Posted in: Tax

Capital Allowances

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HMRC (‘the taxman’) does not allow businesses to claim depreciation of their fixed assets as an expense against taxable profits. Instead, they allow businesses to claim Capital Allowances. The principle is similar but Capital Allowances are computed according to strict HMRC rules whereas depreciation is more subjective.

You will usually see the effect of this on the tax computation, which will start with ‘Profit per the accounts’. The depreciation amount is then added back and the Capital Allowances deducted. This is one of several changes which may be made to the ‘accounting profit’ to adjust it to the ‘taxable profit’.

The good news is that the Capital Allowance rates can be generous. There are two rates: an Annual Investment Allowance (AIA) which is given in the year of purchase, and a Writing Down Allowance (WDA) for subsequent years.

At present there is a 100% AIA for capital expenditure of £100,000. So up to this amount you can claim the full amount of the cost in the first year. Expenditure is generally treated as arising on the day that the title to the asset passes – usually on the day of delivery. However, there are special rules if the date of payment is more than 4 months after the date the title passes. If buying via a hire-purchase agreement it is vital that the asset is actually brought into use.

WDA’s are given on the balance of the asset not yet written off. The Chancellor sets the rate but it is usually around 18% to 20% in 2012.

Where the life of an asset is expected to be less than 8 years it can be classed as a ‘short life asset’ which has a faster write off rate than WDA’s. This treatment is not available for cars and certain other assets.

Leasing is an alternative to purchasing assets outright. The full rental costs can be deducted against profits over the life of the lease. However, there is a 15% disallowance for cars where the CO2 emissions are above 160gm/km.

Disclaimer
The above is general advice and individual treatments may vary. The information should not be relied upon without contacting one of our tax advisers.

Expenses Checklist

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What you can include

We recommend that you look at everything you spend and and ask whether there is a business related element to it. If there is, then it is likely that you can claim all or a proportion of it to reduce your tax bill. If in doubt include it in your expenses along with a note for us and we will review it at year end.

Compare your expenses to the following checklist to see if there is anything else you can claim for:

  • Purchases – of goods and materials for resale
  • Subcontractor costs – people who you sub-contract work to
  • Employee costs – people who work for you on a PAYE basis
  • Premises costs – rent and rates paid
  • Working from home expenses – if you do any work from home (or store business-related things there) you can claim a percentage of your household costs including mortgage interest
  • Repairs and renewals – if this is for property you own and relates to new build or new features (rather than upgrades or replacements) then it may need to be added to fixed assets. Please let us know details
  • General administration expenses – don’t forget to claim for any cash items you pay for personally such as postage, computer consumables, stationery etc.
  • Motor expenses – you can either claim the actual costs (petrol, repairs, MoT, insurance etc.) or a mileage allowance. If you haven’t kept all your petrol and repair receipts then you will need to let us have a note of your mileage
  • Other travelling costs – include a proportion of long-distance trips and holidays if they contain any work related element such as attending business meeting, exhibitions, networking, or doing market research. Don’t forget to make an assessment of parking charges etc.
  • Subsistence – costs for accommodation, food, and and general expenses incurred whilst working away from home
  • Advertising and marketing – don’t forget any networking costs, even social meetings can have a claimable element if it may lead to business
  • Entertaining – there are strict rules on this and we will need to go through this with you. You cannot claim for business meals held within 3 miles of your home
  • Accountancy – all accountancy and bookkeeping costs are fully claimable
  • Staff party – if you have employees you can spend up to £150 per head on one annual staff event such as a Christmas party
  • Other legal and professional costs – these can be claimed if they relate to the business but you cannot claim fines or penalties as expenses
  • Bad debts – you can deduct any unpaid sales invoices if the likelihood is they will not be paid
  • Interest payments – these are allowable and will be shown on the bank statements
  • Bank charges – these are allowable and will be shown on the bank statements
  • Other finance charges – if you have any Hire Purchases or finance leases then you will need to let us see the contracts as we have to separate the interest and capital repayment elements
  • Fees and subscriptions – to professional and work-related bodies
  • Books and periodicals – if these are work-related then you can claim for them
  • Workwear – ordinary clothing is not allowed, but if they display the company name or logo then it will be allowed
  • Safety/protective clothing – high visibility jackets or steel-toed boots are allowable but not ordinary clothing, even if it is bright. If it can be worn socially then it is usually not allowed
  • Staff training and development – technically, this includes upgrading existing skills but not learning unrelated or completely new ones (barmy, but that’s the rule)
  • Mobile phone costs – we usually allow 100% of mobile phone costs used by the business
  • Director’s salary – if paid by a limited company through a PAYE scheme. Ordinary ‘drawings’ are not allowed
  • Capital equipment – such as computer equipment. If you have a camera, iPad, laptop or video does it have a business usage? If so let us know.

Additional first year expenses

Additionally, in the first year of trading you can claim a ‘fair value’ for any plant, equipment, or tools that you already own and introduce into the business, particularly:

  • Computer equipment and software
  • Machinery
  • Tools and equipment
  • Raw materials
  • Other related goods

You can also claim for:

  • Company formation costs
  • Pre-trading expenses – for market research, building prototypes, preparing business plans etc.

What you can’t include:

  • Payments for your own time
  • Your personal drawings – businesses are taxed on their profits, irrespective of whether they are left in or taken out of the business
  • Ordinary clothing – unless it falls into one of the categories above
  • Travel to a single place of work
  • Depreciation – instead HMRC allow you to claim Capital Allowances (we have a separate article on this). We will work this out for you.

The above is a general guide only. Detailed rules apply in many cases and we will guide you on the specifics when we prepare your accounts and tax return.