Can I put a Smartwatch’s cost through my sole trader freelance business?
Freelancer’s Question: I know a contractor who is toying with the idea of claiming a Smartwatch as a deductible business expense through the contractor’s limited company. But what are the HMRC expenses rules in this area for sole traders? I’m a self-employed creative industry professional -- operating as a sole trader -- who would like to buy a Smartwatch and put the entire cost of the wrist device through my unincorporated business. Please advise.
Expert’s Answer: You can put the cost of anything through your business, but that does not mean that it will reduce your taxable profits which, along with recovering the VAT, if you are VAT-registered, would be the motive behind it.
To be tax deductible (i.e. deductible from income when calculating taxable profits), any cost must be “wholly and exclusively” for the purpose of business. On the face of it, that means that anything that is used for both business and personal would not be tax deductible. However, that would result in those costs which have only a minor element of personal not being tax deductible – which would, clearly, be unfair to the self-employed.
So HM Revenue & Customs accepts a fair apportionment of a cost between the business element and the personal element. The part that is business can then be regarded as “wholly and exclusively” for the business and so is tax deductible.
It is highly unlikely that a Smartwatch would be used solely for business, so there may be a need to carry out a sensible apportionment of the cost, should you proceed.
What if the business could be operated without the need for a Smartwatch?
There is no requirement from HMRC’s perspective that a cost has to be necessary for the business, but it does need to be used in the business. Using a Smartwatch within a business will therefore make it a tax-deductible item (subject to the apportionment point, above), even if the business could be operated perfectly well without it. Indeed, it would be quite an unusual situation where a business could not operate without having the use of a Smartwatch!
The cost of the Smartwatch is, technically, a capital expense. This means that it will be used (or is capable of being used) over more than one tax year and traditional accounting practice is to write the asset off against profits over its useful lifetime. However, various tax incentives are likely to mean that the whole cost can be written off, for tax purposes, in the year the cost is incurred.
What HMRC accepts…
Of course, a Smartwatch isn’t a mobile phone. Nor is it a tablet or computer. General purpose Smartwatches can be regarded as a ‘support device’ for your phone -- that you happen to keep on your wrist. This could mean that the proportion of business-to-private usage of the Smartwatch should mirror that for the related mobile phone.
For your reference, HMRC seems to accept that where the main reason for acquiring an asset is for use in the business, and where that business use is significant, the private use can be considered to be insignificant, resulting in a very small, or even zero, apportionment for private usage.
What about specialist Smartwatches?
Specialist Smartwatches, such as for hiking, diving or flying, would be easier to argue to HMRC justify significant business use -- albeit only where that specialism relates to your business.
On the other hand, a diving Smartwatch for, say, a freelance graphic designer, whose leisure pursuit is diving, will need a significant, if not total, apportionment to private use.
Recovering VAT on a Smartwatch
If you are a VAT-registered sole trader, you can recover all of the VAT incurred if the Smartwatch is used wholly for business use. Where there is mixed use, the VAT recovered should reflect the proportion of business-to-private usage, as noted above. The difficulty with this apportionment is that the VAT will be recovered shortly after the device is purchased, but the proportion of business-to-private usage won’t be known. Bear in mind, HMRC says that any apportionment should be “fair and reasonable.”
With Smartwatches costing anything up to about £500, the VAT is only going to be around £80 (at the very most), so any personal element is not going to make a huge difference. Just apply a bit of common sense, bearing in mind the parameters and criteria outlined above, should you proceed.
The expert was Graham Jenner, co-founder of tax advisory Jenner & Co, an accountancy specialist to contractors, freelancers and the self-employed.