100% FYA Low Emission Car

[Extra 300 Driver]

I am thinking of buying a plug in hybrid car and running it as a company car. Lets say it has a 49Co2 figure and we will keep it for 3 years, and costs £70,000.

The business pays £120,000 in tax per year, so will the cost of the car be 100% deductible from our HMRC bill in year one? So if we were due to pay £120,000 to HMRC, but with the car purchase it will only be £50,000.

That cant be right, can it?

[Eric Mc]

Capital Allowances claims are offset against the company profits, not against the actual Corporation Tax bill.

[dazmanultra]

It means out of the money you use to buy the car, you effectively don't get taxed on that portion (it's almost as if you depreciate it entirely in year 1).

[Extra 300 Driver]

Understood, I think,

So
A = CT bill prior to car purchae £100k
B = Car £70k
C = Allowance 20% of £70k = £14k

CT = A-C

[Eric Mc]

Essentially yes.

If the Capital Allowance is 100% of the cost, as it is for assets that qualify for the Annual Investment Allowance (AIA), then the business is allowed to write off the full cost of the asset against its taxable business profits .

Note - the accounting depreciation will almost definitely NOT be 100% as it is not normal ACCOUNTING policy to write off asset purchases in the year the asset is purchased.

This is one of the classic areas where accounting and tax treatment of the same transaction can vary significantly.

[dazmanultra]

Eric Mc said:

Note - the accounting depreciation will almost definitely NOT be 100% as it is not normal ACCOUNTING policy to write off asset purchases in the year the asset is purchased.

This is one of the classic areas where accounting and tax treatment of the same transaction can vary significantly.

Absolutely - It's why I said "it's almost as if..." but it was an imprecise comparison in retrospect!

[98elise]

When the car is eventually sold, it that money then subject to CT?

[Eric Mc]

Only on that element of the sale proceeds (or trade in value) that exceeds the Capital Allowance written down value.

Obviously, if the vehicle was eligible for the 100% Annual Investment Allowance (and it was claimed) in the year of purchase, it's tax written down value will instantly become Nil.

This means that when teh vehicle is eventually disposed of, all the proceeds will be subject to a Corporation Tax charge.

[98elise]

So essentially the saving is the tax on the depreciation?

I don't have a qualifying car, but I will have in the future so its interesting to know what the real benefit is. That said its an area thats likely to see some change.

[Eric Mc]

Yep - governments change their minds on such issues with alarming frequency.

[98elise]

Keeps you in.work though

[Eric Mc]

98elise said:

Keeps you in.work though

Constant change doesn't "keep" me in work. I'd be doing the work anyway. It just makes the work frustrating because it's very hard to give people consistent advice when the legislation is inconsistent.

[oop north]

I would say it is more accurate to describe the benefit as an acceleration of the tax allowable depreciation. With current rules you can actually end up with unrelieved depreciation after the car is sold that could take years to clear (depending on sale proceeds v tax written down value) - you avoid that problem with 100% allowance in year one but then have to pay corporation tax on proceeds when you dispose.

NB get a higher emissions car and the tax relief is slowed down more - 130g used to be the limit but I think is now lower - above that and you get 10% pa tax allowable depreciation, below that (down to 50g I think) you get 18% pa and below 50 you get 100% in year one.

So a higher emission car will have a tax written down value of around 73% after three years and if sold for 50% initial cost the balance of 23% x cost that is unrelieved gets written down over a few years after. There is a point when the balance is written off in one go (at a de minimis limit) but it can delay the tax relief a great deal

[ukshooter]

Quick question relating to the 100% write down and then paying CT on trade in value.

I'm about to trade in my Tesla for another one after 2 years. It got the 100% allowance in year 1. Trade in is circa £42k so CT payable on the £42k but I am trading in for a new one which will also qualify for the 100% write down I think.

So, does the new Purchase cancel out the £42k and I get 100% on the difference between the trade in price and the new purchase price?

Or does something else happen?

[Eric Mc]

You include the sale/trade in proceeds on the old car as "Income" in the Capital Allowance calculation (referred to as a "Balancing Charge" but you also insert the new vehicle and claim the 100% allowance on the new vehicle.

[ukshooter]

Thanks Eric

[Extra 300 Driver]

So, what would be the advantage to a company for buying a £100k new car to an £80k used car, even if it was just pre registered (Knowing that you can not claim the 100% unless you are the first owner).

Thats a saving of £20k straight away, or is the tax saving greater? Sorry, I am having an internal battle with this!