Contractors' Questions: How to buy a laptop and software for business?

Contractor’s Question: My husband plans to do some freelance work and so needs to buy a laptop and Microsoft Office software, plus some specialist software.

What’s the best way to buy all this software, and hopefully the laptop, if he’s a sole trader? Does he buy it outright or just expense it and get the tax back? I worry that despite him needing the ‘full business version’ of the niche software, he wants the 'Home and Student' Office suite. Is this going to be ok with HMRC, despite not being a business-named product?

Expert’s Answer: What he can claim for the software will depend on how much he’s going to use it for business and how much, if any, for private use. If he’s going to use the laptop and the MS software, say, 90% for business and 10% for personal use, then he would include 90% of the cost of both of those in his accounts. If, however, he’s got another computer for private use and the laptop and the MS software will only be used for business, put the full cost into his accounts.

The laptop itself would be a capital asset on which he can claim capital allowances -- unless he used the laptop for personal use before he started using it for business (which it doesn't sound like he will). He’ll almost certainly be able to claim the Annual Investment Allowance on the laptop, which is 100% of the cost of the laptop that he’ll be including in his accounts. He'd put that into the "Annual Investment Allowance" box on the tax return.

For the software, there’s the choice to treat that as a capital asset or as a running cost of business -- there are no ‘hard and fast’ rules. Typically, if someone is paying an annual subscription fee for software, then that would definitely be a running cost, and software for which one would pay a ‘one-off’ cost may be either.

As to your concern about product labelling, HMRC does not say you have to buy a business version of software in order for it to count as a cost of business -- it's how you use it that matters -- so if he’s using it for business, go ahead and put it in!

The expert was Emily Coltman, chief accountant at online accounting platform FreeAgent. 

Friday 4th Jan 2019
Profile picture for user Emily Coltman

Written by Emily Coltman

Emily Coltman FCA, chief accountant of FreeAgent, is a graduate of the University of Cambridge. She has been working with small businesses since the year 2000 and is passionate about helping their owners lose their fear of "the numbers" and the taxman. She is the author of three e-books, "Refreshingly Simple Finance for Small Business", "Micro Multinationals", and "Very Awkward Tax"."

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