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