The use of technology has become increasingly important for businesses since March last year. Innovative applications, software and portable devices have proven invaluable for firms to remain resilient during the COVID-19 pandemic, allowing them to establish a safe work environment for staff at home.
Sole traders and small businesses will find that using technology can be a powerful asset, streamlining workflow and saving time and money through the automation of tasks. In the modern business landscape, even the smallest firms and self-employed individuals are using computers for communicating via email, keeping accounts, making business transactions and completing online tax returns, along with many other processes.
Computer equipment like servers, desktop devices, laptops, tablets and monitors, along with important accessories like mice, printers, headsets, speakers and webcams, can represent a significant investment for any business. Other solutions, from memory cards and software subscriptions to useful online enterprise tools like the commonly used Microsoft 365 office suite, can also prove to be a substantial investment.
The good news is that if one-off purchases for computer equipment or ongoing software subscriptions are for business purposes, it is possible for a company to claim back the costs in the form of business expenses on an annual tax return. Many sole traders and small businesses are unaware of how and what expenses they are able to reclaim and can end up losing out on an opportunity to recoup these costs.
In the following sections, you’ll find everything you need to know about purchasing computer software or hardware to keep your company operating effectively in today’s world.
Calculating if you can purchase computer equipment via your business
You might need to upgrade your desktop or laptop with a more reliable model or update the software package you subscribe to, but either way, you’ll need to understand how these types of expense are treated when it comes to tax if you want to save money. Different computer-related equipment is governed by different rules, but in next passages, you’ll see a detailed list of how these technology costs are calculated so you understand how and what you can reclaim.
Assessing the use of computer equipment purchased
It’s vital to first work out if the hardware or software you are buying is for personal or business use. The cost of equipment is typically among the largest expenses that a standard small business will face. With this in mind, if you need to update your device with a new model or perform a long-overdue software upgrade, and you wish to claim these expenses through your company, you must first understand HMRC’s rules.
The most important rule relates to exactly how the computer equipment you buy will be used on a daily basis. If your enterprise is paying for its purchase, then the computer equipment must mainly be used for the purpose of business processes. Any use that is of a personal nature must be deemed “incidental”.
This is because, if substantial personal use occurs, HMRC could technically claim that the computer equipment bought has what is referred to as “duality of purpose”. In the event of such a decision, you could potentially be taxed on the total value of the equipment as a “benefit in kind”.
Understanding how computer-related purchases are accounted for
It’s important to understand that computer hardware purchases, like buying a desktop device, printer or server, and many other types of technology-based office equipment, will be treated in a different way to software purchases when it runs through your company accounts.
Termed consumables, standard software and software subscriptions, memory cards and licence fees are all classified as allowable business expenses, while items of equipment like a new monitor or a laptop device are categorised as “fixed assets”, which are governed by capital allowance rules.
These larger pieces of equipment will be useful to an enterprise over a lengthier term than many more standard expenses. For this reason, according to the current rules for capital allowance, a proportion of any fixed asset’s value is always offset against a firm’s profits for every year it’s considered to have value.
Under the present rules for Annual Investment Allowance (AIA), a firm is entitled to offset allowable capital purchased of up to £1,000,000 against its annual Corporation Tax bill. This is more than sufficient to cover most companies’ IT equipment needs.
Purchasing computer equipment when you use the Flat Rate Scheme (FRS) for VAT
If you’re currently contracting through your own firm and have joined the FRS, you must be aware that specific rules exist that govern how tax is treated when your business buys computer equipment. You’ll find that you usually cannot reclaim any VAT back from purchases that you make when your firm is operating under the FRS. This being said, you can still reclaim the VAT part of any capital expenditure purchases worth £2,000 or upwards, including VAT.
It’s important to remember that this does not mean you can only claim back the cost of a single item of computer equipment valued at £2,000 or more. It’s also possible to claim back the full cost of a bulk order that includes multiple items, such as a computer, scanner and printer, providing all of the equipment was bought in a single transaction.
Do you require tax return services in Goole?
Making sure that you claim back any expenses for computer equipment correctly on your annual tax return is critical. As mentioned, these items represent a substantial investment for any firm, so making certain you receive any money due back on them is vital. Funds reclaimed can then be fed back into your business, helping it to grow.
At Adaptive Accountancy, we work closely with our clients, ensuring their annual tax returns are completed properly and on time to avoid any unwanted fines from HMRC. If you’d like the peace of mind of knowing that your accounts are up to date and you’ve claimed back every expense you’re entitled to, get in touch today to discuss your needs.