Offsetting car loan against tax?
Discussion
Greetings!
I'm soon to launch a new Consultancy Business (freelance QS) and i was wondering what the rules were on putting a car 'through the business'?
To make it simple, lets say i've have seen a new car at £15,000 (general work-horse). If i were to put down £10,000 and finance £5,000 over 12 months @ say £440 per month could i offset set that against tax as my 'company car'?
I'm also led to believe that i can claim £3,000 per year as 'depreciation'... is this true?
If i were to offset the repayments against tax would the purchase have to be made via a Corparate loan/business account or could it be personal purchase (with say a Personal Loan)?
Any advice is welcome.... this is all very new to me!
Cheers!
I'm soon to launch a new Consultancy Business (freelance QS) and i was wondering what the rules were on putting a car 'through the business'?
To make it simple, lets say i've have seen a new car at £15,000 (general work-horse). If i were to put down £10,000 and finance £5,000 over 12 months @ say £440 per month could i offset set that against tax as my 'company car'?
I'm also led to believe that i can claim £3,000 per year as 'depreciation'... is this true?
If i were to offset the repayments against tax would the purchase have to be made via a Corparate loan/business account or could it be personal purchase (with say a Personal Loan)?
Any advice is welcome.... this is all very new to me!
Cheers!
Slightly different treatments and tax implications depending on whether your business is a sole-tradership or a limited company.
Sole Tradership
Car Purchased using cash, bank loan or HP
i) full cost of car capitalised in balance sheet as an asset
ii) Depreciation Charged in accounts at WHATEVER RATE is reasonable (usually 25%)
iii) finance costs allocated to profit and loss account as an allowable business expense. Finance costs means the interest and charges relating to the loan, not the full loan repayments
iv) vehicle running costs (fuel, maintenance, repairs, RFL, insurance etc) allocated to Profit and Loss account as allowable business expenses
There are some adjustments required before arriving at the tax allowable claims though. These are -
The disallowance of the Depreciation.
The Revenue substitute their own version called Capital Allowances (CA). CAs on cars are restricted to 25% on the cost and subsequent Written Down Value with a maximum claim each year of £3,000 Therefore, a car costing £15,000 would be limited to a claim of £3,000, even though £15,000 @ 25% = £3,750.
Private Use Restriction - the trader needs to work out what portion of his total mileage in the year relates to business and what portion relates to private. This will then give him a Private Useage Percentage or Ratio. All the claims made in respect of the car must then be restricted by this ratio so that only the business element ends up being deducted for tax purposes. The restriction applies to all the car related costs INCLUDING the Capital Allowance claim AND the finance cost/interest charged on the finance/loan.
Car acquired using a Finance Lease
The accounts treatment is exactly the same as for an owned/bank loan/HP car
The tax treatment is different.
No Capital Allowances are claimable. Depreciation IS allowed (but it must not be excessive)
There is also an Expensive Car restriction on the Lease Charges
All the Private Useage restrictions apply.
Operation Lease (Renting)
Car is NOT capitalised in Balance Sheet.
Regular repayments ARE allowed as full deductions
Private Useage applies
Expensive Motor Car restrictions apply
Capital Allowances cannot be claimed (they are being claimed by the LEasing Company)
For Limited Companies all the above apply with the following differences -
there is no need for a private useage adjustment
motor cars supplied by the company to a director are taxed as a Benefit In Kind through the PAYE system.
Sole Tradership
Car Purchased using cash, bank loan or HP
i) full cost of car capitalised in balance sheet as an asset
ii) Depreciation Charged in accounts at WHATEVER RATE is reasonable (usually 25%)
iii) finance costs allocated to profit and loss account as an allowable business expense. Finance costs means the interest and charges relating to the loan, not the full loan repayments
iv) vehicle running costs (fuel, maintenance, repairs, RFL, insurance etc) allocated to Profit and Loss account as allowable business expenses
There are some adjustments required before arriving at the tax allowable claims though. These are -
The disallowance of the Depreciation.
The Revenue substitute their own version called Capital Allowances (CA). CAs on cars are restricted to 25% on the cost and subsequent Written Down Value with a maximum claim each year of £3,000 Therefore, a car costing £15,000 would be limited to a claim of £3,000, even though £15,000 @ 25% = £3,750.
Private Use Restriction - the trader needs to work out what portion of his total mileage in the year relates to business and what portion relates to private. This will then give him a Private Useage Percentage or Ratio. All the claims made in respect of the car must then be restricted by this ratio so that only the business element ends up being deducted for tax purposes. The restriction applies to all the car related costs INCLUDING the Capital Allowance claim AND the finance cost/interest charged on the finance/loan.
Car acquired using a Finance Lease
The accounts treatment is exactly the same as for an owned/bank loan/HP car
The tax treatment is different.
No Capital Allowances are claimable. Depreciation IS allowed (but it must not be excessive)
There is also an Expensive Car restriction on the Lease Charges
All the Private Useage restrictions apply.
Operation Lease (Renting)
Car is NOT capitalised in Balance Sheet.
Regular repayments ARE allowed as full deductions
Private Useage applies
Expensive Motor Car restrictions apply
Capital Allowances cannot be claimed (they are being claimed by the LEasing Company)
For Limited Companies all the above apply with the following differences -
there is no need for a private useage adjustment
motor cars supplied by the company to a director are taxed as a Benefit In Kind through the PAYE system.
Edited by Eric Mc on Monday 19th February 13:53
just a quick thought but does it make any difference if the car is a) a Lotus and b) already financed before the sole tradership came in to being?
...I am thinking about securing a loan on my car for some quick business finance and then using it as a company car...I am self employed and commute to my office in it so I figure why not?
plus, the finance raised would be a nice way to expand
...I am thinking about securing a loan on my car for some quick business finance and then using it as a company car...I am self employed and commute to my office in it so I figure why not?
plus, the finance raised would be a nice way to expand
Make of car is not an issue.
If the car was financed before the business came into being, to get the car and the loan into the business you'ld have to bring the car into the balance sheet at a fair market value and bring the loan into the balance sheet at its current balance.
From that point on, the loan interest on the car could be offset against tyhe business profits as it is now a business asset. Obviously, all the limitations about Private Useage and "Expensive Car" limits would still apply.
If further borrowings are later taken out to fund the business, whether the new loan is secured on the car or not is irrelevant. They point for the allowability if loan interest for tax deduction purposes is the purpose of the loan, not the asset on which the loan is secured.
If the car was financed before the business came into being, to get the car and the loan into the business you'ld have to bring the car into the balance sheet at a fair market value and bring the loan into the balance sheet at its current balance.
From that point on, the loan interest on the car could be offset against tyhe business profits as it is now a business asset. Obviously, all the limitations about Private Useage and "Expensive Car" limits would still apply.
If further borrowings are later taken out to fund the business, whether the new loan is secured on the car or not is irrelevant. They point for the allowability if loan interest for tax deduction purposes is the purpose of the loan, not the asset on which the loan is secured.
minimax said:
just a quick thought but does it make any difference if the car is a) a Lotus and b) already financed before the sole tradership came in to being?
...I am thinking about securing a loan on my car for some quick business finance and then using it as a company car...I am self employed and commute to my office in it so I figure why not?
plus, the finance raised would be a nice way to expand
...I am thinking about securing a loan on my car for some quick business finance and then using it as a company car...I am self employed and commute to my office in it so I figure why not?
plus, the finance raised would be a nice way to expand
a) No
b) You would bring in the o/s finance at the point you became S/E.
However, note that a journey to/from your office is not a business journey.
what Eric said
Note to self: Speed up replies, elaborate further to avoid embarrasment.
Edited by thewave on Monday 19th February 14:17
fantastic guys!thewave said:
However, note that a journey to/from your office is not a business journey.
I am lead to believe that as long as you are working at a client site for less than two years then it is not necessarily classed as your permanent place of work.
A friend and I were recently discussing this but with regards to a commercial vehicle. he a small refrigerated van, and me a land rover 110 double cab. How are commercial vehicles treated in a small limited company(1 or 2 man outfit)? Would an older vehicle male a difference, say 4 or 5 years old?
Motor cars are taxed as Benefits in kind based on -
the LIST price of the vehicle
the manufacture's official CO2 emissions level specific to that particular make and model
whether the car is petrol or diesel
The Revenue will have relevant tables showing the applicable BIK percentages on their website.
There is also a BIK charged when the company/employer supplies fuel for the vehicle.
the LIST price of the vehicle
the manufacture's official CO2 emissions level specific to that particular make and model
whether the car is petrol or diesel
The Revenue will have relevant tables showing the applicable BIK percentages on their website.
There is also a BIK charged when the company/employer supplies fuel for the vehicle.
There is nothing to stop a director introducing what was once his personal car into his limited company as an asset. This will then mean that
a) the company will have an asset on which it can claim capital allowances (subject to the expensive cars restrictions if appropriate)
b) it would also create a "credit" entry on the director's current/loan account - which is usually seen as a "good" thing.
However, there are a number of serious pitfalls in doing this -
if the car is being purchased under a HP or lease agreement, the finance company would need to be contacted to see if they objected to such a transaction. They still legally "own" the vehicle and have a major say in how it is used by the individual who operates it.
the loan/finance repayments would probably still need to be treated as being paid by the individual, rather than the company, unless the finance company agrees to the swap over.
If they do, the loan interest becomes a legitimate business cost and can be deducted as an expense in the company accounts.
If the director retains the loan in his name and the company starts paying off what is still a private loan, the repayments would need to be allocated to the Director's Loan/Current Account and the balance on that account carefully monitored to prevent it from going "negative" - which is actually illegal and can give rise to another form of Benefit in Kind tax charge.
Once the car becomes a "company" owned car, there will be a Benefit in Kind charge arising on the "Company Car" and on fuel provided by the company as outlined above.
Regarding Commercial Vehicles - they are treated VERY differently to "Motor Cars".
These differences are:
There is no "Expensive Car" restriction i.e Capital Allowances can be claimed on the full purchase cost.
If special "Initial Allowances" are available, they can be claimed. At the moment, small businesses can claim an initial Capital Allowance of 50% on "Plant and Machinery". Commercial Vehicles are included in the Revenue's definition of Plant & Machinery.
VAT can be reclaimed when the vehicle is purchased.
The Benefit in Kind rules on private useage of Commercial Vehicles (in this case "Vans" ) are much less stringent than for cars. The BIK is a simple flat £500 per annum. However, from 6 April 2007 this is increasing by a whopping 600% to £3,000. However, the "Private Useage" rules are being relaxed. In many cases, employees who do use a van for the odd personal journey or who only use the van to drive from home to work will NOT be charged the BIK.
This relaxation of the personal use rules seems to have passed most employers by and many employees have been notified that they will receive the £3,000 BIK charge for the taxc year 2007/08 when it is not appropriate.
Hope that helps.
a) the company will have an asset on which it can claim capital allowances (subject to the expensive cars restrictions if appropriate)
b) it would also create a "credit" entry on the director's current/loan account - which is usually seen as a "good" thing.
However, there are a number of serious pitfalls in doing this -
if the car is being purchased under a HP or lease agreement, the finance company would need to be contacted to see if they objected to such a transaction. They still legally "own" the vehicle and have a major say in how it is used by the individual who operates it.
the loan/finance repayments would probably still need to be treated as being paid by the individual, rather than the company, unless the finance company agrees to the swap over.
If they do, the loan interest becomes a legitimate business cost and can be deducted as an expense in the company accounts.
If the director retains the loan in his name and the company starts paying off what is still a private loan, the repayments would need to be allocated to the Director's Loan/Current Account and the balance on that account carefully monitored to prevent it from going "negative" - which is actually illegal and can give rise to another form of Benefit in Kind tax charge.
Once the car becomes a "company" owned car, there will be a Benefit in Kind charge arising on the "Company Car" and on fuel provided by the company as outlined above.
Regarding Commercial Vehicles - they are treated VERY differently to "Motor Cars".
These differences are:
There is no "Expensive Car" restriction i.e Capital Allowances can be claimed on the full purchase cost.
If special "Initial Allowances" are available, they can be claimed. At the moment, small businesses can claim an initial Capital Allowance of 50% on "Plant and Machinery". Commercial Vehicles are included in the Revenue's definition of Plant & Machinery.
VAT can be reclaimed when the vehicle is purchased.
The Benefit in Kind rules on private useage of Commercial Vehicles (in this case "Vans" ) are much less stringent than for cars. The BIK is a simple flat £500 per annum. However, from 6 April 2007 this is increasing by a whopping 600% to £3,000. However, the "Private Useage" rules are being relaxed. In many cases, employees who do use a van for the odd personal journey or who only use the van to drive from home to work will NOT be charged the BIK.
This relaxation of the personal use rules seems to have passed most employers by and many employees have been notified that they will receive the £3,000 BIK charge for the taxc year 2007/08 when it is not appropriate.
Hope that helps.
Edited by Eric Mc on Wednesday 21st February 08:32
Eric Mc said:
Motor cars are taxed as Benefits in kind based on -
the LIST price of the vehicle
the manufacture's official CO2 emissions level specific to that particular make and model
whether the car is petrol or diesel
The Revenue will have relevant tables showing the applicable BIK percentages on their website.
There is also a BIK charged when the company/employer supplies fuel for the vehicle.
the LIST price of the vehicle
the manufacture's official CO2 emissions level specific to that particular make and model
whether the car is petrol or diesel
The Revenue will have relevant tables showing the applicable BIK percentages on their website.
There is also a BIK charged when the company/employer supplies fuel for the vehicle.
What if you're paid a pittance? Could it be beneficial to move a high value vehicle onto the books?
You get "done" for a BIK charge if you are a Higher Paid Employee or a Director.
A higher paid employee is an employee who earns "AT A RATE OF £8,500 per annum INVLUDING THE VALUE OF THE BIK".
So as, you can see, for BIK purposes, Higher Paid Employees can actually be people who are paid below the National Minimum Wage
.
Obviously, the actual tax you pay on the BIK will be a dependent on your overall levels of income FROM ALL SOURCES during the tax year.
A higher paid employee is an employee who earns "AT A RATE OF £8,500 per annum INVLUDING THE VALUE OF THE BIK".
So as, you can see, for BIK purposes, Higher Paid Employees can actually be people who are paid below the National Minimum Wage
. Obviously, the actual tax you pay on the BIK will be a dependent on your overall levels of income FROM ALL SOURCES during the tax year.
Edited by Eric Mc on Wednesday 21st February 09:18
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