Claiming computer hardware and software expenses via your limited company
With the significant increase in remote workers, contractors are asking more and more questions about what they can and cannot claim on expenses via their limited company.
In this article we’ll break down the ins and outs regarding technology – something no remote worker can do without, writes Christian Hickmott, CEO of Integro Accounting.
The tricky thing with expenses is that they need to be solely for business purposes. One could argue a computer, for example, can also be used for personal use, so how does this work when it comes to claims? And how does HMRC differentiate between a pure business expense and one that could be deemed both business and personal?
What are standard company expenses, and what are fixed asset expenses?
One of the important things to grasp is the difference between a standard expense and a fixed asset. In simple terms, an expense is something your business purchases such as office furniture, a computer, a printer. A fixed asset is something your business has purchased that it uses for the production of goods and services and has a useful life of more than one year. For example, machinery, buildings, vans. All of these item which may depreciate.
Fixed assets are further split into two groups: tangible and intangible fixed assets. Tangible are easier to identify e.g. machines, buildings, vehicles. Intangible covers things like goodwill and intellectual property.
How are standard expenses taxed compared to fixed assets?
Standard expenses that you incur in running your limited company can be deducted from your income (with exceptions) which means the amount of tax you owe will be reduced. Let’s say you turnover £30,000 and you claim £5,000 in allowable expenses – you’ll only pay tax on your taxable profit i.e. the remaining £25,000.
Fixed assets are a little different. HMRC does allow you to deduct the cost of fixed assets by claiming capital allowances. Some fixed assets are eligible and some aren’t. Those that include plant and machinery i.e. machinery and business equipment; things that are integral to a building such as lifts, escalators, heating and air conditioning systems; kitchens, bathrooms, CCTV, along with, in some circumstances, patents and research and development.
How can contractors claim capital allowances?
There are two ways that you can claim capital allowances – through the Annual Investment Allowance or using writing down allowances.
The former (the AIA) means you can deduct the purchase price of fixed assets you purchase for your limited company up to £200,000 per year. Let’s say you turnover £30,000 and spend £15,000 on machinery - you’ll only pay tax on the remaining £15,000.
The latter (writing down allowances) means that if you have spent over £200,000 on fixed assets in any one year you can claim for the remainder. Writing down allowances also allow you to claim on additional fixed assets (not covered by the annual investment allowance). These are assets that you owned before starting the business, like cars and gifts. You’ll need to find out what the asset is worth and then need to allocate it into a ‘pool’ – HMRC has three ‘pools’:
- main rate,
- special rate; and
- single asset.
The pool will affect how much you can claim, currently being 18% of the asset’s value on main pool, 8% on special rate and 18% or 8% on single asset, per year.
Although fixed assets ‘depreciate’ (in other words, go down in value) HMRC doesn’t take this into account when calculating taxes!
What tech do contractors often claim through a limited company?
Let’s start with standard expenses. These are usually of a minimal cost and include:
- Software programmes that enable you to perform your business – such as editing or design programmes.
- Back up online software – to enable you to back-up your files which is good business practice.
- Antivirus programmes.
- Subscriptions – necessary for keeping up-to-date and informed of your industry.
When it comes to assets (in the tech space), these are usually around a couple of hundred pounds in cost and include:
- Computers and/or laptops
- Printers and/or scanners
- External hard drives
Personal vs Business usage
The HMRC expenses rules around what you can and can’t claim (whether deemed solely for business use), are very strict, so you’ll need to be able to demonstrate that hardware, or indeed software, is for business use only -- should you claim it in full.
Many purchases will be relatively straightforward. For example, things that you wouldn’t need to purchase were it not for being a contractor. However, using a computer as an example, if you also use the device for personal use half the time, then you can only claim 50% of it against your income. Likewise, if you’re buying printer ink but also using the printer for personal projects, you’ll only be able to claim the proportionate amount.
Final considerations (including if HMRC investigates your expenses claims)
IMPORTANT: Hold on to any receipts as you’ll need them for anything you make a claim on – and keep them for six years, just in case you should be investigated by HMRC.
Lastly, if there is ever any doubt in your mind about putting an expense through, check with your accountant first, who will be able to advise if you can include it in full, as a percentage, or not at all. Obviously the more you can take off your tax bill the better, so be meticulous about keeping receipts for technology or anything else you buy that enables you to do your work.