Business Expenses: Computer Hardware and Software

07 October 2016

Accounting for business expenses has always been tricky for contractors. That's because the government is very careful about differentiating between genuine business expenses and those that end up benefiting both the company and the individual. Computer equipment and software is a good example. How you use your computer and software largely determines how you will claim it for tax purposes.

Exclusive or Partial Use

The first question that must be considered is how you use your computer software and hardware. In order to claim the entire expense against your business, the purchased assets must be used exclusively for the purposes of running your business. This includes completing work for your clients. So if you were to buy a brand-new computer along with a printer and some software, you could claim the entire expense as long as none of what you purchased is used for your own personal benefit – except in an incidental manner.

If you use the assets outside of work at any level that the government would not find incidental, you would only be able to claim a portion of your expense based on its value to your company. The government refers to this as a 'benefit in kind'. If you are not sure how to calculate this, you might want to talk to a professional.

Standard Expenses vs Fixed Assets

The next thing to consider is the difference between standard expenses and fixed assets. This difference really amounts to depreciation. Fixed assets would be something such as a computer or printer that tends to depreciate over time. Other things, like software and flash drives, are considered standard assets.

Standard assets are subject to the full allowance as described above. Fixed assets are claimed using different rules. Their value has to be determined against annual profits with depreciation taken into account along the way. Again, if you're not sure how to calculate the value of fixed assets, you can always ask a professional for help.

Computer Equipment Expenses and VAT

Last is the question of any VAT you pay on your computer hardware and software purchases. How you pay VAT taxes makes a difference here. For example, if you are part of the Flat Rate VAT scheme, you will probably not be able to claim back the VAT you pay on computer hardware and software – except when you're talking about capital expenditures. You can reclaim VAT on any capital expenditures in excess of £2 000.

Determining whether a fixed asset counts as a capital expenditure is where this gets a little tricky. By the letter of the law, a capital expenditure is an investment in fixed assets designed to add long-term value to a company, usually by upgrading assets the company currently owns. HMRC could make the case that your first computer purchased as a contractor does not qualify as a capital expenditure but an upgrade to that computer two years in the future does.

Our personal recommendation is that you keep meticulous records and save all receipts should you need to buy computer hardware or software for your business. As a contractor, you do have the right to claim some of those expenses in order to reduce your tax liability. Saving receipts and keeping records makes it possible to back up your position should there be any questions from the taxman.

If you have any questions about the legitimacy of claiming business expenses, don't take a chance with HMRC. Instead, speak with a professional who can give you sound advice moving forward. Better to get advice and make accurate claims than to do it wrong and face penalties as a result.

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