Capital expenditure
Self-employed - running a business and paying tax
The cost of large items of equipment, vehicles etc. cannot be deducted from your income as an expense. To cover these, HM Revenue and Customs allow you to deduct what are called “capital allowances”. The main form of capital allowances for everything but vehicles is the Annual Investment Allowance.
The Annual Investment Allowance gives a deduction of 100% of the cost of ‘qualifying expenditure’ from your business income up to an annual limit. From 1 January 2016 the rate is £200,000 pa. The limit from 6 April 2014 to 31 December 2015 was £500,000. between 1 January 2013 and 5 April 2014 the limit was £250,000.
There is more about the Annual Investment Allowance on the HMRC website at http://www.hmrc.gov.uk/manuals/camanual/ca23081.htm and on the Gov.uk website at https://www.gov.uk/capital-allowances/annual-investment-allowance .
The size of the Annual Investment Allowance means that for many small businesses, the full costs of new equipment can be deducted.
Items not covered by Annual Investment Allowance (AIA), or where the AIA is not claimed
For any expenditure not covered by the Annual Investment Allowance, an annual percentage deduction is given. The basic annual ‘writing down allowance’ is 18%. This is given on a ‘reducing balance’ basis. So, for say £2,000 of expenditure, the claim would be 18% of £2,000 (= £360) in the first full tax year. This would leave £1,640 at the start of the second tax year (£2,000 – 360 claimed in the first tax year). So in the second tax year the claim would be 18% of £1,640 (= £295).
There are special rules for many different circumstances. See https://www.gov.uk/capital-allowances/overview .
HMRC helpsheet 252 on capital allowances gives example and also shows how small capital allowance ‘pools’ of £1,000 or less can be written off.
Vehicles
Special rules apply to cars. The rates of allowance are usually based on Co2 emissions. Vehicles with private use must be treated separately and an allowance made for private use on each vehicle.
More information about cars can be found at http://www.hmrc.gov.uk/manuals/camanual/CA23500.htm.
Further information
Detailed guidance on capital allowances is available in the HM Revenue and Customs website Capital Allowance Manual http://www.hmrc.gov.uk/manuals/camanual/index.htm. This is a complex area and it is best to take advice.
