Depreciation, Company owned aircraft

[Crankshaft]

There must me a few people out here with a small UK limited company who owns a GA aircraft for different commercial purposes such as business travel or instructing etc.

What I would like to know is how you calculate your aircrafts depreciation regarding calculating the value of tangible assets within the company.
Simply for tax reasons, that is!

We're talking about something built in the 70's. Well maintained and an initial purchase price of around £50K.

Thanks for advises!

[The500man]

Do you not just take the purchase value and the estimated value after x number of years and then take the difference and divide by the number of years and then take off that amount each year?

Working out what the value will be in x years time will be the challenge. Any figure you choose will be an educated guess at best. Since you are buying an old aircraft you could just look at what other examples are worth with more wear on them or older exmples of the same model. You could also consider what the actual parts are worth and use that as the minimum value.

Sounds like a lot of work to me! You could just make it all up to suit your business (like a real accountant).

[late-joiner]

If you are talking about 'for tax reasons', then the rate of write down allowance under the capital allowances regime is more important than the depreciation rate you use. HMRC seem to accept that small aircraft are not long life assets and therefore attract the 20% per annum write down allowance. See down the page on this HMRC document.
CA23782 - Plant & Machinery Allowances (PMA): Long-life assets: Aircraft not within agreement (http://www.hmrc.gov.uk/manuals/camanual/ca23782.htm)

[flybymike]

Our group have owned 5 aircraft over the years . The first five we sold at a similar price to, or profit over, the purchase price, so the write down was completely inappropriate and inaccurate. Our current aircraft in my view also had an underestimated value in the company books, until that is, I was told by a dealer recently that it was virtually unsellable in the present market.

Go figure.

[SDB73]

Can't add anything to late-joiner's advice.

But my accountants advised me to use an LLP rather than a LTD company in order to take advantage of the benefit in kind allowances for LLP partners, and also certainly liability aspects. This may only be appropriate if you already have one or more trading companies, but speak to your accountant about it.

[IO540]

I recommend getting an accountant familiar with "provocative" assets like aircraft, boats, horses, brothels, etc.

The standard street corner accountant is way out of his depth, as I know to my cost. The problem is that he won't tell you that. He will take on the work, and when the Revenue hit you, he will slink away as he is fully entitled to and throw you to the lions.

HMRC (the Inland Revenue part) are a load of shysters nowadays, and use various scams to force settlements. They know any businessman who is actually successful will always write a cheque to get them off his back, regardless of how much bad taste it leaves in his mouth. Only people who are skint will want that weird concept called "justice".

Any half competent inspector can collect many times his salary, just by running a few dozen "enquiries" and collecting £10k-£50k off each one, after he has harrassed the businessman for a year or so. The only proper way to defend an action is to get a tax barrister who will cost you £10k for the preparation and the 1st day, so cutting a deal with the inspector for say £20k is the normal outcome. The Revenue also do not want a case to reach the Commissioners (because it exposes their dirty tricks) so it all works out nicely all around :)

An LLP is thought to be useless because it has to be set up to make a trading profit, which an aircraft is not going to make unless rented out, which in turn will turn it into a wreck sooner rather than later. I have written reams on this topic in the past...

A Ltd Co doesn't have to make a profit but attracts the Benefit in Kind exposure which the Revenue loves to use as a line of attack, and the standard defence on BIK (renting out the plane to outsiders at the same rate as to the proprietor of the business) is attacked too by saying this is valid only if the business is set up to make a profit, which it self evidently has not made which is why the Revenue has gone after you in the first place! If it makes a profit which exceeds the capital allowances (which is awfully hard to do) and you write cheques for Corp Tax each year, they will keep off your back allright.

Some people have pulled this off but to cut a long story short it is hard to do with a quality high performance aircraft (due to the need to select fairly responsible and competent pilots, which on the UK GA scene limits the customer base dramatically) and also it helps if there is more than one aircraft involved in the business.

Another Revenue tactic is borne in their traditional hate of anybody enjoying their business, and they go after what they call "hobby businesses", and flying (and boats and horses etc) are like a red rag to a bull.

I wouldn't bother putting a plane in a company of any sort. Keep it owned personally, and if you do a business flight then charge to the company the pro-rated proportion of the total annual operating cost. That is 100% legal and even the VAT can be recovered in the right situation. And a business flight is any flight wholly for the business - even a visit to an exhibition qualifies. There is no requirement for it to be reasonable; if there was there would be no Business Class airline tickets, etc.

[SDB73]

Or....

Take advice from a good accountant, who knows your circumstances. Just because an LLP (or any other vehicle) doesn't work for IO540 doesn't mean it won't work for you :)

For instance, my circumstances and business structure suits it perfectly, hence for me it is not "useless".

Key thing is, if you're doing it purely to fiddle the tax man, it's only reasonable that he should be able to stop you. If you have a genuinely legitimate reason for an aeroplane as a business asset and expense you shouldn't have too much trouble.

Talk to a good accountant.

[Fuji Abound]

Crankshaft

The intention for some years has been to more closely align accounting profits to the profit on which tax is calculated. It would seem common sense that if your accounts report profits of £100k you pay tax on that sum.

However accounting standards essentially require that assets are usually written off over their estimated useful life most usually on a straight line basis. The government has other ideas and depending on the mood of the moment enable for example small companies to claim relief on the entire cost of an asset in the year purchased. In my earlier example that wold mean if a qualifying capital asset was purchased in the year profits were 100k after a 10 k deduction for depreciation for tax purposes the profits would only be 10 k.

It is not clear from your question whether you ar asking what capital allowances an aircrft would attract or at what rate it should be depreciated for financial reporting purposes. For the reasons given the answers are different.

How you use the aircraft and the size of the company will also be relevant. As others have said this is a field in which the revenue will scrutinize ths majority of claims made. It would be unwise to emark in a business involving aircraft without taking advice other than from an internet forum as mistakes can bd costly.

[flybymike]

I wouldn't bother putting a plane in a company of any sort. Keep it owned personally,

Peter, it's alright for those who can afford sole ownership like yourself, but for those who seek limited liability protection from the civil aviation act's strict liabilty on the aircraft owner, and who have the actions (or inactions) of other pilots in the group to consider, it is a different matter.

[IO540]

For instance, my circumstances and business structure suits it perfectly, hence for me it is not "useless".

What I was referring to is not whether an LLP is right for your main business. It may well be.

What I was referring to is using an LLP to own and operate an aircraft which is used both privately and for a business, with a view to sharing the aircraft between a number of flyers, while providing limited liability protection to those shareholders who are not flying at the time, from liabilities incurred under the Civil Aviation Act by the shareholder who is (obviously) flying.

I know people looked into this who were advised that an LLP cannot be used for a business which by its nature will not make a trading profit.

it's alright for those who can afford sole ownership like yourself, but for those who seek limited liability protection from the civil aviation act's strict liabilty on the aircraft owner, and who have the actions (or inactions) of other pilots in the group to consider, it is a different matter.

I agree, and countless people have been down this road before. I was drawing attention to the need to be very careful because the solutions traditionally offered by street corner accountants may not be very effective.

Reading the OP's post carefully, he doesn't make it clear whether the plane is owned by a real (unrelated to aviation) trading company, and he just wants to know how to write it down, or whether he is doing some other stuff with it. He mentions "business travel"... he is not hugely likely to be doing "business travel" in the same plane in which he is doing "instructing". Who knows...

If you have e.g. a manufacturing or service company, not related to aviation, and this company owns the plane, then (from what I was told by HMRC a few years ago, and this may have changed since) you can write it down 40% a year, unless the plane is being rented out in which case it is 25% a year.

What one does about the BIK issue is a different matter. HMRC told me it is OK if every flyer is also a shareholder. This precludes straight renting, obviously, so if you are doing straight renting then you need to do something else to protect yourself (as the proprietor of the business) from an attack under BIK. One option is to not be a pilot and never use the plane :)

Like I said, one needs an accountant who is familiar with this type of business - aircraft, boats, etc. Having one who is familiar with one's main business is not necessarily much good.

[SDB73]

IO540. My main business is not an LLP. The LLP is the business the aircraft is held in, and again, my circumstances mean that the LLP is a good solution for me.

[Fuji Abound]

Cjboy

Exactly my earlier point.

and to the wit, in the case of a private company that is not subject to an audit, and does not involve third parties, frankly I dont suppose anyone cares these days how you depreciate an asset, although of course in theory you should still apply the accounting standards correctly.

As to an engine and prop fund I dont think there is any easy way of seperating the aircraft from its engine and prop in terms of depreciation given that one may well last 30 or 40 years and the other 1,600 hours all being well, which if the aircraft is being used hard, might only amount to four or five years. That said it is not uncommon to write off plant and machinery over 4 years, albeit this would be very conservative in the case of an aircraft. I would have thought far better to set aside a provision in the accounts each year for the engine and prop. which would be perfectly in order. You might even get the Revenue to agree a deduction for the provision if you have a good accountant. :)

[Crankshaft]

Thanks everyone for your inputs! Much appreciated.

Yes, my business is fully legitimate. The aircraft is justified and is carrying it's own costs. No dodgy things here! It's use is pretty much exclusively for business.

I have an accountant that I'm perfectly happy with however his knowledge regarding aviation could be better. I will for sure have a chat with some other accountant more familiar with the topic - if I could find someone that is.

It is not clear from your question whether you ar asking what capital allowances an aircrft would attract or at what rate it should be depreciated for financial reporting purposes. For the reasons given the answers are different. I was thinking of the latter.

Depreciation has nothing to do with the tax payable in a UK limited company, because corporation tax is calculated after adding back depreciation. Sorry, but I don't really understand what you mean here cjboy. Looking at my accounts for the last few years, the depreciation of other equipment is definitely treated as an expense that reduces the corporate tax.


I found the link from late-joiner very helpful, thanks for that one!
Fixed wing aircraft below 2730 kilograms maximum take-off weight
These small aircraft are sometimes used in business but more often in private use. Patterns of operation vary enormously but there is little evidence to suggest that the life expectancy is easily predictable at the outset of the aircraft's life. Accept that they are not long-life assets and are thus entitled to the 20% rate of writing-down allowanceNot sure though if/how I can use it yet.

[late-joiner]

You are misunderstanding the accounts or they are wrong. Depreciation does NOT reduce tax. Depreciation is added back during the calculation and capital allowances applied instead.

In simple terms, from the quote from the HMRC page, up to 20% of the capital value of the aircraft can be written off against profits made by the business each year. But it is more complex than that and the Annual Investment Allowance probably applies as well, which is £100k until Apr 12 and £25K thereafter.

I am not an accountant so please get some good advice.

[flybymike]

What is the difference between a "Capital allowance," a "writing down allowance" and "depreciation"?

[dublinpilot]

The amount you get taxed on is not the profit shown in your accounts.

If your accounts show a profit of €100,000 after charging depreciation of €15,000, then your accountant will do the following:

They will take the profit of €100,000 as shown in your accounts, and add back onto it the depreciation of €15,000 to give a taxable profit of €115,000.

Then they will subtract from that the capital allowances calculated in accordance with HMRC rules and the balance will be taxed.

There may be other adjustments from the profit shown in your accounts to what you are actually taxed on too. For example entertaining expenditure may be disallowed.




Depreciation is the amount written off your asset in the current year calculated in accordance with financial accounting rules.

Capital allowance/Writing down allowance (the two effectively mean the same thing) is HMRC's way of calculating depreciation. They want you to use their way of calculating the depreciation because financial accounting rules gives you too much scope to write it down very quickly, as you would like to do ;) (They also use it to promote certain types of capital expenditure, but that's seperate to the issue being looked at here.)

I hope that helps with the general way things work. I can't help with UK capital allowances rates because I'm not that familar with UK taxes.

[flybymike]

These seem to be rather esoteric differences which amount to the same thing;)

[A and C]

IO540 makes a good case I have had visits from both the VAT & IR on both occasions BIK was the central thrust of the enquiry.

As I don't fly the aircraft that the company owns except to fly them to the maintenance base or as an instructor when the student is paying left then with no BIK case.

[dublinpilot]

These seem to be rather esoteric differences which amount to the same thing

They do amount to the same thing, but the difference is the rates ;)
Potentially one could be writting the asset off over 3 years, and the other over 10 years ;) It can make a big difference to the tax due ;)

[Crankshaft]

Thanks for contributing everyone!
The last couple of post really sorted out a few misconceptions I had. Now a few other issues makes sense as well.

Cheers