How do depreciation expenses work?

Depreciation is calculated each month based on the amount of fixed assets. Depreciation is an accounting adjustment to take into account the “useful life” of the asset and spread it’s value over time. This has the effect of creating an even charge on your profit and loss account throughout the year.

For Corporation Tax purposes depreciation is ignored and instead capital allowances are used. Over time the depreciation and capital allowance add up to the same amount but because of HMRC rules there can be timing differences between the two, which means the profit for accounting purposes and the profit for tax purposes will not always be the same.

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