If items are taken from a company, hidden reserves may be uncovered which could increase the company’s profit. Whether or not a silent reserve is revealed depends on the carrying amount of the item in question. The carrying amount is the current value by which an item is recorded in the company’s books.
For example: A business owner buys a laptop in January for £3,000. The laptop has an operating life of 3 years. This means that 1/3 of the acquisition cost is depreciated per year. At the end of the year, the laptop has a recorded value of £2,000. At the end of December, the business owner takes the laptop and gives it to his daughter, who begins studying. The daughter does not pay anything for the laptop. The actual laptop value was estimated at £2,400 at the time of removal.
The hidden reserve is calculated by subtracting the book value from the partial value. The partial value is, by law, the value that a person purchasing the entire business would pay for the object in question. The sub-value is therefore always a hypothetical value. For simplicity’s sake, however, it is often equated with market value. The laptop’s silent reserve is therefore £200. The company’s profit increases by £200 due to the laptop’s withdrawal.
If you take goods or services for private purposes, this can also increase the profit to the same amount as the sale of these goods or services to strangers would have.
If you use operational equipment or items for private use, like the company van for moving to a new house, for example, you are making a withdrawal equal to the cost of this use. When using the van, for example, the miles driven are multiplied by the estimated cost per mile of the van in question.
If you take equipment, goods or services from the company, then the withdrawal may affect VAT because you have to subject the withdrawal to VAT. This means that an item you would have sold for £1,190 gross, you will have to pay £380 in VAT to the HMRC should you take the item for private use (VAT rate). The same applies if you use the company’s services for private purposes. If the heating technician you employ repairs your heating system at home, you must book the same amount as a withdrawal that you would have charged a customer, including VAT.
If you use business assets for private purposes, VAT will also be payable for this withdrawal. This neutralises the deducted pre-tax, which has been reimbursed by HMRC in connection with the purchase and maintenance of the goods in question.