Here’s a piece of information from Sterlings Accountants to think about before changing a vehicle.
Choosing the right car (for capital allowances)
The rate of capital allowances (CAs) you can claim for cars used in your business varies between 8% per year to 100% of their cost. That can make a big difference to your tax bill. What steps can you take to achieve maximum tax efficiency?
Capital allowance rates
There’s potentially a huge difference in the capital allowances (CAs) your business can claim against its profits depending on its choice of company cars. The following example shows how significant it can be.
Example. In the year ended 31 March 2016 Acom Ltd purchased six cars for use by its directors at a cost of £150,000. Each car qualifies for 100% CAs. Acom can therefore claim a tax deduction of £150,000 against its 2015/16 profits. If instead each car qualified for the lowest rate of CAs, i.e. 8% per annum, Acom could claim a tax deduction in 2015/16 of just £12,000. It will take decades for Acom to obtain CAs on the remaining £138,000.
Greener = more tax efficient
The rate of CAs for cars depends on their CO2 emissions. New cars which have CO2 emissions of 75g/km or less, bought on or after 1 April 2015 (6 April for unincorporated businesses), qualify for 100% CAs. Cars with CO2 emissions between 76g/km and 130g/km, new or second-hand, qualify for CAs at 18% per year. Cars with CO2 emissions of 131g/km or more qualify for 8% CAs per year.
Avoiding the green issue
The good news is that there are a number of tricks you can use to obtain CAs at a faster rate than usually allowed. Some of these can be used by all businesses but some are only suitable for sole traders or partnerships.
Tip 1. This is one for all businesses. Buy a car-derived van or combi-van. These are vehicles which often combine the comfort of a car with the functionality of a van. Their dual function means they are vans and so not caught by the CA rules for cars. You can therefore claim 100% CAs as part of the annual investment allowance AIA. HMRC publishes a list of vehicles it accepts fall into this category.
Tip 2. This is for unincorporated businesses only. All cars should at some point be used for personal motoring by the business owner. For example, Acom is a partnership which will shortly replace a four-year-old car previously only used by an employee. It qualifies for 8% CAs. Acom makes it available to one of the partners for private use for one month. Because of the private use Acom can claim CAs over the period of ownership, four years, instead of over decades.
Tip 3. A limited company which operates with a sister partnership, e.g. one where all the directors of the company are also partners in the partnership, can use Tip 2. The partnership can own the cars and supply them for use by the company.
Tip 4. This is another for unincorporated businesses only. Instead of claiming CAs for cars claim HMRC’s approved flat rate deduction. The amount of the deduction depends on business mileage. This replaces tax deductions for running costs as well as CAs, so do your sums before choosing this option.
Buy a combi-van instead of a car.
These have the comforts of a car, but can qualify for 100% CAs. For unincorporated businesses, make sure employees’ company cars are used by the business owner for some private journeys. This means CAs can be claimed over the period of ownership instead of over decades.