Check your eligibility for HMRC self employed capital allowances
Self employed individuals, contractors and freelancers may be able to reduce their tax bill by claiming for expenditure on certain items purchased for their business, under HMRC self employed capital allowances.
Capital allowances are a form of tax relief offering companies attractive tax incentives for purchasing and improving items needed to carry out their business.
Capital allowances are available to self employed individuals, sole traders and trading partnerships in a similar way as to companies.
The potential for claiming back the cost of investment against your taxable profit means it’s worth checking if you’re eligible for HMRC self employed capital allowances.
The main exception for the self employed is if you use the cash basis accounting for your self assessment tax return. In which case, you could only claim capital allowances on the purchase of cars.
There are four key steps to establishing your claim for capital allowances:
- Do you satisfy the ‘qualifying activity’ criteria?
- Identify which assets are eligible for capital allowances and can be claimed for.
- Work out the figure to claim against your taxable profits, by applying the relevant capital allowances rate to the expenditure.
- Submit the figure within your tax return.
Let’s look at each step in turn.
1. Qualifying activities
To be eligible to claim for HMRC self employed capital allowances, you must be engaged in a ‘qualifying activity’. This could include:
- A trade, profession or vocation
- A property business – UK or overseas
- A furnished holiday lettings business UK or within the European Economic Area
- An employment or office
- Special leasing of plant and machinery
- Managing the investments of a company with investment business
- A concern in mines or transport undertakings
If you satisfy one of these criteria, it then becomes a matter of looking at what expenditure qualifies for relief.
2. What can you claim HMRC self employed capital allowances on?
Capital assets must fall within one of the following main categories:
- Plant and machinery
- Research and development expenditure
- Patent rights and know-how
- Mineral extraction
The most commonly used category is plant and machinery. 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. The asset also cannot be part of your premises or the setting in which you carry out the business.
Qualifying expenditure includes items such as:
‘Main pool’ qualifying items:
- Manufacturing and processing equipment
- Storage and display equipment counters and checkouts
- White goods (cookers, refrigerators, dishwashers, etc)
- Sinks, baths, showers and sanitary ware
- Furniture & furnishings
- Computer, telecommunication and surveillance systems
- Refrigeration or cooling equipment
- Fire alarms, sprinklers, and other fire fighting equipment
- Intruder alarm systems
- Moveable partitioning (if intended to be moved in the course of the trade)
- Decorative assets provided for the enjoyment of the public (in hotels, restaurants, and other similar establishments)
‘Special rate’ pool qualifying items:
- Electrical systems (including lighting systems)
- Cold water systems
- Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems
- Lifts, escalators and moving walkways
- External solar shading
These lists are not, however, exhaustive. The scope of definition across the categories is extremely broad, which makes it easy for businesses to overlook certain types of expenditure that are in fact eligible.
For example, you may also be able when you start your business to claim for ‘fixed assets’ – items purchased before your business started that you have brought into the business at its commencement.
Note that generally speaking, you must own any asset you are seeking to claim capital allowances on. Hired or leased items fall outside capital allowances, but the rental costs may instead qualify for tax relief as revenue expenditure.
Items which fall outside of the capital allowances scheme, may be treated as ‘allowable expenses’, which cover most day-to-day business expenditure, e.g. motoring expenses, rent for your premises, employee salaries and supplies.
3. How much can I claim for HMRC self employed capital allowances?
Investment in capital assets for your business will initially be treated under the Annual Investment Allowance (“AIA”) rules. The AIA for 2017-18 is £200,000.
Under these rules, you can spend up to £200,000 on qualifying, business-related expenses during the relevant period, and offset this spend against your income tax bill.
Expenditure over £200,000 is then subject to capital allowance rates.
The rates you can claim depend on the item you are claiming for, and when you make the claim.
It’s usually possible to deduct the full cost of plant and machinery from profits before tax using the AIA.
You can deduct the full value of an item that qualifies for AIA from your profits before tax, but will probably need to pay tax should you sell the item.
Other items will require you to gradually set expenditure against tax by claiming a writing-down allowance (“WDA”) each year.
If you use equipment for personal purposes as well, then only the business percentage can be claimed. Relief should be calculated on a pro rata basis.
Current capital allowance rates
|Enhanced capital allowances (ECA) (energy saving and environmentally beneficial plant and machinery)||100%|
|Annual Investment Allowance (AIA) AIA – annual limit £200,000||100%|
|Writing down allowance (WDA) – general pool||18%|
|Writing down allowance (WDA) – integral features and long life assets||8%|
|Small pool write off||100%|
Capital allowances on cars
Cars are also considered a form of capital expenditure that you can claim for, although these are treated differently in tax relief terms.
If the car has carbon emissions below the specified threshold, you will be able to claim 100% of the cost under the First Year Allowance (“FYA”). Emissions above this may be eligible for an 18% or 8% claim of the cost per year.
|FYA for electric cars or if CO2 emissions are 75g/km or lower||100%|
|FYA for electric cars or if CO2 emissions are 95g/km or lower|
|FYA for electric cars or if CO2 emissions are 110g/km or lower|
|WDA if CO2 emissions exceed 75g/km but do not exceed 130g/km||18%|
|WDA if CO2 emissions exceed 95g/km but do not exceed 130g/km|
|WDA if CO2 emissions exceed 110g/km but do not exceed 160g/km|
|WDA if CO2 emissions exceed 130g/km||8%|
|WDA if CO2 emissions exceed 160g/km|
Where a car is used purely for business purposes, your claim will be based on the full cost. The claim may however be subject to a reduction if the car is used for private mileage as well as business, on a pro rata basis.
4. How do I make a capital allowances claim?
Capital allowances are claimed in your tax return:
- Sole traders – use self assessment tax return
- Limited companies – use company tax return, plus a separate capital allowances calculation
- Partnerships – use partnership tax return
For AIA and First Year Allowances, you must claim in the same tax year that you purchased the asset. Otherwise, you can claim under WDA at a lower rate at any time, provided you still own the asset.
Enterprise Tax Consultants can help
It’s common for businesses and self employed individuals in particular to underestimate the proportion of their capital expenditure that qualifies for capital allowances. This means you may be paying too much tax.
But calculating capital allowances is a complex area, with several variable factors and wider circumstances to take into account.
Enterprise Tax Consultants are specialist tax advisers. If you have a question about HMRC capital allowances for self employed, contact our chartered tax specialists.