If you need to buy a new PC or upgrade your software, how are these expenses treated for tax purposes? Here we explain how technology costs are accounted for, and look at the rules which govern the treatment of computer-related purchases.
Business or personal use?
Equipment costs are often the largest expenses a typical small business will incur. So, if it’s time for you to upgrade your laptop, or perform that long-awaited software upgrade on your PC, you need to be aware of HMRC’s rules if you’re claiming such expenses via your business.
The golden rule relates to how your computer equipment is to be used on an everyday basis. If your company is paying for it, then the equipment must be used for business purposes. Any personal use must be purely ‘incidental’.
If there is significant personal use, then HMRC could claim that the equipment has a duality of purpose, and you could be taxed on the value of the purchase as a ‘benefit in kind’.
How are computer-related purchases accounted for?
Computer equipment, such as a PC, server or printer (and any other office-related equipment) is treated differently from software in your company accounts.
Consumables such as standard software, licence fees and memory cards are treated as standard allowable business expenses, whereas pieces of equipment are treated as ‘fixed assets’, subject to capital allowances rules.
Such larger items will be useful to your business over a longer period of time than many standard expenses, so a proportion of a fixed asset’s value is offset against the company’s profits for each year it is considered to have a value – according to the prevailing capital allowance rules.
Under the current Annual Investment Allowance (AIA) rules, you can offset up to £1,000,000 in allowable capital purchases against your company’s Corporation Tax bill each year. More than enough to cover the typical IT contractor’s equipment needs!
We’ve included these details for the sake of completeness. In reality, your accountant and/or accounting software will take care of the specific tax treatment of all of your computing-related purchases.
Buying equipment if you’re on the Flat Rate VAT scheme
If you are contracting via your own company, and have joined the Flat Rate VAT scheme (FRS), you should be aware that there are specific rules which govern the tax treatment of computer equipment purchases. You cannot usually claim back the VAT on any purchases you make if your business operates under the FRS. However, you can claim back the VAT element of any capital expenditure items worth £2,000 or more (including VAT).
Importantly, this doesn’t mean you can only reclaim the costs of a single piece of computer equipment worth £2,000 or more; you can also reclaim the cost of a bulk purchase, which may include a PC, printer, scanner, etc. as long as the goods were purchased in one single transaction.
For more details on this specific measure, read VAT Notice 733, Section 15.2.
When you buy any computer equipment or accessories for your business, make sure you keep any receipts safe and upload/scan them if you use accountancy software.
If you have any questions about the legitimacy of any specific expense claim, ask your accountant for advice.