What is the depreciation period and rate for business laptops or computers?

Before IT contractors can explore the depreciation period and rate for their staple items – business laptops and computers, let’s start with some fundamentals like what is depreciation and who decides it, writes Graham Jenner, co-founder of chartered accountancy firm Jenner & Co.

What is depreciation within a business?

Depreciation is the writing down of an asset over its useful life. The idea is that the cost of the asset less any residual value should be apportioned over the years during which the business benefits from the use of the asset.

The alternative to depreciation would be to charge the whole of the cost in the year in which the asset is acquired. For relatively low value items, this may not make much difference but what if the asset was a £1million printing press that would be used in the business for 20 years!?

Who decides the depreciation period and/or rate?

It is the director or directors of the limited company who determine the depreciation policy and period/rate at which the asset should be written off. They are the only individuals responsible for ensuring that the accounts show a true and fair view and, so, should adopt a sensible depreciation policy.

In fact, for simplicity, a depreciation period or rate might be determined for a complete group of assets e.g. plant and machinery might be written off over, say, 10 years, while computer equipment might be written off over, say, four years.

What is a sensible depreciation rate for laptops and computers?

A good (and oft-used) rate is 25%. This could be on a ‘straight-line’ basis, which writes the asset off at 25% of its cost each year, so that the asset is fully written off after four years. Alternatively, this could be 25% ‘reducing balance basis’, which writes down the value of the asset by 25% in year one (reducing the value to 75%), 25% of 75% in year two (reducing the value to 56.25%), and so on.

However, in some businesses, computers may only be used for, say, two years before they are replaced. Other businesses might keep a computer for, say, ten years. The directors should consider the appropriate rate for the laptop or computer within their business (as opposed to a rate for laptops or computers, generally, in a business).

What if the laptop or computer is scrapped or sold?

If it is scrapped, any remaining value should be written off in the year of disposal. 

If it is sold, then the difference between the proceeds and the written down value will be shown as an additional charge or credit in the accounts, in the year of disposal. This is effectively an adjustment to the depreciation, though it is more commonly shown in the profit and loss account as ‘profit or loss on disposal.’

Does any of this really make any difference!?

If the depreciation rate is too aggressive, the company’s profits will be lower in earlier years than they should be. The main parties external to the company who are interested in the profit are likely to be banks or mortgage lenders. The chance of over-aggressive depreciation of a laptop or computer having an impact on a lender’s decision is remote.

Does depreciation affect the amount of tax the company pays?

For tax purposes, there is a standardised form of depreciation known as ‘capital allowances.’ As a result, it doesn't matter what the depreciation policy is, the tax relief that is given on the asset is based on the capital allowances. In order to determine the amount of profit that is taxable, the profit from the accounts is adjusted by adding back the depreciation that has been charged and, instead, deducting the capital allowances that are available.

Capital allowances used to be straightforward but, over the years, have become increasingly complicated due to various incentives to encourage businesses to invest in capital equipment. In particular, the Annual Investment Allowance was introduced to give people tax relief on the full cost of the asset in the year of acquisition. Laptops and computers qualify for this allowance.

The thinking seems to be that paying for the assets in one year, and having to wait several years for some of the tax relief, may discourage a business-owner from investing in the equipment. However, most business-owners will find that, if they need a new laptop or computer, they need it -- irrespective of whether the tax relief is deferred or not!

Reach out

For all your depreciation queries, whether they relate to laptops, computers or other devices, we would always recommend speaking to your accountant if you are unsure.