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HMRC internal manual

Business Income Manual

Example: Capital allowances are treated the same as other expenses

Roger has been trading for a number of years as a hairdresser working from his home. He makes profits of £15,000 per annum. His expenses are low so he deducts the £1,000 allowance in calculating his profits.

 

Over time there is a change in customer demand and from 2019/20 onwards he goes to his customers’ houses. Some of his customers have moved out of the area but they are prepared to pay more for him to travel to them. Some live in rural areas so he is unable to use public transport. He buys a car for £5,000 in April 2019, so he can travel to his customers.

 

Roger cannot claim £5,000 as an expense as it is a capital item. He may though be able to claim capital allowances as a deduction in calculating his profits, however, he cannot deduct CAs and the trading allowance. This is because capital allowances are treated as expenses of the trade which are not allowed to be deducted if an individual uses the trading allowance.

 

He will need to take into account what level of capital allowances he can claim and also the simplified expenses rules (BIM75000) when deciding whether to elect for the £1,000 allowance in 2019/20.