Business profits, expenses and capital allowances

In this section we take a quick look at how to work out what level of profits you will need to include in your self assessment tax return and what expenses and capital allowances you can deduct from those profits.

If you need information about selling items online on sites such as Ebay, through classified advertisements and at car boot sales you may find it useful to look at the HMRC Guide for people who sell items online, through classified advertisements and at car boot sales as to whether or not you will be trading and if so what to do next.

The topics covered are:

Starting your own business - registering for tax and NIC

Pre-trading expenses

How do I work out my taxable profits?

Which business expenses are allowable?

Capital allowances

Starting your own business - registering for tax and NIC

• You've decided to work for yourself - firstly you need to make sure that you are actually going to be self employed for tax and National Insurance contributions (NIC) purposes as HMRC will need to be happy that this is the case and that you are not in fact an employee instead. So have a look at our ‘employed or self employed?’ guide to help you work it out.
• One of the first things to do when you start trading is to notify HM Revenue & Customs.
• You should do this as soon as possible when you start up your business. You will need to do this even if you already send in self assessment tax returns, as you might need to start paying Class 2 NIC.
• HMRC can charge penalties if you do not register so you should deal with this as a priority once you decide to become self employed.
• You need to register even if you are going to defer Class 2 NIC (because you are both employed and self employed).
• If your profits are low enough so that you can obtain a Small Earnings Exception Certificate which means you will not need to pay any Class 2 NIC, you should apply for this as soon as possible to avoid paying contributions and having to then apply for a refund (as the certificate itself will only be backdated up to 13 weeks).
• Note however that Class 2 NI contributions count towards your entitlement to certain state benefits so you could lose entitlement if you apply for the Small Earnings Exception. You will also need to let the Jobcentre know when you start working for yourself if you are currently unemployed and claiming benefits.
• HMRC have a useful guide which also contains the forms you will need to complete in order to register your business. This is SE1 - Are you thinking of working for yourself.
• The main form you need to complete is CWF1. HMRC have a facility for completing the form online. Alternatively you can phone the Helpline for the Newly Self-Employed on 08459 15 45 15 and complete the form over the phone.
• Also, do not forget to consider whether you will need to register for VAT.
• Another useful HMRC publication for anyone starting up in business for themselves is: Working for yourself - The Guide and Business Link have The No-Nonsense Guide to Starting a Business which is also very informative and covers a lot of other areas apart from tax. Links to Business link equivalents for Scotland, Wales and N Ireland can be found here.
• Additionally you can find more information from the HMRC Starting up in business pages which can be found here.
• New employers can get help on payroll matters from the HMRC’s helpline.
• You may also find it useful to budget for any tax you will need to pay under self-assessment. HMRC have a useful table that you can use as a guide.

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Pre-trading expenses

• The general rule is that you can deduct trading expenditure from profits when it is made and so is not allowable if incurred before trading starts.
• The rule is relaxed for some pre-trading capital expenditure. It is necessary to treat expenditure incurred before a qualifying business begins as being made on the first day you carried on the business. So if Fred decides to start trading as a self employed carpenter and he buys some tools on 1 October 2012 and starts the business on 1 January 2013 - he will be treated as incurring the expenditure on the tools on 1 January 2013.
• There is also some relief available for expenditure made within the seven years before you start in business which, had it been incurred on the first day of trading, would have been deductible in working out your profits. The expenditure is treated as if you made it on the on the first day of trading and will be included in your first accounts. Expenditure which would normally be allowed in your accounts e.g. pre-trading purchases of stock or advance payments of rent, is not within this special relief.

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How do I work out my taxable profits?

Your accounting date

• You can have any day in the year as your accounting date although for working out your tax 31 March or 5 April are the easiest dates.
• If your accounting date falls between 31 March and 4 April - you can treat these dates as if they were instead 5 April as this makes working out your tax much easier.
• You can however choose whatever date is most suitable to your business. If your business is seasonal you may want a date in your low season or when trade is usually slow.
• You may have other reasons for the date you choose or you may just use the anniversary of your start date if you prefer.
• You normally keep the same date each year although you can change the date if you want. However to make your tax simple it is better to keep the same date as far as possible.
• If you make up your accounts to 31 December each year, this is your accounting date and the 12 months to December are your accounting period.

Your basis period

• Apart from your first few years of business and any year in which you change your accounting date - your basis period for any tax
  year is usually the 12 months up to your accounting date ending in that tax year.

So for example if you have been in business for a few years and your accounting date is 31 January - your basis period for 2011/12 (the year to 5 April 2012) will be the twelve months ended on 31 January 2012 as this is the end of the accounting period falling in the tax year.

• If instead you made up your accounts to 30 September 2011 - these accounts would also form your basis period for 2011/12 as your accounting date falls within that tax year.

In your first year

First tax year

• If you started business during 2011/12, your basis period for the first year will be from the date you started to 5 April 2012.

You started business 1 July 2011. Your basis period for 2011/12 will be 1 July 2011 to 5 April 2012.

Second tax year

• If your accounting date falling in this tax year is 12 months or more after the date you started your business - your basis period will be the 12 months to your accounting date.

You started business on 1 June 2010. If your accounting date is 31 August - your basis period for 2011/12 will be 1 September 2010 to 31 August 2011.

• If your accounting period ending in 2011/12 is less than 12 months - your basis period for the year is 12 months beginning on the date you started.

You started business on 1 June 2010. If your accounting date is 31 March - your basis period for 2011/12 will be 1 June 2010 to 31 May 2011.

• If you do not have an accounting date in 2011/12, your basis period for that tax year is 6 April 2011 to 5 April 2012.

You started business on 1 February 2011. Your first accounts end on 31 May 2012. There is no accounting date in 2011/12 and so your basis period for that year will be 6 April 2011 to 5 April 2012.

In your last year

• If you cease your business in 2011/12 (between 6 April 2011 and 5 April 2012), your basis period will be from the end of the basis period for 2010/11 up to the date you finished your business. You will get some overlap relief so that you are only taxed on 12 months profits in total.
• This is easier to see in an example.

Your business stopped trading on 31 March 2012. You normally have an accounting date of 30 September so for the previous tax year 2010/11 (6 April 2010 - 5 April 2011) your accounting date would have been 30 September 2010. For your final year 2011/12 your basis period is therefore 1 October 2010 to 31 March 2012.

Changing your accounting date

• If you want to change your accounting date for tax purposes you will need to explain to HMRC in your tax return why the change is necessary.
• They may not accept your explanation in which case you will have to keep your existing date. However if you have a reasonable argument it is likely to be accepted e.g. you have 2 businesses and you want the same accounting date for each. You cannot just keep changing the date each year to suit yourself.
• For the tax year first affected by the change, you will also need to have sent your tax return to HMRC before the filing date of 31 January following the end of the tax year or the change will not count.
• If you want the change to be temporary - you can ignore it for tax purposes.
• Otherwise:
  • If you have made up your accounts to a date different from that used for your tax last year or;
  • If you intend to draw up a set of accounts for more than 12 months so that no accounting date falls into the current tax year or;
  • If you changed your accounting date last year but this was not accepted by HMRC and you are using the same date again

- You will be treated as having changed your accounting date.

There are 2 rules for working out your new basis period:

• If your new accounting date in 2011/12 is more than 12 months after the end of your basis period for the previous year 2010/11 your new basis period will be from the end of that basis period to your new accounting date.
• You will get some overlap relief so that you are only taxed on 12 months profits in total.

If your basis period for 2010/11 ended on 30 June 2010 and the new accounting date is 30 September 2011, your basis period for 2011/12 is the 15 months - 1 July 2010 - 30 September 2011.

• If your accounting date in 2011/12 is less than 12 months after the end of your basis period for the previous year to 2010/11 your new basis period will be 12 months ended on the new accounting date.

If your basis period for 2010/11 ended on 30 September 2010 and the new accounting date is 30 June 2011, your basis period for 2011/12 is the 12 months to 30 June 2011.

When you have more than one set of accounts for a tax year

• When you start in business you may find you have more than one set of accounts, which come within your basis period. When this is the case you need to work out what part of each set of accounts comes within the basis period and add the figures together.

For example if you started in business on 6 April 2011 - your basis period is the 12 months to 5 April 2012. Your accounts are made up for the 4 months to 31 July 2011 (profit £5,000) and the 12 months to 31 July 2012 (profit £12,000). You can therefore work out the profits to be taxed as the basis period for 2011/12: £ 4 months to 31 July 2011 5,000 8 months to 5 April 2012 (8/12 x £12,000) 8,000 £ 13,000

Overlap relief

• When you start up in business or when you have a change of accounting date you can have some profits that will end up being taxed twice because their basis periods overlap.
• When this happens you should keep a note of the amount of the overlap profit and what number of months it relates to.

Your business started on 1 February 2011 and your first accounting period is for the 12 months to 31 January 2012. Looking at your basis periods: 2010/11 1 February 2011 to 5 April 2011 2011/12 1 February 2011 to 31 January 2012 The period of overlap is from 1 February 2011 - 5 April 2011. So if the profit for the 12 months is £10,000 the amount of overlap relief is 65/365 x £10,000 = £1,780.

• You carry your overlap profit forward in box 3.80 on your tax return until such time as you change your accounting date or the business ends when you may be able to use it.
• You can use all your overlap profits still brought forward when your business ends or if you change your accounting date and your basis period is more than 12 months, you can use your overlap profits to reduce the basis period to 12 months. This is easier to see in the next example.

You have unused overlap profit of £6,000 which came about because 6 months of profits overlapped when you started your business. You then change your accounting date and your new basis period for 2011/12 is 15 months. You can only be taxed on 12 months profits. You have 6 months overlap relief available and you need to reduce the 15-month basis period to 12 months so you use 3 months of your relief up. Overlap relief used 3/6 x £6,000 = £3,000 Your profits for 2011/12, which are based on a 15-month basis period will be reduced by £3,000 and you still have 3 months overlap profits to carry forward.

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Which business expenses are allowable?

You can use the short return if your turnover is under the VAT threshold currently £73,000 and provided certain other circumstances do not apply. Have a look here for the full list. Otherwise you will need to complete the self-employment full version supplementary pages.

If your annual turnover in your business is less than £15,000 you need only enter the total figure of your business expenses in the Self-employment short version Supplementary Pages SA103S. However make sure you keep details of the expenses you claim in case HMRC make enquiries into your tax return.

If your annual turnover in your business is less than £15,000 but you because of your circumstances you will still have to complete the full self employed pages you need only enter the total figure of your business expenses in box 3.25. However make sure you keep details of the expenses you claim in case HMRC make enquiries into your tax return.

If your annual turnover is more than £15,000 you will need to show your actual expenses in boxes 3.30 - 3.63 of the supplementary pages.

Looking at SEF2 of the self employed pages you can see that there are two columns for each expense - the right hand column is where you will include the total expenses or costs and the left hand column is for any amounts that are not allowed but are included in the total in the right hand column.

The disallowable expenses in boxes 3.30 - 3.45 should be totalled and included in box 3.66.

There are two useful tables showing which expenses are allowable and which are disallowable at pages SEFN 8 and SEFN 9 of the self assessment self employed pages notes.

We have a more detailed look next at which types of expenses are allowable and which are not.

Costs of sales (boxes 3.30 and 3.46)

Generally allowed expenses:

• At the end of your accounting period you will normally have a stock take if you are a manufacturer or a retailer of goods.
• Your stock is valued at its cost to you or the amount you would get if you sold it whichever is the lower. You will need to include any work in progress and raw materials you have received but not yet paid for.
• To work out your cost of sales
  • Take your stock value and that of any work in progress at the start of the period and;
  • add: any raw materials you have bought during the period and;
  • deduct: what remains at the end of the period
• If you are a taxi or haulage driver HMRC say you should enter fuel costs in box 3.46 rather than elsewhere unless you are claiming mileage rate.
• If your business provides services rather than goods, you would make a similar adjustment to your work in progress to reflect any increase or decrease during the period.

Generally disallowed expenses:

Fuel expenses for non-business use of vehicles

Construction industry subcontractor costs (boxes 3.31 and 3.47)

Generally allowed expenses:

All payments to subcontractors in the construction industry. If any payments have been made to uncertificated contractors use the amount before any tax deductions.

Generally disallowed expenses:

Any non-business payments

Other direct costs (boxes 3.32 and 3.48)

Generally allowed expenses:

• Any expenses you took off to get to your gross profit for example - discount allowed, commissions payable or carriage
• If you are a manufacturer of goods - the costs of producing the goods you sell such as direct labour costs, machine hire, depreciation of fixed plant, small tools etc.
• If you provide services you may have rechargeable expenses you can deduct from your gross profit

Generally disallowed expenses:

Depreciation (this is a percentage taken off the original cost each year based on wear from use or age) of fixed plant

Employee costs (boxes 3.33 and 3.51)

Generally allowed expenses:

• Wages and salaries including bonuses, commissions and overtime paid to your employees whether permanent, temporary or just casual labour
• Employer's National Insurance Contributions (NIC)
• Pension contributions and insurance costs
• Wages costs (including NIC) of employing your wife or husband or another member of your family provided that they do genuinely work for the business and their pay (which must be within the national minimum wage) is reasonable for the amount of work they do
• Staff entertaining costs - for example the staff Christmas party
• Other staff related costs such as canteen expenses and recruitment agency fees
• Costs of subcontract labour or a substitute/locum to stand in and do the work for you if necessary
• Employee training costs and any fringe benefits

Generally disallowed expenses:

• Your own wages, salary or drawings you take out of the business, your National Insurance or pension payments or other benefits.
• Employees wages remaining unpaid nine months after your accounting date - these will be allowed once they are actually paid
• Any excessive wages paid to family members - you can claim as allowable what is reasonable for the actual work they do.

Premises costs (boxes 3.34 and 3.52)

Generally allowed expenses:

If you have an office outside your home - you can include any rent, business rates, water rates, lighting, heating or power, property insurance and security costs, office cleaning, any repairs and maintenance to the office premises but not any improvements. If you lease your office premises and the lease is for less than 50 years you should be able to claim part of the premium you pay.

Use of home as office

• If you use your home as your office - you can claim part of your mortgage cost only if you use that room or rooms exclusively for business.
• You can also claim a proportion of your home related expenses such as heating, lighting, power, maintenance, cleaning and Council Tax. There is no hard and fast rule about claiming for use of home as office. As a concession HMRC are usually prepared to accept a modest amount of between £1-5 per week in lieu of a claim for specific expenses.
• Bear in mind the proportion of any expense claimed should be based on the total rooms in the house and the number you use for business. You should work out the number of rooms in your house - excluding bathrooms and cloakrooms or smaller kitchens and apportion the total expenses between rooms used for business and those used for private use.

  For example say there are ten rooms in your house and you use one for business - you could claim a tenth of the total expenses for the year.

• You should be aware though that there is no certainty HMRC will accept your figures and it may be simplest to work out the claim on this basis for the first year and when you send in your return, include an explanation of how you worked out the expense in the additional information box on page 4 of the supplementary pages.

  If HMRC agree with this method of working out the deduction, you can use the same basis for later years or if not you may be able to come to some compromise figure between you.

• The fact that you are using your home for business could strictly mean that you might be liable for capital gains tax when you sell your home. Similarly, if you claim for part of your council tax or mortgage payments this might also have the same effect. However if the claim is fairly modest there should not be an issue with this.

  Generally you can prevent the problem arising provided you do not use any one room in your house exclusively for business. For example if you work in your spare bedroom, which is also used as a guest bedroom this should normally be sufficient.

  Again this is a grey area and the above information can only be given as guidance not hard and fast advice. If you do feel that there might be an issue you may want to discuss your own situation with HMRC.

Generally disallowed expenses:

• The cost of buying your business premises
• Any costs relating to that part of your business office not used for work.

Repairs (boxes 3.35 and 3.53)

Generally allowed expenses:

Any general renewals, repairs and maintenance to your office premises, fixtures and machinery and the cost of replacing small tools.

Generally disallowed expenses:

• The costs of any improvements or major alterations to your office or business premises.
• Any non-business part of the cost of repairs and maintenance to your premises or machinery.
• Any general reserve you keep for repairs

General administrative expenses (boxes 3.36 and 3.54)

Generally allowed expenses:

• Typical office expenses such as telephone, fax, postage, stationery and printing, costs of trade or professional journals and subscriptions, courier services, general office expenses, costs of insurance not included elsewhere, together with any other similar recurring costs which arise in running the business.
• Cost of computer software you use in your business which you obtain under a regular licence fee and in addition any computer software with a limited lifetime of generally less than 2 years. Any other software is usually capital expenditure on which you can claim capital allowances.

Generally disallowed expenses:

• Any non-business part of your general expenses
• Any personal expenses
• Payments to political parties
• Most donations and fees made to clubs, charities or churches.

Motor expenses (boxes 3.37 and 3.55)

Generally allowed expenses:

Business element only of the motor expenses incurred in running a vehicle used in your business including insurance, servicing, repairs, road tax, fuel, hire and leasing charges, parking charges (but not parking fines), membership of the AA or RAC or similar

Generally disallowed expenses:

• Any non-business motor expenses
• Travel between your home and business
• Cost of buying vehicles for your business (but you can claim capital allowances instead)
• Parking and other fines

Travel and subsistence (boxes 3.38 and 3.56)

Generally allowed expenses:

Hotel accommodation, air, rail or taxi fares, meals connected to your overnight stay whether included in your hotel charge or separate, additional subsistence expenses such as expenditure on meals where your work involves substantial travelling or where you need to make one-off journeys that are not part of your normal business activities.

Generally disallowed expenses:

Costs of most meals apart from those mentioned above

Advertising, promotion and entertainment (boxes 3.39 and 3.57)

Generally allowed expenses:

• Every day costs of advertising and promoting your business goods or services - for example newspaper advertising, mail-shots, free samples, gifts up to £50 per year to a customer. The gift must prominently advertise or promote your business or services and excludes food, drink or tobacco.
• Staff entertaining unless this arises as part of business hospitality - if a member of staff takes a customer to lunch this is business entertaining and is disallowable.

Generally disallowed expenses:

• Entertaining and hospitality apart from the costs of entertaining staff
• Gifts of more than £50 per year to customers (see generally allowable expenses)

Legal and professional (boxes 3.40 and 3.58)

Generally allowed expenses:

• Fees charged by accountants, solicitors, surveyors, architects, stock takers and other similar costs. The accountants fees can include the costs of dealing with a HMRC enquiry provided there is no fraud or negligence involved)
• Debt recovery costs

Generally disallowed expenses:

• The legal expenses involved in buying premises or equipment as these are treated as part of their cost. If capital allowances can be claimed on the expenditure these legal costs are included in the total spend on the asset involved.
• Costs of settling tax disputes
• Costs and fines for breaking the law or any other illegal acts
• Legal expenses on the formation of a company
• Fee insurance protection (if it would cover your professional costs in the event of fraud or negligence)

Bad debts (boxes 3.41 and 3.59)

Generally allowed expenses:

• You no longer expect to be paid for goods you have sold or services provided which are included in your turnover but remain unpaid at the end of the accounting year and you decide to write off the amount involved
• If you do recover the written off amount in a later year you will need to show the amount you receive in box 3.50 (other income or profits)
• Part of a bad debt given up under a voluntary arrangement

Generally disallowed expenses:

• General bad debt reserve
• Debts untaxed when they arose because they related to the sale of a fixed asset (e.g. equipment, machinery etc.)

Interest (boxes 3.42 and 3.60)

Generally allowed expenses:

Interest on a business overdraft or loan from a bank or other lender including any arrangement fees involved

Generally disallowed expenses:

Any part of the repayment of the loan or overdraft which is a refund of the capital

Other finance charges (boxes 3.43 and 3.61)

Generally allowed expenses:

• Business current account charges
• Credit card charges and fees
• Hire purchase interest (but not any capital repayments)
• Leasing payments (in the case of cars this is limited in the case of a car costing over £12,000 when new unless it is considered to be environmentally friendly)
• Similar costs not included elsewhere

Generally disallowed expenses:

Any part of the repayment which is a refund of the capital.

Depreciation and loss/(profit) on sale (boxes 3.44 and 3.62)

• Add together:
  Depreciation
  Loss on sales of assets
  Then take off:
  Profit on sales of assets
• Put the resulting total in box 3.62
• If the profit on sale if more than depreciation and any losses added together put the figure in box 3.62 in brackets e.g. If depreciation is £1,000 and loss on sale of assets is nil but the profit on sale is £2,500 you will need to show (1,500) in box 3.62. This amount will then be taken off when you add up all your total expenses.
• Whatever figure you put in box 3.62 you should put the same figure in box 3.44 unless some of the costs relate to finance leases. if this is the case you should get advice from HMRC as to what you should include.
• The reason for doing this is that generally depreciation and losses on assets are not allowable for tax and any profit on sale of an asset is not taxable (unless you are liable to capital gain on the profit) so by putting the same figure in each box you simply cancel them out. Generally instead you would claim capital allowances on the asset so on sale you will get a balancing allowance or balancing charge.

Other expenses (boxes 3.45 and 3.63)

Generally allowed expenses:

• Any expenses which you cannot include in boxes 3.46 - 3.62.
• This might include:
  • Subscriptions to relevant trade and professional associations
  • Contributions to business link organisations, local enterprise agencies, training (including local) and enterprise councils, and similar
  • Pre trading expenditure - allowable expenses that are treated as if incurred on the date you start trading
  • Research and development costs related to a trade but not a profession and it excludes any costs of acquiring rights to research but you may be able to claim capital allowances instead.
  • Training expenses - where attendance at a training course is intended to give you new expertise, knowledge or skills, which you lack - the expenditure is a capital cost, so is not allowable as a deduction from profits (particularly where it brings into existence a recognised qualification).

    On the other hand, where attendance is merely to update expertise etc. which you already possess, the expenditure is normally regarded as revenue expenditure and will be deductible if it is training expenses.

Generally disallowed expenses:

• Non business element of any expenses in box 3.63
• Cost of any ordinary clothes you buy even if you only use them for work
• Cost of computer equipment and software if not allowable at box 3.54 (you may be able to claim capital allowances on some items)

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Capital Allowances

Overview

• A capital allowance (CA) is essentially a way of accounting for depreciation for tax purposes - it is a system of writing off the cost of an asset over a period of years, the time taken to write down the asset and the rate that the asset depreciates depends on the nature of the asset involved.
• A capital allowance is a tax allowance you can claim on the purchase of 'plant and machinery', or equipment you use in your business. You can also claim it for example on the cost of converting space above shops or other commercial premises for renting out as flats.
• Capital allowances can also be claimed on computer hardware and software, scanners, phones and faxes etc.
• There is no single definition of what qualifies as plant and machinery although it does include items such as expenditure on fire safety or safety at sports grounds. A list of typical items of plant and machinery on which capital allowances can be claimed can be seen here.
• You cannot claim on any asset bought for your private use but if it is partly private and partly for business you can claim CAs on the business part.
• You take CAs from your profits to arrive at the taxable amount.
• Even if you buy the asset on hire purchase, you can still claim capital allowances, but any interest should be taken off your profits as a business expense.

Cars and vans

You can also claim capital allowances on any cars or vans you use in the business but only on the part that relates to business use.

Capital allowances on cars

• Qualifying expenditure incurred on or after 6 April 2009 on cars is allocated to one of the two general plant and machinery pools. Which of the two pools will depend on the car's CO2 emissions.
• Cars that have an element of non-business use continue to be kept in a separate single asset pool to enable an adjustment to be made for any non business use, but for expenditure incurred from April 2009 onwards the rate of WDA is determined by the car's CO2 emissions
• Where the expenditure relates to a car with CO2 emissions;
  • very low emissions - based on a lowered CO2 emissions threshold of 110 g/km - the existing 100% first-year allowances will continue;
  • 160g/km or below, it will be allocated to the main pool – attracting writing-down allowances of 20% a year, or
  • more than 160g/km, it will be allocated to the special rate pool, attracting writing-down allowances of 10% a year;
    

Cars held before the commencement date of the new rules

• Expenditure on a car that costs less than £12,000, incurred before 6 April 2009, will be pooled in the general pool. The expenditure will remain in the main (20%) pool regardless of the car's emissions.
• Under the current rules, if a car cost over £12,000 when purchased – it is kept in a separate pool and the WDA is restricted to £3,000 per year until the figure of cost less allowances previously given (the written down value (WDV)) falls below £12,000 - the normal 20% WDA is then available for any subsequent years the car is held.
• This is easier to see in an example:

Thomas purchased a new car for his business costing £17,000 in May 2009. Thomas's accounting year ends in June so in 2009/10 (year to 30 June 2009) – he can claim capital allowances of £3,000 on the car. The written down value (WDV) carried forward to 2010/11 is then £14,000 (17,000-3,000). For 2010/11 again he can claim £3,000 so that the WDV carried forward to 2011/12 is £11,000 (14,000-3,000). For 2011/12 as the written down value is now below £12,000 he can claim 20% WDA on £11,000 = £2,200.

• The existing rules for expensive cars applies to any cars purchased before 6 April 2009 for a transitional period of 5 years. After this time, any expenditure remaining in a single asset pool (unless there is any non-business use of the car) will be transferred to the main capital allowances pool.
• For the transitional 5 years the rate of WDA will remain at 20%. For expensive cars – those over £12,000 however, WDAs will continue to be capped at £3,000 a year for that period.
• If the car is disposed of before the end of the 5 years, a balancing charge or balancing allowance will occur as normal. But if there remains any balance of unrelieved expenditure in the single asset pool after the 5 year period, this balance will be added to the main capital allowances pool.
• The transitional period will end on 5 April 2014.

If Miraj bought a car for £36,000 on 6 April 2009 – say his accounting year is to 5 April so he will be able to claim an expensive car WDA capped at £3,000 for the tax years 2009/10 to 2013/14. At that point in time he will have had 5 years allowances of £3,000 totalling £15,000. So at 5 April 2014 – when transitional relief ends - the remaining £21,000 (£36,000-15,000) will go into the main capital allowances pool.

Selling an asset

• When you sell an asset on which you claimed capital allowances, you will have an adjustment to make. If the amount written off against your expenditure on the asset is more than the actual difference between that expenditure and the sale proceeds, you may make a balancing charge, which you will need to add to your profits. If the amount written off is less than the difference between what you spent on the asset and the sale proceeds, you will get a balancing allowance, which you take off your profits.

Ming spent £7,500 on tools for his engineering business. Over a number of years he claimed £6,000 in capital allowances and then sold the tools for £5,000. Ming will have a balancing charge of £3,500 (£5,000 - (7,500-6,000)). If however Ming had sold the tools for only £500 he will have a balancing allowance of £1000 (£500 - (7,500-6,000)).

Capital allowances on plant and machinery

Annual Investment Allowance (AIA)

Businesses have an annual investment allowance (AIA) for the first £100,000 (£50,000 for 2009/10) of their expenditure on most plant and machinery for 2011/12. It is intended that the allowance be reduced to £25,000 from 6 April 2012.

Where an accounting period straddles the changes for 2010/11

Where an accounting period straddles the old and new allowances - the allowance should be apportioned.

For example, a business with an accounting period from 1 January 2010 to 31 December 2010 would calculate its maximum AIA entitlement based on:

(a) the proportion of a year from 1 January 2010 to 05 April 2010, that is, 3/12 x £50,000 = £12,500; and

(b) the proportion of a year from 6 April 2010 to 31 December 2010, that is 9/12 x £100,000 = £75,000.

The maximum AIA available would therefore be the total of (a) + (b) = £12,500 + £75,000 = £87,500.

Who is AIA available to?

The AIA is available to:

• any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office);
• any partnership consisting only of individuals

Businesses can claim the AIA in respect of expenditure on long-life assets and integral features, as well as on general plant and machinery.

Where businesses spend more than £100,000 in any chargeable period, any additional expenditure will be dealt with in the normal way - entering either the special rate or main pool, where it will be eligible for the usual WDA.

Where a business has a chargeable period which is more or less than a year, the maximum allowance is proportionately increased or reduced.

There are special rules where an individual has more than one business and those business are related because they have similar activities and/or share premises.

Jim's accounting year ends on 5 April. In the year to 5 April 2011 he buys ovens for his catering business totalling £5,000. He has a capital allowances pool brought forward at 6 April 2010 of £10,250.The capital allowances claims Jim can make are: Expenditure in year – qualifying for Annual Investment Allowance (AIA) £5,000 Annual Investment Allowance – £5,000 Pool Capital allowances claims: 2010/11 (AIA £5,000 and £2,050 WDA) £7,050 2011/12 (WDA £1640) £1,640 £ 2010/11 Pool brought forward 10,250 WDA (2,050) Balance carried forward £ 8,200 2011/12 Pool brought forward 8,200 Allowance (WDA 20% x 8,200) (1,640) Pool carried forward £ 6,560

Small plant and machinery pools

Businesses can claim a plant and machinery writing-down allowance (WDA) of up to £1,000 where the unrelieved expenditure in the main pool or the new special rate pool (long life assets) is £1,000 or less.

Businesses do not have to claim the maximum allowance in respect of the balance in their small pools. Businesses with a main or special rate pool of £1,000 or less can claim less than the whole residue if they prefer. This ensures that very small concerns will not be disadvantaged by being required to take the full allowance immediately.

Jeff has only a small woodcarving business and at 6 April 2011 he has a capital allowances pool of £850. His profits for 2011/12 are £7,500 and his year end is 31 March. Jeff can use the whole of the pool against his profits for the year or if he has no other income he should only claim sufficient allowances so that his taxable profits remain at £7,475. This means he then uses up his full personal tax allowance for the year. If he had claimed the full £850 he would have wasted £825 of capital allowances he can now claim in a later year.

Special rate pool for long life assets

The rate of WDA on long-life assets increased from 6% to 10% and the original pool brought forward is called a Special rate pool. A long life asset is one that reasonably expected to have a useful life of at least 25 years when new.

In addition some integral features of a building, expenditure will be allocated to the new special rate pool and will attract writing down allowances (WDAs) at 10% a year.

Expenditure incurred on certain integral features attracts the 10% special rate of WDAs.

These assets include:

• 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

The rules apply to both initial and replacement expenditure. Replacement expenditure is incurred where either the whole, or more than 50% of the integral feature is replaced in a 12-month period.

Changes to capital allowances from 2012/13

From 2012/13 under new law to be introduced, the writing down and annual investment allowances are to be reduced. The changes are:

• firstly, to reduce the rates of writing-down allowances (WDAs) for new and unrelieved expenditure on plant and machinery:
  
  • from 20% to 18% per annum for expenditure allocated to the main rate pool; and
  • from 10% to 8% per annum for expenditure allocated to the special rate pool; and

• secondly, to reduce the maximum amount of the annual investment allowance from the current limit of £100,000 to a new limit of £25,000.

Finding out more about capital allowances

You can find out more about capital allowances by using HMRC's Helpsheet HS222 and there is a useful section in the Business Link website. Thare are also Business link websites for Scotland, Wales and N Ireland which can be accessed via the links:

Scotland - Business Gateway
Wales - Flexible Support for Business
Northern Ireland - NIBusinessinfo.co.uk

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