- Project plans
- Project activities
- Legislation and standards
- Industry context
Last edited 10 Jun 2013
Over time the value of assets declines or depreciates, ultimately to the point where the value is Nil.
For businesses it is important to recognise this fact by reducing the value of assets shown on the balance sheet in accordance with the depreciation policy set by the directors. Because different types of asset lose value at a faster rate than others it is usually the case that a business will have different rates of depreciation for different classes of asset.
Businesses are free to decide their own depreciation rates and because depreciation is merely an accounting entry which does not involve expending actual funds, but which still reduces profit, it effectively provides a fund for replacing the asset at the end of its useful life.
However, in calculating taxable profits, the value of the depreciation is ignored and is replaced by capital allowances which are set according to statutory rules. The reason for this is simply that HM Revenue and Customs do not allow businesses to set their own depreciation in such a way that would provide tax relief earlier than they believe should be the case.
For example if electrical equipment is purchased for £10,000, and the business decides to depreciate the value by 100% in year 1, leaving the full depreciation in the calculation would provide tax relief upon the entire value of that equipment in the year of purchase. Instead, by using pre-determined capital allowances the equipment may be depreciated in full - but over a much longer period of time. Tax relief is therefore available over the same extended period.
It can be seen therefore that there is a connection between depreciation for accounting and replacement purposes on the one hand, and the use of predetermined capital allowances set by HM Revenue and Customs on the other for the calculation of tax payable by a business.
 Find out more
 Related articles on Designing Buildings Wiki.
 External references.
- HM Revenue & Customs: Capital Allowances.
Featured articles and news
UK energy policy uncertainty as Welsh project put on hold
What collaborative working achieves and how it can be put in place.
BSRIA publishes the 2019 edition of its small but concise annual databook.
Using QSAND to measure the performance of disaster response.
What U-values are, why they matter and how they are calculated.
The need to ensure that we plan for all aspects of our bio-economy
BSRIA calls on government to reach deeper into the causes of pollution.
George Demetri brings a whole new level of technical knowledge to Designing Buildings Wiki.
Quality professionals need to take an active role in driving the completion process forwards.
The innovations needed to move from rhetoric to realisation.
Creating a sense of place, with radically-low running costs and the highest comfort levels.
A conversation between David Mitchell and Caitlin DeSilvey.
A quick guide to brick sizes.
The Union Street development in Southwark was a passion, as well as a business endeavour.