A Capital Idea, Old Prof!
A long, long time ago, at a university far, far away, Tavis, The Tutor King took Accounting 101. He received an A, but what he learned haunted him, approximately 15 years later. Don’t let HMRC self-employed capital allowances haunt you too.
Let’s Talk Business
When it comes to expenses and running a business as a sole trader, nothing has been more confusing or elusive to me than capital expenses. Now what I learned from my Accounting class is that Capital are the tools and things you use to make the things you sell. So if you are building birdhouses, then your saws, hammer and paintbrushes are your capital; the wood and paint are consumable goods and do not have as much value in themselves until the capital turns them into something much more valuable—the bird house.
Easy enough, but capital goods depreciate over time. Depreciation is when the tools you use wear out with use and become less valuable in the years after you initially buy them. Furthermore, if your birdhouse business goes bust, you could sell the capital to recoup some of your losses.
Let’s Talk Tutoring Business
So what is capital in private tutoring? Tricky question, but according to Her Majesty’s Revenue and Customs (HMRC) capital is anything you use in the process of creating your good or service that has a use for longer than two years. So for a private tutor, HMRC self-employed capital allowances could be:
- Vehicles: Cars, Motorcycles and Bicycles
- Computer Equipment: Desktops, Laptops, Printers, Scanners and Copiers
- Mobile Devices: Smartphones and Tablets
- Video Equipment: Microphones, Speakers, Webcams
- Office Furniture: Desks, Bookcases, Chairs and Shelving
All of these things are different than, say, paper, textbooks, calendars, folders, rucksacks, uniforms and such because these items are not necessarily expected to last for two years and therefore have very little resale value.
So because capital has value in itself—that means when you drop greater than £1,000 on a computer you cannot write the whole thing off as an expense. Furthermore, if you happen to use any of that capital for personal use—for example, driving your car to the shop to get groceries or using your computer to book a holiday, it has personal use and that needs to be taken into account as well.
Now, calculating what depreciation you can write off as an expense gets complicated and depends on many variables—especially for cars. This is made further difficult because CO2 emissions are now a thing and need to be taken into account as well.
So, let’s pretend we bought a brand new 2017 Ford Ka for £9,305 for tutoring in. The second thing we need to know is CO2 emissions rate is 114g/km. The CO2 emissions rate of depreciation is 18% as set by HMRC. Last, you need to know what percent of the car is used for business use and what percent is for personal use. Let us assume that on average we drive the car 150 miles per week and 15 of those miles are personal driving on the weekends. 15/150 is 10%, ergo, the business use of the car is 90%.
Now we will calculate this on an assumption that the car will last for two years (and an additional assumption is that the tax rules will not change over those five years, which they are likely to change).
Year 1: Car Capital Allowance
So in Year 1 (2017-18 Tax Year) the capital expense allowance formula for cars looks like this:
So in our example:
For the 2017-18 Tax Year, you could write of £1,508 (you can round up) of the car as a capital allowance.
Year 2: Car Capital Allowance
Now in Year 2 (2018-19 Tax Year) you must first depreciate (or subtract) the FULL capital allowance of the car (to reflect 100% use; personal + business use). Ergo:
Once you have the new depreciated value of the car, you then calculate the CO2 emissions rate and personal allowance again to find out what you can write off as capital allowance
So our example goes:
For the 2018-19 Tax Year, you can write off £1,237 of the car as a capital allowance. Now things change of course if you have an accident and have to total the car, or if you sell it and even then different things happen depending on if you sell it for under or over the depreciated value. Throw in the detail that you have to calculate it to the specific number of days that you used the car in the tax year before you sold it and it can start to look like your Algebra Nightmare where you have to answer word problems in the final exam naked… only you feel worse because you’re in your mid-thirties and still might not pass.
Let’s listen to the experts: HMRC self-employed capital allowances explained
For all the possible situations, I recommend watching the brilliant video produced by HMRC and tax advice organisation, FreeAgent, on HMRC Self-Employed Capital Allowances. This video has loads of detail and case studies to help you figure out how to depreciate everything from cars to countertops.
Furthermore, if you think your capital starts to get too complicated for you to handle, it’s OK to throw in the towel and hire a tax professional. Remember, their fee is an expense (a non-capital expense) so if your tuition business is in profit, why not?
Now off you go to save with HMRC self-employed capital allowances. For more savings, read through more of Tavis’s Tax Tips in the rest of the blog series.
Tutor Tax Expense Spreadsheet