If you are a contractor who runs your own company, you will more than likely need the use of a computer or laptop. You can use the computer to carry out projects that are part of your work. It can also assist you in many other areas of your company’s daily activities, some of which we will go over below. With this in mind, you may decide to buy a computer for your business.
Can you claim for a computer?
As a business owner, can you claim for the cost of a computer or laptop as a business asset? What’s more, how about the cost of other related smaller pieces of equipment or even a computer upgrade as a business expense? The answers here are yes providing that you use the computer mainly for your business and any personal usage is only minor.
If you buy a computer for your business, it could be the case that you use your computer a large amount of time for personal reasons. If this is so, HM Revenue & Customs (HMRC) might see that this has a `duality of purpose’. In this case, it would be treated as a Benefit In Kind (BIK) and you will need to show this upon form P11D. BIK are subject to income tax for you as the individual. They are also subject to Class 1A NI for your company.
You must be using your computer for business reasons. This should also be regularly i.e. each day or each other day. If personal use is only minor, you will be able to claim for the computer or laptop through your business.
What do you use a business computer for?
As a contractor, you may use your company’s laptop while on a client site to perform your actual contract work. What’s more, you may also use it for other tasks for your business. These may include:
- Maintain your business records. You could be using an Excel type spreadsheet or some other accounts system to do this. If your business is VAT registered, it needs to comply with the Making Tax Digital rules. If this is so you will probably be using an online software accounting type package, such as FreeAgent.
- Send emails to your business’ customers, clients, and contacts.
- Write official letters from your business.
- Create invoices to send to your clients. You could use a Word or an Excel template. Some software type packages let you create invoices as part of their software package.
- If you have a business website, you could also maintain this on your company’s computer. Your work on the business website could include updates to your profile and your work history. You may also advertise your business and market your services online. It may also include updates in any skills and you can also showcase your completed projects. Other work could consist of general website updates and maintenance.
Accounts and tax rules govern how to treat computers and other equipment in your business’ accounts. What’s more, they also dictate how to treat business expenses for tax purposes.
When you run your own business, you may incur computer type running costs. These could include software and printer cartridges. Other costs may include online subscriptions and other small or low-cost items. It is correct to treat these types of costs as normal business expenses. In turn, you can deduct these against your company’s profit that is subject to Corporation Tax (CT).
You may decide to buy a new computer, printer, extra memory, servers or other equipment. These items have a longer life, and you treat these as `Fixed Assets’ in your business accounts.
Depreciation is a term that we use in accounting. This is the write off of part of the value of an asset, We apply the depreciation to Fixed Assets in your business accounts at a suitable rate. The write off of the equipment in the business accounts can, therefore, occur over several years. This is due to assets do not lose their value until they are older or are obsolete.
As a final note, the depreciation that we apply in the accounts is not deductible against tax. Instead, a business claims `Capital Allowances’ (CA) against the equipment in its CT workings.
Under CA rules, a UK business can currently claim the Annual Investment Allowances (AIA). At the moment, this is set at up to £1 million per annum, against profits that are subject to CT. Therefore, this is more than enough to cover a contractor’s IT equipment requirements.
Your accountant will make sure that they claim the correct CA for your business. Software such as FreeAgent, now lets you treat equipment that you buy as Fixed Assets. What’s more, it also allows you to select the depreciation rate and method.
VAT -the Flat Rate Scheme
If your business is registered for VAT and it is using the VAT Flat Rate Scheme it cannot reclaim VAT on normal business expenses. However, in the case of certain assets that you buy such as company equipment, it can reclaim the input VAT. This is providing the total cost (including VAT) is at least £2,000. Equipment will include computers, laptops, and other electronic devices.
The above does not mean that you need to spend £2,000 or more on one piece of kit. You can buy a computer and other equipment at the same time. This could include a printer, a scanner, extra monitors, extra memory, speakers, etc. Therefore, if the combined cost comes to at least £2,000, you can claim the VAT amount.
Let us assume that you buy a computer for your business costing £1,500, a printer costing £200, and memory costing £500. The total cost for your business would be £2,200. The VAT amount that is within this is 100/120th or 1/6th, giving £366.67. Therefore, the cost to your company is £2,200 minus £336.67, which equals to £1,833.33. If your business is trading it will also save an extra 19% CT (£348.33) on this cost. Therefore, the bottom line cost is £1,833.33 minus £348.33 which equals £1,485. In other words, the actual cost to your business is £1,485 for equipment valued at £2,200. If you buy this same equipment yourself it will cost you the full £2,200. Hence, I am sure you will agree, this is a worthwhile saving.
VAT -the Normal Scheme
If your company is VAT registered and it uses the `normal scheme,’ it can claim back the VAT on any computer equipment. It can also claim the VAT on all other normal business expenses. In the example shown above computer equipment costing £2,200 would again cost your business £1,485 if your company is trading.
Please make sure that you obtain and retain invoices or receipts for all computer expenditures. Indeed, this includes both purchases of equipment and normal running costs. The invoices should be made out in your company name wherever possible, rather than to you. Please arrange this when you buy it from a shop or store. If you buy online, please make sure that you obtain an electronic receipt.
Most contractors use their computer or laptop, mainly for work. When they do this, they can claim for this cost through their business, and they will receive tax relief.