Capital Allowances

The purpose of this video is to talk to you about capital allowances for the self-employed and what exactly are they?

What are Capital Allowances?

So this tends to be expensive purchases that can be in the business. It can last a couple of years or more. Normally its over 1 year, but then people get confused whether it’s a whole tax year or whether it’s just a calendar year. So we put in the fact that it should be used for more than two tax years.

I have to state it is an allowance, not an expense. I’ll come back to this a bit later. More or less it’s one in the same thing, but it’s just the general treatment at the end. There are two main types of capital allowances for the self-employed.

The first is the annual investment allowance. It is also sometimes called a first year allowance, but on the tax return, it’s the earning investment allowance. You can have 100% allowance in the first year of spend on theses of type of capital equipment. I will go into what capital equipment is.

Capital Equipment

You can write it off all in the first year, 100% of it providing it is below the maximum amount of capital investment you could write off in one year. That does vary year by year. At the moment has been anywhere between £25,000 and £200,000. It probably won’t apply to most of you, but those people wanting to buy expensive instruments might find they are over the £25k limit. Just check what it is for the tax year you’re buying it in.

Writing down

The second type of capital allowance is called the writing down allowance. This means you can charge your business 18% on what we call the reducing balance value until it is written off to zero. Now for a car, there are different rules that isn’t 18%. Some cars are only at 6%. For those types of cars, gas guzzlers basically, this covers 6%.

If they’ve got high CO2 emissions or they’re not in the low class CO2 emissions, then you can only have a writing down allowance of 6%. Things like a car would have to be proportionally claimed because a car is often used for business and pleasure. You would have to work out what the business proportion is. Only allowing annual investments allowance of 100% in the first year of purchase or a writing down allowance, which could be 18% or 6%, depending on the type of asset.

Reducing value or balance?

Now I’ve said reducing value or reducing balance. What exactly is that? It basically means you would take the value that you purchased it at. You then take off 18% and 18% is what you charge your business, assuming it’s not a car. That gives you a value you’re left with at the end of the year.

The following tax year, you take off 18%, but it is only 18% of the tax value and not 18% of the original value. Here you will see that we have purchased, let’s say a violin for £15,600. We want to claim the writing down allowance of 18%. In year one, you’ll get an allowance of £2,808. The value therefore at the end of the year comes down to £12,792.

In year two, you take 18% of that reduced value. You get a capital allowance of £2,302.56. This brings its value down to £10,499.44. And so it continues at 18% per year. It doesn’t actually get written off until year 24. Now there are other rules you can apply. So if the pool of assets goes down to less than a thousand pounds, you could write them all off, but that’s a different story and it does depend on having a small pool of assets.

Well, maybe only one asset in its own pool, but there are different rules for that. But you can look at my asset pool’s below a thousand pounds, I would write it all off. So you’ll see it’s a nice little curve going down and eventually more or less flattens out at the end. Now it might give you that, but you have to know whether you are eligible to qualify for this. So you must be in a trade professional vocation be self-employed.

Different rules for property

I am specifically ignoring companies here. So you are registered as a self-employed person or a sole trader or even the partner in a partnership. You can then qualify if the activity is there. So it might be self-employment. It could be something, a property business. There are special rules for property, a furnished holiday let. You can look at the rules.

There are other videos on these two types of letting. And there are a few other cases where you can claim a capital allowance, but they’re not really relevant for the music arts entertainment industry. You need to look at what type of asset you are purchasing.

So what type of piece of equipment you’re purchasing, whether it qualifies for relief and you can only claim for expenditure that is for the business. So I might decide to go and buy a new washing machine for 600 pounds. It will hopefully last me more than two years, but it’s absolutely nothing to do with my businesses as an accountant. I don’t take in laundry services, difficulty doing my own. So it has to be for the business. It has to be certain types of expenditure and you must be in a qualifying activity.

Categories

Third. There are various categories on what you can claim allowances on. I’m just going to read this. Plant machinery, research and development [inaudible 00:07:04] expenditure. If you’ve got patents on various bits of invention you’ve had, mineral extraction. If you want to go and be a miner or dredging, if you want to go and dredge for certain sorts of valuables, et cetera.

But really the only one that affects us is plant and machinery. Or you might call it fixtures and fittings or furniture and fittings or computer equipment. So that’s the type of thing we can go for. And of course I’ve moved on to the next slide by accident. So what is plant machinery for a musician or a performer?

Well, there is a nice long list here, but the most important thing is you must own the asset to be able to claim capital allowances. If it’s hired or lease or your parents bought it or it was a gift, et cetera, you cannot claim any capital allowances.

If it’s hired or leased, you may be able to claim the rental costs that you pay each month rather than applying for capital allowance. So the typical things that you can have as fixtures and fittings or plant and machinery are new instruments, a new computer, a Mac, recording equipment, studio lighting, PA systems, furniture for the office, a brand new printer that costs a bit more than 50 quits.

Those ones we wouldn’t bother capitalising. And there is the ability to have a capital allowance on vehicles. Vehicles is not covered in this video, but it is covered elsewhere if you have a search of the knowledge base. So how do you actually claim for having the capital assets?

Self Assessment

Well, it all comes via the self assessment tax return and part of the self-employment section that is a bit on capital allowances. And it asks you if you’ve got anything in the annual investment allowance or you’ve got tiny bits that are left over, you want to write off in one go. That’s the under a thousand pounds or other capital allowances is your writing down allowance.

But what you must remember, the annual investment allowance can only be claimed in the year that you spent the money or you purchased the asset. I’m going to say purchase the asset because that would be the date of the invoice or the bill from your supplier. And that’s the year it goes into.

So it’s the purchase of the asset that determines which year it goes into. If you are bringing in an asset from a prior business or you’ve just set up a self employed, you would have already had those existing. So you haven’t actually paid for them, but you can bring them into your business at the second hand value. And then you’ll be doing a writing down allowance over the next 24 years, if you keep it for that long. So you can only claim a writing down asset allowance if you still own the asset.

Sale of assets

Now sometimes you sell these assets. You might have a flute. You’ve used it for a few years. You now want to upgrade the flute to a much more expensive one. So you sold the other flute. Now, but it was always a problem. If you sell a piece of capital equipment that you have claimed capital allowances on it.

So what you look at is the balancing charge. As in have you sold it for more than its tax value? Now sometimes people will pay or claim 100% annual investment allowance, which is fine. A 6,000 pound joint head that has been written off in year one and then come year three, you’re selling that joint head, but in effect it has a tax value of nothing because you’ve claimed 100% of the allowance.

So therefore if you sold it for £5,000, you effectively have a balancing charge of 5,000 pounds to pay back to the government. You’re not paying back the 5,000 pounds. You’re only paying your tax rate on that 5,000 pounds. So if it was bought when you were 20% taxpayer and sold at the 20% taxpayer, that’s fine. You’ve got equilibrium of you buying and claiming the capital allowance and then selling it and you’d have to pay back 20% of the sales price.

That’s all very well. But if you suddenly go into being a 40% taxpayer, you can’t tell the system, “Oh, but I only claimed my capital allowance at 20%. So I only want to pay it back at 20%.” You don’t. You effectively pay it back at 40%. So that is just something to be aware of.

If you are going to sell….

If you are likely to sell any instruments or any assets, et cetera, a few years after you’ve purchased them, don’t write them off as 100% annual investment allowance. Just do a writing down allowance. Obviously, if you have a whole pool of instruments and you sell one of them, you can actually deduct what you sold it for from the pool value and just claim lower levels of writing down allowance in the future. That does rely on you keeping very accurate records of what is in that pool, what you are taking out and the values you are taking out.

But we know tax and account is all full of paperwork. So you have to get used to it. But that’s the danger. Personally, if you’ve got something new, might sell, don’t claim the annual investment allowance. And what I’d also say is if you’ve got an instrument that’s likely to increase in value or hold its value, consider not claiming any allowance or just a small allowance of the 6%.

Just recognise the fact that you are using an instrument, you have purchased it, it’s going to have some kind of decline in value. But things like stringed instruments, harps, and yes, I do know harp has a string, but instruments like that may not go down in value very much.

So consider not writing it off as the annual investment allowance. Just consider a small amount of writing down allowance. That way you’ll definitely avoid the balancing charge for when you sell it for possibly more than it’s worth. So there is a box in the tax return where you can put this balancing charge.

Accrual or cash accounting?

So finally, this is a big note. Capital allowances only works if you’re doing an accounting based form of your accounts. So what we call the accruals format. If you tick the box to say you are using cash accounting, you cannot claim any capital allowances. You have to account for the cost as an expense in your business.

The fact you might have purchased a flute for £15,000 and your income is only £20,000. You’ve only got income then of £5,000, which you won’t pay tax on. About seeming no other income anywhere. So it really is a bit of a waste of capital allowances.

This is one of the biggest reasons why I suggest to people that do buy capital equipment or new instruments never to use cash accounting. Don’t use cash accounting if you can help it. If you are doing the annual investment allowance, make sure it’s nothing you really want to sell at year end. Think about a writing down allowance of 6% in the special rate category, just to recognise the fact you have bought a new instrument and it’s depreciating down.

So that’s it really. That is what your capital allowances look like. Some people call them capital gains, but that’s something completely different. So do not think about that. That’s nothing to do with capital allowances. Any problems feel free to drop me an email. Thanks then. Bye.

 

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