrap it for spares after it failed its last MOT they would only have a profit if they sold some of the bits on. If they stripped it and used the spares to keep other vehicles on the road, then, whilst they would not have any expenditure in lieu of the spares they fitted to those other vehicles, they wouldn't have an income from the internal sale of those spares.
Also, a scrap yard I know keeps his capital equipment for as long as he can to claim the writedowns.
That is my understanding of the system for what it is worth. I don't think it is far removed from the truth, but it is based on information I was given a few years ago.
Hope this helps
