Capital allowances and the AIA: saving tax on expensive purchases

[@mostafadhussein]

Watched several other accountants on that matter and I confirm none of them impressed me like you 😊

[@nathanrobinson4163]

And plant and machinery embedded in a building when purchasing also qualifies for AIA and even better.. it’s based on a percentage of the purchase price of the building itself!! Good video 👍

[@julierivet8264]

Great video, answered my question perfectly. There is something very charming about the way you talk, I never thought I could ever feel charmed by an accountant haha

[@AccountingTeaBreak]

Thank you! Cheered my Wednesday right up that did!

[@julierivet8264]

@@AccountingTeaBreak haha better to spread compliments online that negativity! I've subscribed so I can go back to the charming accountant when I need to to learn more lol

[@Economically.]

Thanks! I'm studying Industrial Economics and you explained this better than my lecturer :) Subscribed, I thought you'd have way more subscribers considering the quality and usefulness of your content.

[@AccountingTeaBreak]

Thanks, that's really kind! If I wanted a million subscribers I should have been playing minecraft. Maybe I should do an Accounting In Minecraft series? No, that's nothing. :-)

[@Economically.]

@@AccountingTeaBreak Maybe! You could get a million subscribers by giving out dodgy/illegal financial advice on TikTok! lol

[@AccountingTeaBreak]

@@Economically. And they'd never bust me for it because no one senior enough to press charges knows how tik tok works. Well we'll call that Plan B for now!

[@jaysenb]

This is one of the most important thing to know as a freelancer !

[@WH05DAT]

mate, love the wah you explain things, super helpful

[@pudd1964]

Great information, any chance on a video on claiming for your van as a sole trader

[@AccountingTeaBreak]

That's a good suggestion, I'll put it on the list for the new year and see if I've got enough helpful stuff I can say about it. Cheers!

[@selinaclarke9359]

@@AccountingTeaBreak I would have liked a careful, concise explanation just like you have done in this brilliant video too. But I feel by the time you able to do one it will be too late for me :(

[@jamesross4474]

Great video! Very well explained

[@beelucas-buckley9998]

Thank you for your very clear videos. I bought my first fixed assets (small UK limited company) in tax year 2020/21, and did the double entry bookkeeping for the depreciation and it all works great (after much initial misunderstanding) and everything balances. I've also been claiming AIA 100% first year and the super-allowance in the second year. I haven't been showing the capital allowances in my accounts because I thought (probably naively) that the capital allowances was for tax purposes only. In the tax year 2022/2023, I made a profit before tax but, after capital allowances, made a loss. Am I doing this right - do I just gaily carry on with my double entry bookkeeping (add back the depreciation to my pre-tax profits, work out the tax then say "oh but I made a loss for tax purposes" and carry it forward against tax for future years without it affecting my accounts? I'm totally confused about it.

[@BagelKing212]

Thank you. I guess the big question is at what annual profit does it make sense to switch from self employed to a ltd company. Is that something you can help with?

[@russdavey1919]

This was really helpful, liked and subscribed - thank you!

[@chiaojijijhijn9566]

Thanks so much for making this video, I have a quick question: Is it ok to claim for an item worth over £1000 for the year on the cash basis? I asked because you mentioned avoiding going over £1000 for a single item for AIA but does that count also for the Cash Basis? Say for example you purchase a machine for work which costs £2000 and you want to put through as an expense using the Cash Basis, would you be able to claim for the full year with this amount for the single item? If so, how many years do you need to make sure you keep hold of the machine for after the submission of the item as an expense for that year. Thanks in advance!

[@kamathwal3100]

stumbled onto this video, setup a company and this has helped loads, thanks!

[@peterschofield6220]

Brilliant video, thanks for your advice. I agree with Julie too, you are a surprisingly charming accountant

[@AccountingTeaBreak]

Thanks Peter! My home life will remain harmonious if I can charm an equal number of male and female viewers, so you're helping out in a big way. :-)

[@jaysenb]

The golden rule make sure all expenses are under or £1000 using AIA rule!

[@chiaojijijhijn9566]

Does this also apply if doing so on the Cash Basis and claiming for that year? As in should you claim more than £1000 for a single item in the year if on the Cash Basis? Thanks in advance

[@motochileiros-motopackers103]

Thanks for the video. I'm planning to buy a brand new motorbike under sole trader expenses, can I claim the whole value under AIA/Capital allowances? Or even under cash basis? What about an Electric car for personal use? The main reason is to bring the tax brackets down to the basic level.

[@feastsocial754]

Hey Benedict! Can you please do a video on this new super deduction thing? I've tried to work out how it would apply to my ltd company if I bought van for work. Loving your videos by the way, keep up the good work!

[@AccountingTeaBreak]

Thanks for the tip, I'll put it on the list and see if I have enough coherent things to say about super deduction to put out a video. A couple of quick pointers to start with though: first, it's only for new vans, not second hand, apparently. That will wipe it out for a lot of small businesses, since we tend to want some big company to take the first depreciation hit on the new Sprinter or Transit Custom we're eyeing up. Second, with this and with AIA and with other taxes on assets things, the way to do the maths is to work out two sets of profit for the year you buy the thing (and two sets for the next however many years into the future you want to guess at.) Do one in accounting terms, where you take off your profit 1/10th or 1/5th or 1/3rd or 1/X of the price of the thing you bought, depending on how many years you think it will last. Then do the profit in HMRC's eyes, where you don't take that 1/10th off, you take off all of it in year 1 for AIA and none after, or 130% of the price in year 1 for super-deduction and none after. Then work out your tax bill, 19% of the HMRC profit figure (for now at least). Maybe I haven't explained that well enough, but tax rules like this mean keeping two parallel sets of profit calculations for the company. Thanks again!

[@martintomkins]

Fantastic video! Thank you so much! You're the first person to make this subject make sense and in a way I can understand 😊. One question regarding disposal of assets for tax purposes where you claimed 100% in a tax year and dispose of it further down the line - would it be prudent to keep a list of items you claimed AIA for in previous tax years which you can refer back to if you sell it later down the line? Since tax records need to be kept for 6 years, if you disposed of the asset in 8 years, would it still need to be declared on your tax return? Thanks in advance! Great channel!

[@AccountingTeaBreak]

Great point: yes you should have *some* way of working out what fixed assets you have in the business. For a lot of us, that's obvious, since it's just a laptop or something similar, just one or two things and you can always go back and find your notes about it. But if you have lots of high-value long-lasting things, then keep a nice clear list of them: when you bought them, how much you paid, how much AIA you claimed, how long you are expecting them to last for depreciation, when you sold them, how much for... But like I say, that's rare. Remember that if your depreciation is spreads over three or five years, then the thing, whatever it is, will be completely worthless in the accounts before the six year record limit. So when you get rid of it, it's £0 in for a £0 asset, so no extra accounting or tax to worry about. When the depreciation is fully used up, the accounting numbers and the tax numbers will be back in agreement, this temporary split caused by claiming all of it with AIA will have healed. Thanks for the comment!

[@martintomkins]

@@AccountingTeaBreak Fantastic Benedict, you've cleared up a question I have every time I do my tax return - we're all very fortunate to have you and your channel - I hope it grows and gains the attention you deserve! Many thanks x

[@martintomkins]

I'm a self employed guitarist/teacher - where I usually come unstuck is where I buy equipment which can easily have a working life of many years (pedals, guitars). I have claimed 100% AIA in a given year and maybe 8 years will go by and I decide to sell it (sometimes it can be worth as much as I originally paid as it can hold its value well). I never know whether it should still be classed as income when all that time has passed and whether I need to be keeping more than 6 years of records which I can refer back to for AIA items 🙈.

[@AccountingTeaBreak]

Of course, music, that would be a job where a sole trader could have lots of expensive equipment that doesn't really depreciate. I'll have to have a think about how you should handle that. I could tell you what my instinct says, but I feel like there might be a rule to stop us doing what I want to do. Until I get a chance to look into it, maybe search for Small Business Toolbox: he does self assessment advice and he's been a self employed musician for ages, so he must have thought about it (or got his accountant to think about it.) Might be too specialist for him to have done a dedicated video, but he might respond to a direct comment about it. Cheers!

[@martintomkins]

@@AccountingTeaBreak thank you so much for your time Benedict, really do appreciate it! I'm reaching a point where I need to be careful about selling gear as it would cost me to add it to income but want to do the right thing too haha! I think in future for ease I may treat new gear as a personal cost and save the headache haha! Thanks a lot for the heads-up, I'll go take a look x. Once again, thanks for all your help x

[@ianstell614]

Great video, really clear

[@willhelm94]

Massively helpful, thank you!

[@cyderryder]

Hi Thanks for a great video. I am a sole trader using cash basis. I bought a van (£3000 deposit £15000 loan (including interest)) Do I just put the total £18000 as an expense ? Can this be done in simplified expenses? Any advice would be most appreciated!!

[@redlady935]

Thank you for this. Very helpful. What about when starting up. Can I still put self down as 'cash basis' but spread out pre-trade costs from past couple of years over the next few years or does stuff bought 3 years before starting trading all have to be claimed for in first year? thanks :-)

[@orphicenvyy]

Great video, very informative, thank you!!

[@louisbir2728]

Great video as always mate, thank you! A question I have about getting rid of an equipment before it fully depreciates (say you want to close your business, or your business becomes very successful overnight and you want to buy something even better and get rid of the old equipment). I'm aware that in traditional accounting you could sell your equipment to yourself and pay tax on the sale (profit) value, however would you do the same in cash basis? Since your equipment is lumped in together with all your expenses, I would guess you would not need to seel it to yourself? Thanks again and good luck with your channel! It's great stuff!

[@AccountingTeaBreak]

Under either system, if you got rid of the equipment you'd end up with the difference between what you get for it and what value your accounts say you hadn't yet used up: that would be income. So accruals basis, buy something for £5,000, sell it in three years later when you've "used up" £3,000 of it, and if you get £2,500, your accounts will show a £500 profit. Under the cash scheme, you'd show a £2,500 profit from the sale because you "used up" the whole value as soon as you bought it. Works out the same in the end. And if you were using the accruals system and had claimed AIA then the sale would get you £2500 income for tax purposes, just like with the cash scheme, because in tax land you'd already "used up" the whole value in the first year's tax return. If you give the asset to someone (including yourself) for less than you'd have got on ebay for it (maybe you take the asset for free, or sell it to a mate for £1000 instead of £2500) then you should really treat it as if you sold it for £2500 and then gave yourself a gift of £2500 cash (or gave you mate £1500 cash). There'd be too many loopholes for sneaky accountants to mess around with if you could move assets at any value you choose. Thanks for the comment!

[@RossHbn]

That's just the question I had in my mind whilst watching. Great response thank you!

[@ianwebster5055]

Great video in explaining how asset purchases can be used against profit for tax purposes. I have one question albeit a little unrelated...if you are a sole trader not registered for VAT and you buy a laptop worth £2,500 inc VAT, is your asset value recorded in your books still without VAT? if so can you claim back the VAT some other way remaining unregistered?

[@AccountingTeaBreak]

That's a great question: when you aren't registered for VAT then the allowable cost to the business of anything you buy is the full price inclusive of VAT ("gross" they call it). So you'd reduce your profit by £2500. If you were registered for VAT you'd reclaim £417 of VAT in your quarterly VAT return and then reduce your profit by £2083 (the "net" price of the laptop).

[@rhythmstick8170]

So helpful. Many thanks.

[@firechrist5513]

How does purchasing a capital expenditure work for a limited company If i purchase a studio and decided to receive depreciation the following years. But will this reduce my tax the year i purchased the studio?

[@dannymurphy1779]

Great explanation many thanks!

[@ArsHaD-dg1gb]

But, the Value of money of £10,000 which I claimed to Tax is not as the same value which will be in the next 4 years right? Then how can we say the profit level of £40,000 is unchanged?

[@marcobeyermann3435]

Great video! thanks for sharing this. I have a question regarding finance schemes. I bought this high end mac for work purposes early last year (Jan2019) and decided to apply for a 12 month payment finance as it was quite expensive. How should i treat this when it comes to tax return? Shall I treat this as an expense/subscription I pay each month or should I put down the whole cost of the machine as capital allowance? Thanks for your help and sorry if I haven't express myself correctly.

[@AccountingTeaBreak]

That's a good question and I'm going to give you a "probably" answer. It depends on the exact type of the loan/finance thing. I assume that the loan is one where you have to pay the whole price and you have to end up owning the laptop. (I guess it's not like a car lease where you can choose at the end whether to make the final payment or give back the car. They don't want your mac back.) So if you are eventually paying the full price and the laptop is very definitely yours, then treat the purchase as happening on the original invoice date, Jan 2019. If you had a lease more like a car lease then the answer might be more like treating each payment as laptop rent. Cheers!

[@marcobeyermann3435]

​@@AccountingTeaBreak Ok great, thanks for your advise man!

[@jamieteasdale2124]

Thanks for this useful video. It's unusually engaging for a video about tax returns! I've read on the HMRC website I can split a large purchase between first year AIA and use some of the value as a writing down allowance in the coming years? I can't really work out how to do this or if there's a guide amount to the split? When using WDA is there a standard length of time to deduct over or is it self nominated and you keep going until the original cost is written off? To give it some context I bought a van outright in the tax year 19/20, if I put it through as an AIA it drops me significantly bellow the tax threshold, it would be more beneficial to write off half the cost now and then use the remainder as WDA over the next 5 years. Is this acceptable and is it as easy as just making a note in one of the boxes that sometimes pops up between sections when completing my return online?

[@jamieteasdale2124]

Actually, I see you've answered this question lower down in the comments already! Is WDA 18% of the purchase value until written off or 18% of what you've not already written off? They really don't make it easy to understand.

[@AccountingTeaBreak]

@@jamieteasdale2124 Hey, glad you found that, yes! The 18% thing is 18% of whatever is left, so the amount you claim reduces each year, and never quite reaches zero. But that's okay because when you get rid of the van you do one last claim to make up for the difference between what the van is worth in your tax calculations and what you actually got for it, if anything. So if you had something worth £100 in your main pool for 18% WDAs, it would (in tax world) be worth £100, then £82, £67, £55, £45 and so on. It kind of works well with vehicles where they depreciate on a curve, losing less value each year. And like I say, it all works out when you sell, so you don't get hurt in the long term if the 18% WDA estimate doesn't reflect reality. Cheers!

[@antnewman5365]

helpful & understandable. thank you!

[@googleuser795]

Hi Benedict, what would happen if you had a business with a profit of 40k and they bought a machine for 100k using their aia. Would they carry forward a 60k loss or would it be a different situation? Thank you

[@AccountingTeaBreak]

That's a good question because I just learned something new from trying to answer it. The answer is that you've got two choices: 1) the thing you said: claim all the AIA, make a £60k loss for tax, roll that loss forwards and offset it against future profits. If I ran a limited company, that's what I'd do. You might have no tax on profit for two or three years. 2) claim just part of the costs as AIA and then claim the rest in future years using the "normal" fixed asset tax treatment of Write Down Allowances. WDAs are too complicated for a short youtube video, I think. The advantage of method 2) is that if the business is Self Employment you can keep some profit for the year (say £12.5k) by underclaiming AIA (say £27.5k out of £100k) so you have some tax free income in the year and don't throw away your personal allowance. You eventually get all the tax saving for the cost of the expensive thing, you just spread it out so that you use up more of your personal allowance every year, which would likely end up saving you some tax in the long run. If I were self employed, that's what I'd do.

[@googleuser795]

@@AccountingTeaBreak thank you so much for taking the time to answer that, very kind, I appreciate both options. Think I'm going to try find out more about standard written down allowances, not much info out there. Thank you!!

[@scottsmith-andrews6065]

​@@AccountingTeaBreak thank you for this - very helpful - we're just doing our first "new partnership" return for our Guest House (never having bought a business before) - how do you decide what % of costs relate to the business when you live in the business? EG - Gas and Electricity - a % of floor space doesn't work as it depends on how many guests are in as to where the gas etc is used (heating applies to whole house but cooking depends on no of guests in etc) and electricity depends on guests having showers/using kettles etc, but even when there's no guests in the house is still lit of an evening and so on. Can we take a set monetary value for "own use"? I'm sure HMRC will complain if we try and claim the full cost as business! Your video is fab by the way - I shall watch more of them!

[@AccountingTeaBreak]

@@scottsmith-andrews6065 You know I've never had a guest house business client... but I'm confident there will be good advice online because 1) there are thousands and thousands of guest houses and B&Bs in the UK, 2) they are almost all independent businesses and 3) they are run by the sort of people who will think about this and at least try to do the tax return right. And that means there must be discussions online about how much to claim. If I airbnb'd one bedroom in my house every other week then I'd have to claim only a small amount of the utilities bills as expenses, but it might be that above a certain threshold (maybe you have four or five guest rooms and then a room you use for yourself) HMRC accepts that it's close enough to 100% business that you can claim it all? Like I say, it's not one I know the answer to, but I would hope there would be forums where your one thousands of "co-workers" have argued about it. Good luck!

[@paulbateman2217]

@@scottsmith-andrews6065 I'm researching this as well, as in the process of purchasing a property, part of which will be for holiday let. You can use simplified expenses www.gov.uk/simpler-income-tax-simplified-expenses and there is a link on this page to a checker to work out if this is the best. However it doesn't help explain how to apportion personal usage if you decide to go down that route instead!

[@JCook6788]

Thank you for breaking this down. Liked, Subscribed as you did not quote a law or some other text I cant understand 😂

[@AccountingTeaBreak]

Thanks! I'll try to stay away from jargon as much as possible.

[@suehamilton-white8412]

Hi, my self-employment relies on my having a professionally recognised qualification. Getting this qualification took 5 years and cost £35k. Can I claim this as an expense for the business I can now conduct as a result (MA Art Psychotherapist, regulated by HCPC) thanks!

[@AccountingTeaBreak]

To the best of my knowledge, no, there isn't a way to claim that sort of training as an allowable expense. I forget the precise wording HMRC used, but it amounts to saying that learning a new skill is not an allowable expense, while a bit of training to maintain your skill while in work *is* an allowable expense. You can tell they started with the answer they wanted and then worked backwards to a justification, because the last thing they want is graduates paying no tax for years because they are claiming the expense of their (increasingly expensive) education.

[@ofshah01]

Love it ... 👍🏼👍🏼👍🏼

[@W3BT3C]

Say if you buy a 3k second hand van how do you put that into a tax return ? How much can you claim ? I was told you can claim back £3k a year , I know someone who pays £250 a month , he said over 5 years that van would of cost him nothing 🤔 I don’t no how there doing that 🤷🏼‍♂️

[@AccountingTeaBreak]

The tax rules around vehicles are a right mess, so I don't know what they would have been talking about with the £3k a year thing. There's usually no good way to get anything more than the price you paid taken off your profit for tax. So you buy a £3k van, put it in the AIA box of the Self Assessment and your profit (on which you are taxed) goes down £3k which might save you 20% income tax and 9% NI, if you're a basic rate taxpayer; or 40% income tax and 2% NI if you're a higher rate taxpayer... I suppose if you had a really cheap AND reliable vehicle you'd maybe be able to claim 45p mileage, do 10,000 business miles a year, and maybe save more tax than you spent buying and running the vehicle? You'd have to be really lucky though! No, I think usually you just put whatever you paid into the AIA box of your Self Assessment and save 29% or 42% tax that way. Cheers, and good luck!

[@W3BT3C]

@@AccountingTeaBreak thanks sounds really complicated when it comes to adding vehicles 🤦‍♂️ , He said he gets his accountant to do it ... perhaps I need a accountant if it’s gonna work out like that be worth off spending the extra if you can claim back all the monthly cost back

[@AccountingTeaBreak]

@@W3BT3C Yes, sounds like one of those times that having a free consultation with an accountant would be ideal: let them know what you're trying to do and if they can talk you through it in 20 minutes then it's probably worth paying for their help with each year's Self Assessment if it can save you more tax than you spend on them. :-)

[@abihasami7287]

thanks a lot

[@swiftgames5382]

hi , so what if im buying a van on finance for 19k (total finance ) can I claim all that in 1 year (the 1st year I bought it )? my total tax is going to be around £4000 inc NI how much.would that bring it down or should I not use it all as aia ?

[@AccountingTeaBreak]

Depends on the type of finance. This page talks about lease purchase vs lease rental: westwon.co.uk/annual-investment-allowance-aia-can-it-be-claimed-on-a-lease-purchase-agreement Apparently if the VAT is all paid up front then it is the type of lease that you CAN claim AIA on. If your finance is the right type, so you can claim AIA, then you are allowed to limit the AIA you claim in year 1 so that you don't go under your personal allowance (assuming you're self employed) and then claim the remaining amount as normal Write Down Allowances in future years. That's a pretty useful trick for the self employed so that they get to use AIA and save tax soon, but don't waste personal allowance by taking their profit all the way down to £5k or something. Good luck!

[@swiftgames5382]

@@AccountingTeaBreak thank you so much yes I’m self employed and the van is lease finance purchase, so I’ll outright own the van after 5 years .

[@AccountingTeaBreak]

@@swiftgames5382 Great, then you put in as much AIA to your Self Assessment as you want to wipe out profit, but stop when your tax bill gets very low and use the rest of the expense to save tax in future years. Cheers!

[@swiftgames5382]

@@AccountingTeaBreak brilliant thank you so much for your help . Really appreciate it 😃👍🏻

[@msilna782]

liked it :)