Making Tax Digital · Sole traders
Capital allowances vs allowable expenses: claiming tools and machinery
ONLY£15A MONTHA drill bit and a production machine may both come from the same supplier, but they do not always follow the same tax route.
A drill bit and a production machine may both come from the same supplier, but they do not always follow the same tax route. Before deciding how to claim, establish the accounting basis, what the item is and whether it has private use. Price alone is not the test.
Running costs and lasting equipment
Consumables used in the trade are normally considered as running costs. Equipment kept for business use may need capital treatment under traditional accounting. Under the cash basis, many such purchases instead receive an expense deduction when paid, subject to exceptions.
HMRC explains the distinction. A business using traditional accounting may use Annual Investment Allowance for qualifying plant and machinery, within the conditions and limit. Cars are excluded from AIA.
Accounting depreciation allocates an asset's cost in the accounts; it is not itself the allowable tax deduction. Where capital allowances apply, maintain the tax calculation separately.
Do not deduct the purchase cost and the repayments of the same financing again. Keep the agreement and distinguish interest from capital. For a mixed-use item, consider the business proportion under the relevant rules.
Worked example: two businesses buy the same machine
Each business buys qualifying equipment for £3,000 solely for business use. A cash-basis sole trader may deduct the eligible payment as an expense. A traditional-accounting sole trader considers AIA or another capital allowance.
The immediate tax deduction may be the same if AIA is fully available, but the records and later disposal treatment differ. A £3,000 deduction is also not a £3,000 refund: its tax value depends on the taxpayer's position.
Give equipment its own review
The tax treatment of equipment depends on the accounting basis and the asset, not just its price. Under the cash basis, many business equipment purchases are deducted when paid. Cars and certain other expenditure are exceptions. Under traditional accounting, a purchase with lasting business use may instead enter the capital-allowances calculation.
HMRC's capital-allowances guide explains the available routes. Annual Investment Allowance can cover qualifying plant and machinery, subject to its conditions and limit, but it does not apply to cars. Accounting depreciation is not itself the tax deduction.
Keep the purchase invoice, date, payment evidence and any finance agreement. A finance instalment can combine capital and interest, so treating every payment as an ordinary running cost may give the wrong answer. Record private use where relevant and retain the disposal paperwork when equipment is sold or part-exchanged.
For an expensive or unusual purchase, resolve the treatment before relying on a tax estimate. A category chosen from the merchant name cannot tell you whether an item was bought outright, leased, used privately or acquired as part of a larger building project.
Keep the evidence connected to the figures
Your digital record should explain the amount, date and nature of the transaction. Keep the invoice, receipt, statement or other evidence that supports it. A photograph can make a paper document easier to retain, but a folder of photographs alone does not create complete transaction records.
For sole traders, HMRC normally requires business records to be kept for at least five years after the relevant 31 January filing deadline. Keep them longer where the rules for a late return, enquiry or other circumstances require it. Check the record-retention guidance.
Make the records usable by your future self. Include a short explanation where a bank description is vague, retain the calculation behind a business-use split and make corrections traceable. For a missing receipt, try the supplier account, email confirmation or a replacement invoice before relying on incomplete evidence.
At review time, compare your records with the bank or payment account and investigate differences. Equal totals are useful, but two errors can cancel each other out. A sample of individual transactions can reveal a duplicated purchase or an omitted customer receipt that a totals-only check misses.
Where this fits into Making Tax Digital
For 2026/27, the first mandatory phase generally covers individuals whose combined qualifying self-employment and property income was more than £50,000 in 2024/25, subject to exemptions. Qualifying income normally means income before expenses. It is a different figure from taxable profit. Check the qualifying-income rules.
Once within MTD, keep the required digital records and send quarterly summaries for each relevant business. The summaries are cumulative from the start of the reporting year. They do not contain your entire personal tax position, and sending one does not itself create a quarterly tax-payment demand.
HMRC does not require accounting or tax adjustments before each quarterly update. Those adjustments and the other information needed for the annual return still have to be completed at the appropriate stage. Keep a review list so a matter deferred until year end is not forgotten. Read HMRC's quarterly-update guidance.
Software can organise the information, but the business facts remain essential. Review the figures you approve rather than assuming that a successful import has also settled every tax question.
Keep an equipment record
Record purchase date, cost, business use, financing and the relief claimed. When selling or replacing the item, retrieve that record before categorising the proceeds. Avona AI can flag a purchase for review; the accounting basis and asset history determine the answer.
Take the next step
Avona.app offers a self-service route from £15/month. Bring your records together, review the figures and choose a workflow that fits your business. For professional help, discuss the scope and total price of Avona Concierge, managed by chartered accountants, before choosing a service.