I posted a reply to a blog recently ‘what kind of car do you drive‘ where I mentioned deprecation as an important consideration for business owners, and would like to expand on that to help others.
When people are considering purchases for a business they may not always consider deprecation, when it can be a significant cost to them. Taking the example above of a vehicle, something that costs more initially but has a lower depreciation will cost less than a cheaper purchase that has a higher depreciation. You may think this is a simple point, but with the amount of things a business owner has to consider it can easily be missed.
There are tax reliefs called capital allowances for depreciation on purchases for a business, but the overall costs should be considered rather than just the tax – depending on the purchase, the depreciation could offset the tax relief when a different purchase could result in savings overall.
For some assets they may qualify for the Annual Investment Allowance instead, this can be of great benefit to business owners as it gives 100% tax relief on the purchase cost – a useful additional benefit to a growing business.
This is also something often overlooked. I discovered someone recently who had purchased an asset for £50,000 five years ago and was pleased that it was still worth the same amount second hand…
Except he had forgotten to allow for inflation in his calculations, so his asset had actually depreciated in money value by over £8000.
There is some good news with inflation though when considering finance, the repayments will actually be decreasing each year in real terms as the value of money changes.
Depreciation and inflation can be ways to save money in your business, and as they are often overlooked they can be a great way to gain an advantage. When combined with looking at the available tax reliefs at the same time, there can be increased savings available.