"capital allowances" - how do they work? and for how long?

[tonyf]

my memory's a bit fuzzy, but i seem to remember that if you buy things like computer equipment (and things which aren't utterly disposable like paper) - that they would be considered "capital allowances"...

and also that if you haven't basically made much money, that it was okay to keep the receipts of these for a number of years (can't remember how many years it is/was though - anybody know?) and these type of expenses could be used to reduce my tax bill in a future year.

anybody know more about this? or could redirect to me the right hmrc page? or know how many years that you can hold over these type of expenses for?

On another part of mumsnet somebody posted:

"You don't have to claim capital allowances in any particular year and if you don't then the pool balances carry forward indefinitely, or until you stop trading."

Is this correct or incorrect?

They also posted this bit as well:

"Special rules apply for private cars and certain other assets, but for general things like computers any amount not claimed as Annual Investment Allowance goes into a General Pool and you can claim Writing Down Allowance on the balance of this pool at the rate applicable in a future year (currently 18%), or Small Pools Allowance for the whole balance if this is no more than £1,000. Note that you can only claim Annual Investment Allowance in the year you purchase an item, so this is not he same as just "holding over" recognition of an expense, which is not allowed."

Some of what has been said in the above paragraph though, I don't understand. Just the language is a bit over-my-head. It's a bit accountancy-ese for me. I guess for me to understand such things it would need to be in more idiot proof terms probably.

am self-employed

thankyou

[emsyj]

You can attend free workshops on basic tax stuff with HMRC and I think one of them deals with capital allowances - if you attend any course with them then you will get the direct dial number of the course trainer and can call them with specific queries.

www.hmrc.gov.uk/startingup/bus_sup.htm

Sorry I can't answer your question, I work for HMRC on the graduate scheme but we haven't covered this on the course yet!

[Areyoumadorisitme]

Most of the things you are talking about would be considered eligible for Annual Investment Allowance but this can only be claimed in the year of purchase. If you do not claim AIA then you can add the value to the Main Pool and in the future claim Writing Down Allowances but these are only at 18% of the value on a reducing balance basis. So £1,000, in the first year you could claim £180 WDA, in the second year 18% of the remainder (18% x £820 = £147), in the 3rd year 18% of the remainder (so 18% of £673=£121) etc etc so you'd never actually get thetax advantage of the whole purchase.

Capital Allowances can be fairly complex and you really ought to see an accountant to deal with it properly.

[DorisShutt]

If you buy capital equipment, you can depreciate the asset against your profits and write down the value each year - is this what you mean?

[DorisShutt]

HMRC have guidance here

[Areyoumadorisitme]

Sorry to be awkward but the link DorisShutt refers to capital allowances for companies and they work differently for self employed people. For the SE you have to make private use adjustments for example.

Also, depreciation is an accounting term which is irrelevant for tax, in fact for tax computations depreciation is added back on and then Capiral Allowances taken off.

Sorry to look pedantic but they are important distinctions.

[tonyf]

As I said "I guess for me to understand such things it would need to be in more idiot proof terms probably."

[MirandaWest]

Basically if you buy something you're going to use over several years, you spread its cost (although not what you actually pay which is different) over the time you use it. This is an asset (computer equipment, fixtures and fittings, land and buildings etc). The capital allowance is the amount used up each year.
Capital allowances are used in tax calculations whereas depreciation is an accounting treatment.

Some allowances can only be used in the year you buy the item. Other ones you can use at any time over the life of the asset.

If you are self employed and also use the asset for your own use such as a computer, you can only get the capital allowance on the percentage used for business.

I don't know the current tax rates (am an accountant just not a tax one and not in practice any more) and so contacting an accountant who is mire up to date would be a good idea.

[Lonecatwithkitten]

There are capital allowances with tax write of for self employed people and they are on a wide variety of things at the moment. However, this is an area where an accountant is really useful as they understand the rules and could potentially save you more tax than their fees.

[tonyf]

how long does this business go on for? can you hold on to receipts for 10 years or more to use them in claiming capital allowances? are there time limits?

[Lonecatwithkitten]

Tony you really need the help of an accountant. A really good book keeper may also be able to help you. As you need to be producing a set of basic accounts from all your receipts detailing capital purchases so they hold a value in the account that depreciates and profit and loss. You can do this in excel. In your other posts you detail that you are making a loss so again you need advice on how to put this in your accounts as capital introduced so you can take it back at a later date without paying tax.
But no you can not hold on to things for years they needed to be claimed in the correct tax year of purchase.

[Areyoumadorisitme]

I agree with lonecatwithkitten, you really do actually need to see an accountant. You have asked the same question in different ways a couple of times.

There is no magic way to just keep back receipts and there has never been such a thing since I qualified in 1998!

A qualified accountant will be able to help you and work out the best way to claim the expenses. It may be best to take the full loss now and set off against other income but you need someone who knows what they are doing to look at your particular figures rather than well meaning people on the Internet.

[tonyf]

Thanks. I think i almost understand this now though.

[tonyf]

Essentially if you don't claim an allowance for something like a computer in the year it was purchased (as Annual Investment Allowance) - because you didn't do so because it wasn't worth doing so because you didnt earn enough money - you can claim up to 18% of its value in a subsequent year when it may be worth doing so if you've earned enough money for it to be worth doing so. And say you claimed 18% in 2008-2009 of a £700 computer, you could then if you wanted claim 18% of 82% of £700 in 2009-2010.

And the years don't have to be consecutive, I believe?

Not sure how far you can go back in time, though? To when you started trading? Or before?

What if buy a tool and it breaks for example, but you haven't earned enough for it to be worth claiming for AIA, but you've kept the receipt for it - can it still be used later as WDA?

And how does "Small Pools Allowance" work?

[OfflineFor40Years]

Tony, I don't mean to sound rude but you should really speak to HMRC directly or employ an accountant as you have posted this message in 4 or 5 places on this forum, as well as on mse, taxation web and yahoo answers. If you're not getting the clarification you need you would save yourself a lot of time by seeking advice from a specialist.