Since the introduction of the Cash basis of accounting as the default basis of preparing trading accounts from 6 April 2024, the purchases of capital assets such as a computer or a piece of furniture, but excluding motor cars, are treated as an ordinary expense of the business.
Authors who decide to opt-out of the Cash basis and prepare their accounts under the Accruals basis of accounting, (known as the ‘traditional basis’ of accounting), are able to claim capital allowances on asset purchases including motor cars. (It is necessary to opt-out of the Cash Basis for anyone who wishes to claim Author’s averaging so this is often the case for an author)
On capital expenditure of up to £1,000,000 per tax year, authors can claim the Annual Investment Allowance (AIA) on up to 100% of the cost of the asset in the tax year of purchase.
The reason being that it is not compulsory to claim the full 100% of the purchase price in the tax year of purchase. In some cases, authors might prefer to claim a lesser amount, either to maximise the tax saving over the years, or sometimes to avoid allowances being wasted.
An example might help.
An author whose sole income is from writing makes a trading profit of £15,000. Having purchased office furniture and equipment costing £8,000, it would probably be best to claim only £2,430 to reduce the taxable profits to £12,570. This equates to the tax-free personal allowance.
In this instance there would be no income tax nor any Class 4 National Insurance contributions payable.
The unclaimed balance of £5,570, known as the “pool”, can be carried forward to future years, when the Writing Down Allowance (WDA), currently of up to 14% of the remaining, reducing balance can be claimed each year. When this balance reduces to £1,000 or less, you can claim all or part of it.
Where no capital allowance claim has been made previously for any asset, WDA can be claimed at 14% on the cost or market value at the time it is brought into professional use.
In the tax year of commencement of the trade you can claim AIA on assets you’ve bought previously, such as office equipment and furniture etc, that are still in use on the first day of trade.
Unless you’re claiming the mileage allowance for the business use of a car, you can claim capital allowances, based on the cost of the car and its CO2 emissions rating, restricted to the business use percentage.
Instead of claiming actual car expenses and capital allowances, you can claim a fixed allowance for business mileage as follows:
In addition to the mileage allowances, you can also claim road tolls, congestion charge and parking.
Mileage allowance claims are treated as ordinary expenses in the self-assessment tax return. Capital allowances are shown separately. There are currently boxes for AIA and WDA included separately on the tax return form.
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