If you are a sole trader or partnership running your own business you may be able to reduce your tax bill by taking advantage of any capital allowances.
Below we examine the basic principles relating to HMRC self employed capital allowances and how these can help to minimise any tax liability.
What are HMRC self employed capital allowances?
The capital investment you make in any equipment needed to do your job or run your business will often qualify for tax relief. While capital allowances can also be claimed for things like research and development, by far the most commonly used category is plant and machinery.
These items are known as ‘capital assets’ and are taxed differently to other tax-deductible expenses. HMRC self employed capital allowances allow you to deduct some or all of the value of these assets from your profits before you pay tax.
This covers assets that you buy and use in your business, but does not extend to items that you buy and sell in the normal course of trade.
You can claim for the cost of things that do not constitute business assets as ‘allowable expenses’, for example, the day-to-day running costs of your business or even the finance costs for purchasing any capital assets.
Do I qualify for HMRC self employed capital allowances?
To qualify for HMRC self employed capital allowances you must satisfy the following criteria:
- be carrying on a qualifying activity, and
- incur qualifying expenditure, ie; capital expenditure on plant or machinery wholly or partly for the purposes of the qualifying activity.
A qualifying activity could include any of the following:
- a trade, profession or vocation
- an ordinary UK or overseas property business
- a UK or EEA furnished holiday lettings business
- an employment or office
- a special leasing business
- the management of an investment company
- a concern in mines, quarry or canals.
The range of qualifying activities is very wide. It broadly covers all taxable activities other than passive investment.
The range of assets that qualify as plant and machinery is also very wide. It generally covers all fixed assets used in the business other than intangible assets, although you can’t claim capital allowances on actual buildings and land.
You can, however, claim for integral features such as lifts and escalators, space and water heating systems, as well as electrical and lighting systems. You can also claim for fixtures such as fitted kitchens and bathroom suites.
To qualify for HMRC self employed capital allowances you must normally own, rather than be leasing, the asset as a result of incurring the expenditure.
How much can I claim for HMRC self employed capital allowances?
In most cases you can deduct the full cost of any capital expenditure from your profits before tax using your annual investment allowance (AIA). This means that you will only need to claim any capital allowances if you spend more than the annual limit.
As from 1 January 2019 the limit has been temporarily increased from £200,000 to £1 million for a period of two years, providing significantly faster tax relief for your capital investments.
You can claim AIA on most plant and machinery up to the annual limit, although items you owned before you started using them in your business are specifically excluded. Cars are also excluded from the AIA.
The writing down allowance can be used if you have spent more than your annual investment allowance limit on capital assets, or if the item doesn’t qualify for AIA. This allows you to gradually set expenditure against tax in subsequent accounting periods, although the amount of the deduction depends on the item.
The main rate is currently set at 18%, and the special rate at 8% per year.
If you invest in energy efficient and environmentally beneficial plant or machinery you may qualify for what’s known as enhanced capital allowances. Currently this will entitle you to 100% relief on your expenditure in a single tax year, although these provisions are currently under review.
How do I make a claim for HMRC self employed capital allowances?
If you are a sole trader or partnership running your own business you will need to claim any capital allowances using your self-assessment or partnership tax return and submit this to HMRC.
For your annual investment allowance and any enhanced capital allowances you must claim in the same tax year that you purchased the asset.
If you buy an asset that qualifies for the 100% first year allowance for a qualifying energy efficient item, you can deduct the full cost from your profits before tax. You can claim first year allowances in addition to your annual investment allowance, whereby they don’t count towards your AIA limit.
Provided you still own the asset, you can claim the writing down allowance over subsequent years.
Can I claim HMRC self employed capital allowances on the cash basis?
The method of accounting you use for your business will affect your eligibility to claim HMRC self employed capital allowances.
Many businesses use traditional accounting where you record income and expenses by the date you invoiced or were billed. However, if you run a small business, cash basis accounting may suit you better than traditional accounting.
This is a much simpler way of accounting whereby you only need to declare money when it comes in and out of your business, and you only pay income tax on money you actually receive during your accounting period.
If you use cash basis accounting and buy a car for your business, you can claim for this under HMRC self employed capital allowances. However, all other items you buy for your business must be claimed as allowable expenses in the normal way.
In order to take advantage of any available capital allowances for any expenditure on plant or machinery to use in your business, you would need to adopt the traditional accounting basis.
Are HMRC self employed capital allowances available for all cars?
Cars that you buy to use in your business are considered a form of capital asset that you can claim tax relief on, although special rules apply here.
There are three different allowances you can claim when you buy a car for business purposes. The year the car was bought, and whether it is new or second hand can also have a bearing on the allowances you can claim.
If the car has low carbon emissions you may be able to claim 100% of the cost under enhanced capital allowances, while special rate allowances of 8% apply to vehicles with high CO2 emissions. However, main rate allowances of 18% apply to most vehicles.
Key takeaway for HMRC self employed capital allowances
For most businesses, the investments you make in capital assets will fall well under the annual investment allowance.
That said, for tax relief on business vehicles, or for those of you who have made significant capital investments, the benefits of HMRC self employed capital allowances can still be worthwhile.
By understanding what constitutes qualifying expenditure and what this means to your business in terms of tax savings can make a real difference to your overall cash flow.