Sole Trader Expenses - Computer Purchase?
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ubiquitous
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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.
contemporary
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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
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?
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
contemporary
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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.
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.
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...
ubiquitous
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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.
contemporary
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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
to answer your question ubiquitous they were rev audits, I wonder sometimes does it depend on the person you get
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.
[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.
H
HME
Guest
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.
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.
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.
(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.
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?
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....
____________________________________
________________________
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....
____________________________________
simplename
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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.