If you are self-employed you’ll have various running costs and business related expenses. You take these costs and expenses away from your business income to work out your profit in your accounts. The items of expenditure are written up as a cost.
You can only deduct certain expenses as not all are allowable for tax purposes – excessive restaurant bills will, for instance, come under close scrutiny potentially. You can also claim capital allowances for certain other costs or expenditure to reduce your taxable profits.
Thus capital allowances are the “secret” ways that business owners are able to potentially earn more than an average employee, as they can accrue allowable assets used by the company and have them tax deducted. The saying goes that ‘job’ stands for ‘just off broke’ and capital allowances are just one reason why. A vehicle written as a cost reduces your overall income as a business owner in the eyes of the government; as an individual, you would bear the cost regardless.
That being said capital allowances provide tax relief for the reduction in value of ‘qualifying’ assets that you buy and own for exclusive business use; not all are legitimate. So for instance you can write off their cost against the taxable income of your business. A case in point might be the purchase of a vehicle or a computer or other device which is necessary for the effective running of your business,
Capital allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax. These allowances apply to plant & machinery (excluding cars); they can be wholly deducted as expenses if under the AIA value.
We recognise at SimpleTax that accounts are a whole specialist skill in themselves and that every business is different and it is easy to trip up and suffer unnecessary scrutiny for avoidable mistakes. Sometimes, it can be difficult to tease out the truth from grey areas from HMRC and can mean that you miss out on nuances on highly complex laws and procedures.
Other Keywords: bankroll; equity; valuables; purchase