The short answer is no, making a capital allowances claim for tools is not that easy. And that’s why so many UK taxpayers miss out on the capital allowances claim they are entitled to. It’s worth seeking professional advice here because the amounts are substantial.
Since 2002 our experts have been supporting car mechanics and other vehicle technicians reclaim their capital allowances under the PAYE system. It’s this expertise that stands us in good stead to help explain the capital allowances scheme.
What are capital allowances?
Capital allowances are the amounts you can claim on capital expenditure you spend on your business or to do your job. Capital expenditure is the government’s term for larger, one off purchases you buy for work. This can include, but is not limited to, large pieces of equipment (like tools and tool boxes bought by mechanics), vehicles, IT equipment, intellectual property and machinery.
How do capital allowances reduce my tax bill?
After adding together all your capital allowance expenditure, you deduct this amount from your profit before you pay any tax. This means a smaller tax bill overall. You are also allowed to make a backdated claim for previous financial years. It is a great asset for businesses, especially in your first year.
Can I definitely claim capital allowances?
You can claim capital allowances if you are:
- Employed under PAYE or self employed
- Sole trader
- Partnership
- Limited company
Sounds simple enough…
It does sound simple enough on the surface and many taxpayers enthusiastically set off down the capital allowance claim road on their own, only to give up half way through. Everyone is very aware of the substantial HMRC fines that are often applied to, even honest, paperwork mistakes. This is because there are a myriad of factors that influence your claim, as HMRC attempt to account for every possible situation in their rules.
For example:
- Identifying your capital allowance expenditure
- Valuing your assets
- Finding out which of the processes and deadlines for self assessment and PAYE procedures apply to you
- Following the correct application process depending on your business status
Once you start getting into the nitty gritty of it, things start getting complicated. But this doesn’t mean that you should give up and lose out, it just means that you need an expert eye.
Identifying capital allowance expenditure
This means looking at all your business purchases and seeing which ones are eligible.
Valuing your assets
If you have bought the items whilst in business, then their value is their cost (supported by receipts). If you were gifted the item or already owned it before using it for work, then its value is its resale price. You can use our free tool tax rebate calculator to work out an estimate on the value of your tool claim.
Processes and deadlines
If you are submitting a self assessment tax return, then your capital allowances are included on this form and all the usual self assessment deadlines apply accordingly. If you are making a PAYE claim, you can choose when you claim, but you lose out on the 100% of the value choice after four tax years.
Application process for different business types
The way you claim for capital allowances depends on what type of self employed business you have, or if you are paid under PAYE. As a sole trader you use your self assessment tax return to claim for capital allowances. If you are a limited company you work out capital allowances independently from other monetary calculations. As a business partnership, you use your Partnership Tax Return.
If you are paid within the PAYE system as an employee, it depends how much your capital allowances total. If they are over £2,500, you will need to submit a self assessment tax return. Under £2,500, you need to write to the tax office with the evidence that proves your capital allowance claim and a capital allowances schedule.
Other terms connected to capital allowance claims
There are several other terms relating to capital allowances that are crucial to making an accurate claim.
- Annual Investment Allowance (AIA)
This is to be used for plant and machinery items and means that you can take away the entire cost from your profit figure before paying tax. This has a ceiling amount, which varies from year to year. You can only use the AIA in the tax year in which you made the purchase. This is the usual method for claiming if you are paid under PAYE.
- First Year Allowances
This mainly applies to water and energy efficiency equipment and you can only submit a claim in the tax year you bought the assets.
- Writing down allowances
The writing down allowance option is for those who exceed the AIA ceiling figure, or have items that are not included in the AIA scheme, like cars. Using this section of the rules means that you can only use for a percentage of the assets’ worth in your tax calculation. HMRC will assign a standard rate to these assets, based on your writing down allowances calculations.
Can I claim for dual purpose capital allowances?
Yes, if you have an item that has split usage between home and work, then you can apply the proportionate amount of work usage to your capital allowance claim. This applies to sole traders and partnership set ups using the AIA system.
Not as easy as it first sounded…
No, it isn’t, there are many moving parts to a capital allowances claim. As with all tax related situations, it is absolutely critical to ensure accuracy and evidence before submission to HMRC. If you have made a big outlay for work essentials then it is only fair that you recoup that spend in the form of a PAYE tax rebate.
The government expect you to, which is why the capital allowance regulations exist.
