Dear Contractor Doctor,
I’ve just started my first contract as an interim project manager for my first client’s new project launch, trading through my own limited company. I’m spending a lot of time working on the train and in the evening on my laptop, which I bought six months ago before I’d even considered contracting as a career choice.
Because I hardly use my laptop for anything else apart from work now, one of the contractors I’m working with has told me that I should get my limited company to buy the laptop and other home office equipment because of the tax breaks.
Can I sell personal assets to my company?
Thanks
Alex
Contractor Doctor says:
The short answer according to James Abbott, head of tax at contractor accountant Baker Watkin, is ‘yes’. But there are rules set out by HMRC which explain what processes a contractor should go through.
Abbott explains: “The most common scenario is exactly as Alex describes. When a contractor has just started their new business and is using equipment previously bought personally for business purposes, they can sell that equipment to their contractor limited company and offset the expense against tax.”
Check timings and, if required, fair market value
The first step is to check how long the contractor has owned the asset, because that will affect the price that can be charged to their business when making the sale. “As Alex’s laptop is six months old and it was not bought with the intention of using it for business purposes, she probably would not be justified in charging the full purchase price. So she’ll have to put a market value on the laptop.”
Abbott says that’s fairly straightforward, and HMRC would accept a fair valuation based on how much laptops of an equivalent specification and age are being sold secondhand. A simple search on eBay will do for most computer and office equipment.
“If the contractor bought the laptop specifically for the business before incorporation but using their own money, or if the equipment was weeks or not more than a month or so old, then the contractor would be justified in charging the full purchase price,” he adds.
Tax treatment of personal asset sales
Once the value has been established, contractors must account for the sale correctly, as Abbott explains: “Contractors have an Annual Investment Allowance (AIA) of up to £100,000 a year and get a 100% deduction against corporation tax for the expense.”
If Alex’s laptop originally cost £1,000 and research online using a website like eBay showed the secondhand value of the laptop to be £300, then the contractor’s limited company would buy the laptop from Alex by giving her £300. In practice, this would mean a transfer of £300 from the limited company bank account into Alex’s personal account.
When a contractor has just started their new business and is using equipment previously bought personally for business purposes, they can sell that equipment to their contractor limited company and offset the expense against tax
James Abbott, Baker Watkin
Alex would receive the £300 tax-free and her limited company would incur an expense of £300, which would be deducted from the company’s profits and offset against its corporation tax liability. There would be no benefit in kind on the laptop so long as any private use was insignificant.
What assets can be sold?
The rules allow for the costs of plant and machinery assets to be offset against corporation tax. In Abbott’s experience, contractors typically only ever sell personal assets such as computers and other IT equipment, office equipment such as furniture, plus mobile phones.
“Once the company has been incorporated, many contractors switch their mobile phone over to a business tariff to ensure they can charge the costs to their business,” explains Abbott. “The rules say that employer-provided mobile phones must be owned by the employer, which means the ownership of their phone must be assigned to their business.”
If the phone was not free when the contractor took out the original personal contract, then the same principles apply as for laptops. The contractor can check the market value of the phone, which can be considerable for some models, and charge that cost to the business.
“Larger or more specialised items, such as property, vehicles, goodwill and intellectual property, are rarely transferred between contractors and their limited companies,” adds Abbott.
Contractors who already know they will be registering their new company but have not processed the paperwork can incur pre-incorporation expenses personally and claim them back from the company once it’s up and running with a bank account and an income.
James Abbott heads up Baker Watkin's tax department and often speaks on freelancer / contractor tax matters. He has his own portfolio of contractor clients.
Baker Watkin are PCG Accredited Accountants and UK200 Group members based in Hertfordshire.
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Abbott concludes: “HMRC treat each case on its merits. So as long as contractors can justify the transaction, they should have no problems if their business subsequently undergoes an investigation.”
Good luck with your contracting!
Contractor Doctor
Published: Wednesday, September 21, 2011
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