Don’t pay too much tax on your gear

Some things you buy for your business will not be deducted in full against income in the year of purchase. This is generally known as capital expenditure. 

Many consultants and private GPs have medical equipment, office equipment and possibly premises, and these types of expenditures are given special treatment for both accounting and tax. 

Ian Tongue takes a simple look at the concepts and steps to ensure you are obtaining the maximum tax relief on these costs.

Capital vs revenue expenditure

Costs that are one-off in connection with trading activity are generally deducted against the income they relate to. 

Typical examples of this are room rental, secretarial fees and defence cover, although the latter may be spread over a different period to your accounting or financial year end.

Capital expenditure, on the other hand, will typically generate economic benefits over a number of years and so your accountants will include these as capital expenditure and charge the profit and loss account with a proportion of the expenditure each year. 

This is known as a depreciation policy and the rates of depreciation will vary depending on the classification of the asset in question.

So if, for example, you bought a new computer for £1,000 and your depreciation policy was over four years – 25% per year – a £250 expense would be shown in the financial accounts each year until the asset is written down to nil. 

Other depreciation policies may apply a percentage against the value brought forward rather than writing off over a fixed period. 

It is important to note that depreciation in the context of accounting is not expected to represent loss in market value and is a tool to spread the cost of an asset over its expected useful life.

Capital allowances