# Sole Trader Expenses - Computer Purchase?



## ButtermilkJa

I purchased a computer from the UK for my business. The laptop cost €1450.00. I paid for it with a busness development loan I got from my bank.

How would you account for a purchase like this in year-end accounts? I've heard you have to write it off over a number of years. Is this the case? If so, how is it done?

Thanks!


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## Rascal

Buttermilk

The cost to you in EURO should be capitalised in your accounts.

Capital allowances are claimed over 7 years.

Ciaran
Ciaran@dublin.com


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## ButtermilkJa

Cheers Rascal!

I'm not sure what capitalised means but I don't think I'm prepared to write it off over 7 years. It's only a laptop that will be useless in less than 3 years probably.


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## contemporary

you can write it off over 1 year too, 7 years is a long time to be writing off a laptop


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## ButtermilkJa

Can I? Is this a kind of, 'Use your judgement' sort of thing. Are there no set rules? In other words, I can write off a laptop over a year or two, but if I spend €50,000 on something I would spread it over longer. You spread it over the 'life' of the equipment so to speak. If so, what do I do now?

If I'm going to write it off over 2 years say, do I divide the ex-vat cost (€1450) by 2 and then include the result as an ex-vat expense for the year in my Income Tax calculations? Similar to any other ex-vat expense? Or is there a different way to treat equipment?

Cheers!


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## contemporary

no, you can write it off in the 1st year as an overhead, rather than a fixed asset. a laptop will depreciate massively while something like a printing machine doesnt. if you decide to treat it as a fixed asset you can capitalise it, but for something like a laptop and of relatively low value you are better off treating it as an overhead, a lot of it comes down to your turnover, tax bill etc, as with all these things an accountant would advice you of the best course of action for your business


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## ButtermilkJa

Cheers, thanks contemporary! I'll leave that one for the accountant so.


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## janeymc

For what it's worth

We were advised to depreciate them over three years. 1/3 each year. We have 12 laptops so our situation is not exactly like yours but the above is the norm I believe

Janey


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## Rascal

Buttermilk

The period you may claim capiatal allowances are dictated by revenue rules.

You may depreciate your assets in your own accounts any way you choose.

HOWEVER...depreciation is not an allowable expense.

Instead, capital allowances are claimed on your tax return.

There are rules governing claiming capital allowances and how they are claimed.  Be careful. as revenue may reverse anything you may do incorrectly.

Hope this helps...

Ciaran
Accountant in Practice


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## ButtermilkJa

Yes thanks! All the above helps. I'll most likely be getting an accountant anyway so I'm sure he/she will be able to sort me out.

I'm just trying to do as much as possible myself as it's only a part-time business so the turnover is not huge and I don't want to have to pay a few hundred on accounts if I can save a bit by doing a lot myself.


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## extopia

I thought Capital Allowances were claimed at 12.5% per annum, therefore over 8 years rather than 7?


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## jimmyjoe

ButtermilkJa said:


> Yes thanks! All the above helps. I'll most likely be getting an accountant anyway so I'm sure he/she will be able to sort me out.
> 
> I'm just trying to do as much as possible myself as it's only a part-time business so the turnover is not huge and I don't want to have to pay a few hundred on accounts if I can save a bit by doing a lot myself.


 
As has been said, the way to claim it is through Capital Allowances, which are normally claimed over 8 years.  

There may be a box to claim accelerated allowances in the first year - maybe 40% (I don't know the detail) which will resolve the most of it for you.

If after 2 years, the laptop's kaput, you claim that you've disposed of it for Zero, and then claim the Written down Allowance for the remaining amount in 1 lump.

T'would be on your conscience to say that it'd died in year 1, when it may actually be working quietly away somewhere else


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## extopia

jimmyjoe said:


> There may be a box to claim accelerated allowances in the first year - maybe 40% (I don't know the detail) which will resolve the most of it for you.



Where would this box be?


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## bazermc

extopia said:


> Where would this box be?



Does not exist.  Accelerated capital allowances were phased out years ago.  Must be written off at 12.5% per annum therefore over 8 years


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## liteweight

So is it possible to claim it as an overhead or MUST you write it off over 8 years at 12.5%?


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## Kiddo

liteweight said:


> So is it possible to claim it as an overhead or MUST you write it off over 8 years at 12.5%?


 

You can't claim it as an overhead under any circumstances. You must capitalise it in your accounts ie treat is as a fixed asset on your balance sheet and depreciate it. You can chose any reasonable depreciation % you like for your accounts but in order to arrive at your taxable profit for the year depreciation will be added back and capital allowances will be claimed.


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## liteweight

Thanks Kiddo.....seems crazy though, Buttermilk is obviously a sole trader, running a part time business and he has to operate like a multi national!!


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## extopia

Well look on the bright side - you can be getting tax relief from the purchase long after the laptop has ceased to function!


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## contemporary

Kiddo said:


> You can't claim it as an overhead under any circumstances. You must capitalise it in your accounts ie treat is as a fixed asset on your balance sheet and depreciate it. You can chose any reasonable depreciation % you like for your accounts but in order to arrive at your taxable profit for the year depreciation will be added back and capital allowances will be claimed.



I've worked in the IT and office equipment business for many years and from experience of dealing with the revenue they are quite happy for sole traders and small companies to write off minor office & IT equipment off in the first year. They appreciate that the machines have a limited life and that a small trader isnt going to claim (nor do they really want them to) for it over 5,6,7,8 years. You dont see many STs/SMEs keeping an asset register for their fax machine, 50 euro inkjet printer etc. Its when you get into the the 10,000's that the RC become interested in capital allowances


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## ubiquitous

contemporary said:


> I've worked in the IT and office equipment business for many years and from experience of dealing with the revenue they are quite happy for sole traders and small companies to write off minor office & IT equipment off in the first year. They appreciate that the machines have a limited life and that a small trader isnt going to claim (nor do they really want them to) for it over 5,6,7,8 years. You dont see many STs/SMEs keeping an asset register for their fax machine, 50 euro inkjet printer etc. Its when you get into the the 10,000's that the RC become interested in capital allowances



In how many Revenue Audits have you seen this policy implemented by the Inspector?

Common sense would indicate that the cut-off for this purpose should be a lot higher than €50 euro, but it would be crazy to suggest that one could get away with a cutoff as high as €10,000.


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## Pegasus

Yes but I'd say 1450 would be arguably ok unless the p&l figures are very small.


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## ubiquitous

Pegasus said:


> Yes but I'd say 1450 would be arguably ok unless the p&l figures are very small.



This would depend totally on the circumstances and is ultimately down to one's own judgement and conscience.

A claim for 100%, instead of 12.5%, of €1450 would represent a claim of €1,268 over and above what is legally permitted.

For a 42% taxpayer, paying 5% PRSI, this would represent a tax underpayment of €596.

This could technically become due for payment along with interest and penalties if requested by Revenue at any stage in the future. 

Whether this is a reasonable or acceptable risk for any given individual is a matter of opinion and will depend on their own perspective and circumstances - it might not be a wise course of action for anyone with any other grey areas in their tax compliance history.


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## contemporary

3 (recent) audits, generally PC's/servers with a value of up to 3k have been written off  in year one, once you start getting into the high 000s you do have to look at capital allowances e.g. €5k+ photocopiers (i must have been generous to say 10k but thats wasnt my intention) i have never seen a small company with 2-3 people in the office use capital allowances for buying a new pc/laptop/printer/fax, never in 15 odd years. With regard to the OP I would say it is quite reasonable for him to write off a €1500 laptop in year one


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## extopia

contemporary said:


> I would say it is quite reasonable for him to write off a €1500 laptop in year one



But you are not backing this up with any reference to actual revenue guidelines or tax law, unfortunately.

What do you mean by your reference to 3 recent audits. Are you saying you were the auditor and this is what you saw?

Does anyone have a definitive answer on this? And what about computer software purchases - off the shelf stuff like MS Office for instance?


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## bazermc

extopia said:


> What do you mean by your reference to 3 recent audits. Are you saying you were the auditor and this is what you saw?



Tax law is very vague on the whole area of what is capital and what is revenue hence the reason for so many court cases and case law precedents in ireland and UK.  Better judgement would lead you to conclude that the purchases of a PC is not revenue based on its enduring benefit etc...... 

 I cannot imagine any revenue inspector allowing it as revenue expenditure


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## extopia

Eh, not sure if I follow you. Do you mean no revenue inspector would allow it to be written off all at once?


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## contemporary

extopia said:


> What do you mean by your reference to 3 recent audits. Are you saying you were the auditor and this is what you saw?



an employers company, a friends company and a clients company, i cant back it but with the law only with experience, the rev i find are more interested that vat/paye & prsi are being paid.


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## Tenacious

If the computer is considered an asset (i.e. last more than one year, be possessed or controlled by the individual and give probable future benefit), then it should be capitalised. By being capitalised the cost of the computer will be shown as an asset on the face of the Balance Sheet instead of being expensed in the Profit & Loss Account. A sole trader may decide to depreciate an asset over the length of time he deems fit. This may be his accounting policy. Accounting policies are the specific accounting bases selected and consistently followed by a business as being, in the opinion of the management, appropriate to its circumstances and best suited to present fairly its results and financial position. In any event depreciation is always added back to accounting profits to arrive at taxable profit. Capital allowances are at 12.5% at the moment. Therefore in the sole trader's adjusted profit computation (to arrive at his Case I/II Income from accounting profits) wear and tear allowance should be claimed over 8 years on the cost of the computer.


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## Kiddo

Tenacious said:


> If the computer is considered an asset (i.e. last more than one year, be possessed or controlled by the individual and give probable future benefit), then it should be capitalised. By being capitalised the cost of the computer will be shown as an asset on the face of the Balance Sheet instead of being expensed in the Profit & Loss Account. A sole trader may decide to depreciate an asset over the length of time he deems fit. This may be his accounting policy. Accounting policies are the specific accounting bases selected and consistently followed by a business as being, in the opinion of the management, appropriate to its circumstances and best suited to present fairly its results and financial position. In any event depreciation is always added back to accounting profits to arrive at taxable profit. Capital allowances are at 12.5% at the moment. Therefore in the sole trader's adjusted profit computation (to arrive at his Case I/II Income from accounting profits) wear and tear allowance should be claimed over 8 years on the cost of the computer.


 
Exactly....

In 10+ years of working in accountacy practices and in that time working in 4 different places (all small practice) I've always treated capital expenditure as above. Depending on the business of the company some calls can be made as to what constitutes captial expenditure or expense but in 99% of cases expenditure on computer equipment will be capitalised.



> And what about computer software purchases - off the shelf stuff like MS Office for instance?Yesterday 06:12 PM


 
It really depends on the price...if its €200 or so I would tend to make a judgement that its an expense...but if it was included in the cost of a computer then I'd capitalise it. However if you spent €1k+ on specific software I'd say it has to be capitalised...


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## ubiquitous

> 3 (recent) audits, generally PC's/servers with a value of up to 3k have been written off  in year one,



contemporary, 
Just in the interests of clarity, are you talking about Revenue Audits (ie visits by a Revenue Inspector) here? 

I am aware of one recent Revenue Audit case where the Inspector made a big deal of the issue that capital allowances were claimed at 20% p.a. on an €25,000  asset, when only 12.5% per year should have been claimed. The annual overclaim was approx €1,875. Assuming the guy was a 42% taxpayer, this translates into an underpayment of €881 in tax & prsi. I understand that the Inspector was demanding payment of interest and penalties on top of the repayment of the tax amount. I'm not sure how it panned out in the end but at the time I heard about the case, the businessman and his wife were worrying a lot about it.

The amount of the original tax underpayment in that case was less than that in the "€1450 asset" example above.


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## contemporary

i have to say this is a very interesting thread

to answer your question ubiquitous they were rev audits, I wonder sometimes does it depend on the person you get


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## extopia

Came across this in Revenue Tax Briefing 46

[The discussion in question is in relation to hardware and software costs incurred during the euro changeover period but no reason to assume it no longer applies, I suppose. Note that allowance has since changed from 20% to 12.5% per annum]
____________________________

*Changeover Costs*
The question of how business costs incurred to deal with the euro will be treated for tax purposes is again topical as we approach the changeover date. It is therefore timely to repeat and update an earlier article on this topic which appeared in Issue 31 of Tax Briefing (April 1998). Most queries on this topic relate to the costs incurred on computer software and hardware, on adapting point-of-sale equipment such as cash registers and vending machines, and on training costs.

*Revenue vs. Capital Expenditure*
The starting point in dealing with this issue is to understand the basic difference between costs of a revenue nature (which can generally be written off in full for tax purposes in the year in which they are incurred), and costs of a capital nature for equipment (which, in most cases, can be written off for tax purposes over 5 years for expenditure incurred on or after 1/1/01). In this regard - although there are some exceptions such as finance leases - the capital/revenue classification for tax purposes will generally follow accountancy principles. For accountancy purposes, costs are of a capital nature if they give rise to an asset. Where costs are incurred in adapting existing assets, it is necessary to assess whether the expenditure enhances the economic benefit of the asset (by extending its service potential) or simply maintains its standard of performance, as originally assessed. In the former case, the costs are of a capital nature and will qualify for capital allowances; in the latter case, the costs can be written off for tax purposes as incurred.

*Software Costs*
Software to deal with the euro changeover can either be bought in or developed/adapted in-house. In either case, the principles outlined above will determine whether the costs will be of a capital or a revenue nature. As a general rule, these costs are likely to be of a revenue nature, and therefore can be written off for tax purposes as they are incurred.
They represent no more than a modification of existing assets to deal
specifically with the euro. They will only be capital where the new software acquired or the adaptation of existing software clearly results in
an enhancement beyond the original standard of performance and is not a mere maintenance of its service potential. Any software expenditure of a capital nature can be written off for tax purposes over 5 years (for expenditure incurred on or after 1/1/01) in the same way as plant and machinery.

*Hardware Costs*
It may be that existing hardware (computers, cash registers, vending machines etc.) may also need to be modified to cope with the euro.  Again, the capital/revenue distinction, as outlined above, must be made to determine the tax consequences. As with software, the cost of modifications to maintain the equipment’s service potential can be written off for tax purposes as incurred. The cost of new hardware, or the cost of enhancing existing hardware beyond the asset’s originally assessed standard of performance, can be written off for tax purposes over 5 years (i.e. 20% per annum for expenditure incurred on or after 1/1/01).

*Training etc.*
The costs of training, and other costs such as informing customers, changing stationery, etc., will generally be of a revenue nature and can be written off for tax purposes as incurred.
_______________________________

So it seems clear that computer hardware costs should be capitalised. Computer maintenance costs (including software upgrades) could be interpreted as a revenue expenditure.

Unless Revenue policy or Tax Law has changed since this was published, of course.


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## HME

Ciaran's reply is the one to rely on, the other answers while definitely based on common sense, unfortunately will not stand the test of a Revenue Audit.


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## extopia

HME said:


> Ciaran's reply is the one to rely on



If you're referring Rascal's reply above, surely this cannot be relied on as it specifies that capital allowances be claimed over seven years, when in fact it's 8 years?


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## Numbs

Sorry for jumping in on this thread but I have a question. In the case of software that is >€1,000 in value, do I capitalise this? If so, do I treat it as a capital asset and depreciate it using the 12.5% over 8 years rule? I know it can be argued that software does depreciate but I'm a bit confused.


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## extopia

Here's how I'd look at it (I am not a tax expert).

(Have a look at my post above, quoting from Revenue's "Tax Briefing" if you haven't already.)

I'd say that a software purchase (regardless of the price of the sotware) constitutes a modification of existing assets (i.e. your computer hardware). You must decide whether this modification enhances the performance of the asset or whether it just maintains the performance of the asset.

If it enhances the performance (say you buy video editing software for the first time) it's an asset and must be capitalised over 8 years. If it merely maintains the performance of the asset (say an anti-virus application, or perhaps an upgrade to an existing appliction) it's a cost and can be written off in full.


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## Glenbhoy

In a slight variation to the OP's query.  I was depreciating my laptop at 33 1/3% and claiming capital allowances at 12.5% as I was supposed to.  Then my laptop had an unfortunate meeting with a pint of water!!  Now, what I intend to do next year is to claim the remainder of the capital allowances on that laptop as a loss on disposal, I actually had 6 yrs worth of them left.  If that's allowable that would mean that in most cases (certainly re computer equip) the write-off would not be over 8 yrs but over the life of the equipment.  Can I do this?


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## extopia

It would appear that you may claim the remainder of the capital allowances as a balancing allowance -  as the asset has been scrapped. From the [broken link removed]: (page 17)

________________________

*Balancing Allowance and Balancing Charge* 

If you sold/traded-in or scrapped any item of Machinery/Plant or Road Vehicle during the year, you cannot claim a Wear and Tear allowance on that item for that year. 

Instead, if you sold the asset for a sum less than its Written Down Value at the beginning of the year, you may claim a balancing allowance equal to the difference between the two amounts....
____________________________________


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## Glenbhoy

Thanks Extopia, balancing allowance, that's the term, all coming back to me now 
Though my old boss used to be adamant that virtually any capital expenditure could be written off as an expense (depending on the profit for the year of course!!).


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## simplename

so what's to stop you modifiy an existing asset by changing the motherboard, ram, hard drive etc. This prob would not have to be capilzed.


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## extopia

See above. If the modification enhances the performance of the computer, or extends its useful life, it should be capitalised. If it just maintains the performance, you can write it off.


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## Pegasus

There are two aspects to be considered - the nature of the item and materiality - when considering whether or not to treat as a capital or revenue item for tax purposes.
A 10 euro calculator has all the characteristics of an asset which should be capitailsed except that its cost is such that no-one will have a problem with you writing it off immediately. No exact figures are given by revenue or set down in law afaik so it comes down to a judgement call in each case. Some items are very obviously one or the other, and in certain entities' accounts/tax comps a laptop will be a borderline case. I don't think it comes down to a matter of conscience.


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## Gordanus

hmmmm.........I think I've got 3 computers on my books at the 12.5% capital allowance.  Only one is still (bought last year) with me!  (am a Sole Trader)


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## extopia

Well as long as you didn't sell the other two you should be OK...


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## Tenacious

It should be noted that capital allowances are only allowed if the asset is in use on the last day of a businesses accounting period. Assets disposed of during the year are not entitled to capital allowances for that year. Assets bought even the day before the last day of an the accounting period qualify for a full year's capital allowances. Indeed if the sale proceeds of a disposed asset exceed the Tax Written Down Value (TWDV) a Balancing Charge will arise on the difference. Also leased assets do not qualify for capital allowances, while hire-purchased assets do.


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## ButtermilkJa

Surprised to see this thread brought back to life after so long in the dark, but hey, that's the great thing about a discussion forum...

Anyway, just to clear things up a bit (if it helps), I've just got my accounts back from a professional accountant and she says that I must capitalise the laptop over 8 years regardless. However, I am free to sell it at any time and any money I make back is adjusted off the allowances I've claimed and it eventually balances itself out.

I think that's the gist of what she was saying.


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## Tenacious

You will get a balancing allowance if you sell you laptop for less than its tax written down value (Cost less no. of years of capital allowances) so you won't lose out.


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## Gordanus

extopia said:


> Well as long as you didn't sell the other two you should be OK...



Not even the kids would take them!


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