Straight-line depreciation

What it means

Straight-line depreciation splits the entry price of an asset into equal annual amounts over the period attached to its depreciation group. The annual charge is the entry price divided by the number of years, however hard the asset was actually worked.

In the first year only a proportional share of the annual charge is claimed, set by the months from the asset entering use to the end of the tax period. The unclaimed remainder is not lost: it is taken in the year after the depreciation period expires.

Once the depreciation period has run, the residual value is zero, but the asset does not vanish from the register. The company keeps using it, counts it at stocktaking and removes it only when it is sold, scrapped or destroyed; straight-line depreciation describes how the price is spread for tax, not how long the asset really lasts.

How it works in practice

The method is chosen when the asset enters use and cannot be changed for the rest of its depreciation; accelerated depreciation is moreover allowed for only two of the groups, so for most assets straight-line is the only option.

After a technical improvement the charge is taken from the increased entry price, so the asset runs on past its original period. Tax depreciation may be suspended, accounting depreciation may not: that follows the plan, and the gap adjusts the tax base.

Each time an asset enters use we open an asset card with its entry price, date of entry and depreciation group, and the software works out the annual amounts from there. At year end we compare tax depreciation with the accounting depreciation from the depreciation plan and carry the difference into the tax return, so that it is neither claimed twice nor forgotten.

What to watch out for

A car bought and put into use in December does not yield a full annual charge, only one twelfth of it. Claim the whole amount and an audit assesses the difference for every year the same thing was done, plus a penalty calculated over the period from the original due date of the tax.

An error in the entry price follows straight-line depreciation for its whole life. Leave delivery or installation out of the acquisition cost, or, as a non-VAT payer, leave out the VAT, and every annual charge is wrong, so the correction means supplementary returns for every year affected.