Tax treatment of company hardware and software expenses

Computer hardware and software are two essential expenses for any modern business and costs can run into the thousands, but what can you legitimately claim against your company’s profits?

This type of business expense can often be a tricky area for directors, especially if you are installing new software or using a laptop or PC that you use for business but also for personal correspondence or other reasons.

So how does HMRC differentiate a genuine business expense from one that benefits both the business and the individual?

Business or pleasure?

The key here is to determine how your computer is used on a daily basis.

If the laptop or PC is purchased by the company then the equipment must be used for business purposes, such as completing work for clients, processing orders etc. HMRC accepts there will be some personal use of a business computer, but this should be incidental.

This means you can send the occasional private email, catch up with the latest news headlines, and maybe even order a pizza for the office, but if there is significant personal use, the ‘duality of purpose’ rule will apply.

If this is considered to be the case, HMRC will deem the asset a benefit in kind and you could be taxed on the value of the item and only be able to claim a portion of the value as a legitimate business expense.

What about software or computer-related purchases?

Computers, including servers, laptops, printers – and any other type of office equipment – are considered fixed assets that depreciate in value over time.

Software, licence fees, memory cards and flash drives are considered to be standard assets.

For tax purposes, you can offset the cost of standard assets against your company’s Corporation Tax bill, whereas hardware and office equipment come under capital allowance rules.

This means they will be useful to your business over an extended period so that a proportion of their value can be offset against any profit the business makes for the year.

The current Annual Investment Allowance limit is £1m (2023/4).

Full expensing rules, which run from April 2023 to March 2026 mean that your company can also offset the full cost of any qualifying assets within year one. Rather than accounting for the cost over several years.

The Flat Rate VAT scheme and tax

If your company uses the Flat Rate VAT (FRS) scheme – introduced to provide smaller businesses with a simpler way to calculate their VAT liability – the tax treatment of computer hardware purchases is covered by separate rules.

If you use the FRS, you can’t claim back VAT on purchases, however, you can claim the VAT element on capital expenditures on items costing more than £2,000.

This doesn’t have to be for a single item such as a computer, but may include a scanner and printer, as long as the items were bought in a single transaction. You can read more in this HMRC guide.

Keep records and receipts

Be sure to keep meticulous records and receipts for all hardware and software purchases you make for business use.

That way you can back up any claim you make to reduce your tax liability and deal with any enquiries from HMRC.

A note on websites and tax relief

If you incur costs through website development it’s important that you are able to identify the exact costs of the website for tax purposes.

Previously, you may have simply accounted for website costs as marketing, advertising or general IT costs which were seen as tax-deductible revenue expenses.

But websites are increasingly more a function of the business instead of just an online shop window and as such, certain maintenance costs can qualify for capital allowance of up to £1m.

HMRC is also focusing more on whether the website is designed to generate income for the business and if so, how much that is likely to be.

Make sure you keep detailed records of all website costs and pass these on to your accountant so they can be allocated correctly for tax deductions.

Read our complete guide to limited company expenses here.