Depreciation: what you can claim

Depreciation is the one category in HMRC's list that is not really an expense at all. It is the bookkeeping entry that spreads an asset's cost over its working life — and HMRC always adds it back when working out your taxable profit, giving capital allowances instead.

What you can claim

Strictly, nothing in this category reduces your tax bill. It exists so your books balance and your quarterly totals match your accounting software. What belongs here:

• Depreciation on equipment — a £900 laptop written off over three years is £300 a year.
• Depreciation on premises — as calculated in your year-end accounts.
• Amortisation — the same idea applied to licences and other intangible purchases.
• Automatic monthly depreciation — posted by your bookkeeping software.
• Depreciation on assets sold or scrapped — the adjustment your accounts make when an asset leaves.

What you can't claim

• Depreciation itself — never accepted as a tax deduction, however carefully calculated.
• The full cost of equipment — that is claimed once, through capital allowances, not here.
• Depreciation on personal assets — things with no business use.
• Both the purchase and the depreciation — claiming the £900 laptop and its £300-a-year write-off is double counting.

Common mistakes

The most common error is claiming the purchase price and the depreciation. If your software posts £300 of depreciation on the laptop you already bought, your quarterly totals include a cost that gets removed at year end. Your final declaration sorts it out — but the quarterly picture is misleading in the meantime.

The reverse mistake causes its own mess: skipping depreciation entirely because "it's not deductible" leaves your tracker totals out of step with your accounts. Record it here so the two match, and let the year-end adjustment handle the rest.

The third point is simply knowing what you get instead. Most small businesses can write off equipment in full in the year they buy it, using the Annual Investment Allowance of up to £1 million — which is why depreciation rarely changes a sole trader's actual tax bill.

How to record it in your MTD tracker

Record depreciation entries under Depreciation so your quarterly totals reconcile with your software or accountant's figures. Keep a separate note of asset purchases — date, cost, description — because that list is what your accountant needs to claim capital allowances at year end.