As bookkeepers working with tradespeople across Chichester and further afield, our clients often ask us about claiming capital allowances on tools and equipment. So, in this guide, we are rolling up almost everything you need to know about claiming capital allowances into one handy jargon-free read!

Claiming Capital Allowances as a Tradesperson:

What qualifies as “tools and equipment” for capital allowances?

Anything you use within your trade that is necessary to perform tasks and services. For example;

• Builders: Power tools (drills, saws), cement mixers, ladders, and scaffolding.
• Electricians: Testers, multimeters, and cable pullers.
• Plumbers: Pipe benders, cutting tools, wrenches, and blowtorches.

Other assets can qualify if you use them exclusively for work purposes. These might include laptops, mobile phones, and even your van!

What is the process for claiming capital allowances?

Claiming capital allowances can reduce your business’s taxable profit, lowering the income tax you must pay as a Sole Trader or the corporation tax you need to pay if you’re operating as a Limited Company. So, it’s a worthwhile process!

Always keep receipts and records of any business-related equipment purchases. As a sole trader, you report these purchases in your self-assessment tax returns (use SA103 for self-employed). Your limited company can claim through corporation tax returns (usually with assistance from accounting software, like Xero, or a tax advisor).

Can I claim capital allowances on second-hand tools and equipment?

New and second-hand tools can qualify for capital allowances. The main requirement is that you need the tools or equipment for business purposes. However, you can only claim capital allowances on equipment you own, not that you hire or lease.

What tools or equipment might not qualify for capital allowances?

Some items are non-qualifying. These include workwear, even if you wear it for work. However, you can include protective gear, like gloves and helmets.

Consumables or materials used for jobs, like paint and nails, aren’t capital expenditures. That’s not to say you can’t offset them as expenses, but you’ll need to categorise them differently in your accounts.

Limits and caps:

HMRC has set the Annual Investment Allowance (AIA) at £1 million annually for most businesses. This means a business can claim 100% tax relief on qualifying equipment up to this amount.

For most tradespeople, capital expenditures, like a van or a piece of equipment, can be offset against tax in the current year rather than spread over multiple years.

If your capital expenses exceed £1 million per year, a Writing Down Allowance applies, usually at 18% per year for general tools and equipment.

A writing-down allowance isn’t the same as depreciation. Depreciation is an accounting adjustment to recognise the decreasing value of an asset (like wear and tear or obsolescence over time). It is non-deductible for tax. Capital allowances are a tax-deductible version of depreciation.

The AIA threshold was temporarily increased to £1m, although it’s expected to remain at that rate for a while. This is good news for tradespeople looking to invest in their tools and equipment.

Top Tips:

Firstly, keep all your purchase invoices and receipts so you can have evidence of your purchases.

Also, keep a register of your assets (we call this a Fixed Asset Register). It should detail the purchase date, the cost and a description. Your accountant or bookkeeper may do this for you.

Finally, talk to a bookkeeper! That’s where we come in. Let us help you understand what you can and can’t claim so you maximise profits but stay on the straight and narrow! We work with tradespeople just like you across Chichester and further afield. Get in touch HERE.