| The capital allowances section of the self assessment | | | | on the self assessment tax return form to arrive at |
| tax return form is the most difficult for people who are | | | | the actual net taxable profit, those tax allowances |
| self employed and not conversant with at least a | | | | being according to a fixed set of rules applicable for |
| minimum knowledge of accounting and the tax | | | | the tax year. |
| system. The difficulty in this section of the tax return | | | | Completing the self assessment tax return form also |
| form is that it is an area which many start up | | | | includes calculating the capital allowances which |
| businesses may not have come across before. It is an | | | | compromise of two elements. Capital allowances |
| area which affects not just the calculation of the tax | | | | being a first year allowance which can be claimed on |
| allowances and knowledge of the tax rates but also | | | | some types of fixed asset and writing down |
| how an item becomes considered for such tax | | | | allowance on the net asset value in subsequent years |
| allowances. | | | | until the total value of the fixed assets has been |
| The first step towards claiming capital allowances is to | | | | claimed against profits earned. |
| understand that not all purchases which may have | | | | The rate of first year allowance for small businesses |
| been entered into the accounts are treated the same | | | | has changed each year from 2004-05 to 2007-08 |
| for tax purposes. 100% of the purchase price of the | | | | starting in 2004-05 at 40%, rising to 50% the next year |
| majority of items is deducted from income to produce | | | | and then back to 40% in 2006-07 before returning to |
| a net taxable profit. Purchases of certain items where | | | | 50% in 2007-08. The first year allowance can be |
| that item is not consumed by the business in a single | | | | claimed on most assets except vehicles were special |
| year but may be used by the business in both the | | | | rules are applied. |
| current year and future years are not expensed in the | | | | Generally first year allowances can not be claimed on |
| year of purchase but classified as fixed assets. | | | | vehicles except if that vehicle is deemed to be a |
| A fixed asset includes not just the original cost of the | | | | commercial vehicle. The inland revenue website |
| item but also the cost of alterations, improvements and | | | | contains a list of vehicles it considers to be vans and |
| extensions of the asset. The fixed asset cost does | | | | commercial vehicles and first year allowances can be |
| not include the repairs and maintenance of that asset | | | | claimed. Cars and commercial vehicles not on the |
| which may be treated as a normal business expense | | | | approved list are not subject to a first year allowance |
| and written off against income when incurred. | | | | except new vehicles with low CO2 emissions below |
| Accounting records need to be kept of fixed asset | | | | 120gm per km driven. |
| purchases in order for the capital allowances to be | | | | The writing down allowance is 25% of the net written |
| calculated and included in the self assessment tax | | | | down value for tax purposes and is the amount of |
| return. | | | | capital allowance claimed on fixed assets after the |
| Having identified certain items as fixed assets the | | | | first year and in the case of motor vehicles used for |
| normal accounting practise is to use a technique called | | | | business purposes in the first year. Capital allowances |
| depreciation to write off the cost of the asset against | | | | on motor vehicles being restricted to a maximum of |
| profits over the expected life of that asset. The scale | | | | 3,000 pounds per vehicle and vehicles costing over |
| of the write off being a management decision as all | | | | 12,000 pounds being in a separate section of the tax |
| depreciation calculations are ignored for tax purposes. | | | | return to those under 12,000 pounds |
| Depreciation is entered on the self assessment tax | | | | The capital allowance section of the self assessment |
| return and subsequently deducted in an adjustment | | | | tax return form also includes the term balancing |
| section. | | | | charges. A balancing charge arises when an asset is |
| When calculating the net taxable profit of a business | | | | sold or disposed of and is the difference between the |
| the tax system add back to the profit shown in the | | | | amount received and the net written down value for |
| business accounts any depreciation charges the | | | | tax purposes. Net written down value is the original |
| business has made in the preparation of the accounts. | | | | cost less capital allowances that have already been |
| The tax system then deducts the capital allowances | | | | claimed against the net taxable profit. |
| from the net profit made by the business and shown | | | | |