Capital depreciation and claiming tax relief back in buying Tesla outright through business

[av_raje]

Hi

We were going to buy a Tesla through our Ltd company to use the 100% First Year Allowance. However our accountant has said that from second year based on the depreciated value, the corporation tax saving will slowly be paid back every year and overall there is no actual saving. Is this correct, can anyone who has been in this situation please advise. Thanks

 

[UK Contractor Accountant]

What is he/she talking about - you will get 100% allowance on new or unused fully electric car in year of purchase. So if new Tesla cost £80K then £80K comes of the taxable profit for the year.

Maybe some claw-back will happen down the line when you come to sell the vehicle without replacing.

 

[MyAccountantOnline]

Hi

We were going to buy a Tesla through our Ltd company to use the 100% First Year Allowance. However our accountant has said that from second year based on the depreciated value, the corporation tax saving will slowly be paid back every year and overall there is no actual saving. Is this correct, can anyone who has been in this situation please advise. Thanks

I'm an accountant and I dont understand what you've been told.

I'd ask for clarification on that - I hope it's a misunderstanding.

 

[David Griffiths]

I think that there might be crossed wires here. In the accounts, there will be an annual depreciation charge for the Tesla so that its value is reduced in the books over its working life. Let's work on the basis that the car cost £60k, and the depreciation charge is £10k per year. That's a fairly arbitrary figure based on the car been worth 20% of its origiinal cost after 5 years.

The depreciation is not tax deductible. In the year of purchase of the car, the depreciation is added back (the term for it being disallowed for tax) but the £60k cost will be deducted. That means that the taxable profits will be £50k lesss than the accounts profits.

In subsequent years, the £10 depreciation will still be added back, but there will be no further tax allowances for the car, so the taxable profits will be £10k more than the accounts profits. This could be what the accountant means by his explanation. If so, I don't think that it's a very good (or even accurate) way of explainng things.

The reality of the situation is that you get a full allowance for the cost of the car when you buy it. When you sell it, the sale proceeds are brought in to tax, That means that you get tax relief on what the car has actually cost you in terms of depreciation over the period that you hold it. There is no question of paying back the initial tax saving. The only way that would happen is if you sold the car for the same as you paid for it, or for more. Not very likely.

This interpretation may or may not be correct. It's my best guess at deciphering the original comment, based on many years of explaning to clients that what the man down the pub said might not quite be what happens!

 

[av_raje]

I'm an accountant and I dont understand what you've been told.

I'd ask for clarification on that - I hope it's a misunderstanding.

Hi, thanks for the reply. The following is what my accountant has emailed

The depreciation of the asset is added back to the profit every year as per the depreciation rate when the corporation tax is calculated as depreciation is not an allowable expense for tax purpose.

Over the phone they said, say if car was bought for 40k and first year allowance is claimed and hence saves £10 in corporation tax that year. However the next the car being an asset is declared that it has say depreciated in value by say £10k, so £2500 is paid back to HMRC. This way each year the corporation tax that was saved in the first year will be paid back to HMRC in subsequent years.

Is this correct?

 

[av_raje]

I think that there might be crossed wires here. In the accounts, there will be an annual depreciation charge for the Tesla so that its value is reduced in the books over its working life. Let's work on the basis that the car cost £60k, and the depreciation charge is £10k per year. That's a fairly arbitrary figure based on the car been worth 20% of its origiinal cost after 5 years.

The depreciation is not tax deductible. In the year of purchase of the car, the depreciation is added back (the term for it being disallowed for tax) but the £60k cost will be deducted. That means that the taxable profits will be £50k lesss than the accounts profits.

In subsequent years, the £10 depreciation will still be added back, but there will be no further tax allowances for the car, so the taxable profits will be £10k more than the accounts profits. This could be what the accountant means by his explanation. If so, I don't think that it's a very good (or even accurate) way of explainng things.

The reality of the situation is that you get a full allowance for the cost of the car when you buy it. When you sell it, the sale proceeds are brought in to tax, That means that you get tax relief on what the car has actually cost you in terms of depreciation over the period that you hold it. There is no question of paying back the initial tax saving. The only way that would happen is if you sold the car for the same as you paid for it, or for more. Not very likely.

This interpretation may or may not be correct. It's my best guess at deciphering the original comment, based on many years of explaning to clients that what the man down the pub said might not quite be what happens!

Hi, thank you for your reply. Even without selling, they said the depreciation of the asset will be declared and for that depreciated amount the corporation tax will be added back to the end of year account. Is this correct?

 

[MyAccountantOnline]

Hi, thanks for the reply. The following is what my accountant has emailed

The depreciation of the asset is added back to the profit every year as per the depreciation rate when the corporation tax is calculated as depreciation is not an allowable expense for tax purpose.

Over the phone they said, say if car was bought for 40k and first year allowance is claimed and hence saves £10 in corporation tax that year. However the next the car being an asset is declared that it has say depreciated in value by say £10k, so £2500 is paid back to HMRC. This way each year the corporation tax that was saved in the first year will be paid back to HMRC in subsequent years.

Is this correct?

This is correct -
The depreciation of the asset is added back to the profit every year as per the depreciation rate when the corporation tax is calculated as depreciation is not an allowable expense for tax purpose.

But ask them to clarify the advice they gave you on the phone in writing.

 

[av_raje]

This is correct -
The depreciation of the asset is added back to the profit every year as per the depreciation rate when the corporation tax is calculated as depreciation is not an allowable expense for tax purpose.

But ask them to clarify the advice they gave you on the phone in writing.

Thank you. So is there no real corporation tax saving in buying a Tesla through Ltd company?

 

[DWS]

Hi, thanks for the reply. The following is what my accountant has emailed

The depreciation of the asset is added back to the profit every year as per the depreciation rate when the corporation tax is calculated as depreciation is not an allowable expense for tax purpose.

Over the phone they said, say if car was bought for 40k and first year allowance is claimed and hence saves £10 in corporation tax that year. However the next the car being an asset is declared that it has say depreciated in value by say £10k, so £2500 is paid back to HMRC. This way each year the corporation tax that was saved in the first year will be paid back to HMRC in subsequent years.

Is this correct?

What they said over the phone is wrong, if you pay £40k for the car then you can reduce profits using FYA, depreciation is purely for bookkeeping and has a Nil affect on Corporation Tax.

 

[DWS]

Thank you. So is there no real corporation tax saving in buying a Tesla through Ltd company?

Of course there is a saving, using rounded figures if you have profits of £50k and so a C/Tax bill of £10k but you buy an asset that qualifies for FYA for £50k, this reduces your profit to Nil and saves you £10k in C/Tax!
Depreciation in future years has no affect, it reduces profit on the profit & loss but then you add it back for the C/Tax calculations, so Nil affect!
You are still £10k better off

 

[av_raje]

What they said over the phone is wrong, if you pay £40k for the car then you can reduce profits using FYA, depreciation is purely for bookkeeping and has a Nil affect on Corporation Tax.

Is it? I have relayed this to them, will wait to see what they say. Thank you

 

[av_raje]

Of course there is a saving, using rounded figures if you have profits of £50k and so a C/Tax bill of £10k but you buy an asset that qualifies for FYA for £50k, this reduces your profit to Nil and saves you £10k in C/Tax!
Depreciation in future years has no affect, it reduces profit on the profit & loss but then you add it back for the C/Tax calculations, so Nil affect!
You are still £10k better off

That's great, so we can go ahead I guess. I have asked for confirmation from the accountant.

If you don't mind, what does the following in your response mean please?
but then you add it back for the C/Tax calculations

 

[DWS]

That's great, so we can go ahead I guess. I have asked for confirmation from the accountant.

If you don't mind, what does the following in your response mean please?
but then you add it back for the C/Tax calculations

As an example
Profits £10k minus £2K depreciation leaves £8k profit according to the Profit & Loss but when it comes to working out how much C/Tax you pay depreciation is not an allowable expense so you have to add it back so £8k plus £2K depreciation gives £10k taxable profits, hence what I said earlier, depreciation is purely for bookkeeping and has no affect on the taxable profits.

 

[av_raje]

As an example
Profits £10k minus £2K depreciation leaves £8k profit according to the Profit & Loss but when it comes to working out how much C/Tax you pay depreciation is not an allowable expense so you have to add it back so £8k plus £2K depreciation gives £10k taxable profits, hence what I said earlier, depreciation is purely for bookkeeping and has no affect on the taxable profits.

Got it, thank you so much, really appreciate it.

 

[David Griffiths]

Basically you get tax relief on the difference between the purchase and selling price of the car.

The initial allowance gives you relief on 100% of the car, and that is clawed back in part by effectively taxing the sale proceeds. IMO the disallowance of the annual depreciation is completely irrelevant.

 

[av_raje]

Basically you get tax relief on the difference between the purchase and selling price of the car.

The initial allowance gives you relief on 100% of the car, and that is clawed back in part by effectively taxing the sale proceeds. IMO the disallowance of the annual depreciation is completely irrelevant.

Thank you so much David, really appreciate it

 

[DWS]

Is it? I have relayed this to them, will wait to see what they say. Thank you

Just interested to see what reply you received from your Accountant, if you don’t mind sharing?

 

[av_raje]

Just interested to see what reply you received from your Accountant, if you don’t mind sharing?

Hi, I have asked them to comment on this, no reply yet. Will update you

 

[Bobbo]

I think maybe OP's accountant has poorly explained it - perhaps trying to put it in layman's terms - but they aren't necessarily wrong.

The electric car qualifies for a 100% first year allowance which is much more beneficial than the 18%/6% writing down allowances available on non-electric cars. The benefit is only from a timing perspective, as the relief is up front rather than over a number of years, the overall amount of tax paid over the years will be the same.

 

[DWS]

I think maybe OP's accountant has poorly explained it - perhaps trying to put it in layman's terms - but they aren't necessarily wrong.

The electric car qualifies for a 100% first year allowance which is much more beneficial than the 18%/6% writing down allowances available on non-electric cars. The benefit is only from a timing perspective, as the relief is up front rather than over a number of years, the overall amount of tax paid over the years will be the same.

But they are wrong, according to the OP they are saying that if you receive tax relief of £10k in the first year then you pay £2.5K in depreciation over the next 4 years and there is no benefit in the purchase as you pay back what you received, which is incorrect.

 

[macScot]

Just a different way to try and explain this if it helps:

For corporation tax purposes, when you purchase your car, the purchase becomes an allowable expense only via capital allowances as HMRC controls the rates and therefore time span at which the values can be claimed back.

In the case of the first year 100% allowance it would mean you can claim the full value of the purchase as an allowable expense in the respective tax year and therefore there will be no need to claim smaller chunks of this over the lifetime of the asset e.g. 20% each year over 5years if that's how long you envision the car to be of value in the business.

This means that like any other allowable business expense, the capital allowance value will reduce the amount of taxable profits for the tax year and therefore you end up paying less tax in the respective tax year, however as you have fully used up that allowance in that first year, you can not reduce the taxable profits in subsequent years.

For accounting purposes however, you have to show the value of the asset purchased on the balance sheet and reduce its value over time gradually whilst the asset is still in use and has value e.g. the 5 years by depreciating it each year e.g. 20% per annum.

Depreciation is therefore not allowable as it has been substituted by capital allowances.

There are different types of depreciation calculations and percentages can also vary based upon each business. To prevent businesses using different or inconsistent calculations to work out taxes and potentially trying to avoid paying taxes when it suits them, HMRC has implemented a standardised way for businesses to claim the wear and tear via capital allowances. Also by adjusting the first year allowances and thresholds, the government has found a way to encourage growth and investments in new assets when it requires businesses to spend more.

 

[DWS]

Just a different way to try and explain this if it helps:

For corporation tax purposes, when you purchase your car, the purchase becomes an allowable expense only via capital allowances as HMRC controls the rates and therefore time span at which the values can be claimed back.

In the case of the first year 100% allowance it would mean you can claim the full value of the purchase as an allowable expense in the respective tax year and therefore there will be no need to claim smaller chunks of this over the lifetime of the asset e.g. 20% each year over 5years if that's how long you envision the car to be of value in the business.

This means that like any other allowable business expense, the capital allowance value will reduce the amount of taxable profits for the tax year and therefore you end up paying less tax in the respective tax year, however as you have fully used up that allowance in that first year, you can not reduce the taxable profits in subsequent years.

For accounting purposes however, you have to show the value of the asset purchased on the balance sheet and reduce its value over time gradually whilst the asset is still in use and has value e.g. the 5 years by depreciating it each year e.g. 20% per annum.

Depreciation is therefore not allowable as it has been substituted by capital allowances.

There are different types of depreciation calculations and percentages can also vary based upon each business. To prevent businesses using different or inconsistent calculations to work out taxes and potentially trying to avoid paying taxes when it suits them, HMRC has implemented a standardised way for businesses to claim the wear and tear via capital allowances. Also by adjusting the first year allowances and thresholds, the government has found a way to encourage growth and investments in new assets when it requires businesses to spend more.

Everyone on this site has described the process correctly but the issue is the advice the OP has received from their Accountants, hopefully they can clarify their thoughts on this.
EDIT the accountants not the OP

 

[WaveJumper]

lets move on ....... what colour are you going for

Seriously though we may all have done this at some time or the other, I certainly know ive had meetings where i thought I fully understood what I was being told (trusted even) only to go away and think is that really my understanding of how it works.

For us none accountant types trying to get your head around some of these things can be quite a challenge especially when on the face of it you can see little sense.

Proves two things to me here, it's great to seek further clarification and WOW the UKBF members certainly are on hand and help with that. Number two I always advocate find an accountant you can relate too don't pick the first or even cheapest out the book......... one who speaks your language. and especially for me dumb things done until I grasp the issue

 

[NortonBishop]

As stated above, people need to remember that 100% first year allowance doesn't save any tax at all - it simply moves it into year 1.

If a £60k car is bought in year 1 with a 100% allowance claimed, then if it is sold next year for £50k then corporation tax will be payable in the 2nd year on a "profit" of £50k.

 

[DWS]

As stated above, people need to remember that 100% first year allowance doesn't save any tax at all - it simply moves it into year 1.

If a £60k car is bought in year 1 with a 100% allowance claimed, then if it is sold next year for £50k then corporation tax will be payable in the 2nd year on a "profit" of £50k.

So what if the car is never sold and the Company continues to trade?

The point as far as I read the post, is that the OP has been advised that even if they do not sell the car they will need to pay back to HMRC £2.5K every year to use the tax relief claimed as mentioned in #5 in the thread

 

[JEREMY HAWKE]

What's the point just to have an electric Mondeo
Don't get it

 

[av_raje]

Just a different way to try and explain this if it helps:

For corporation tax purposes, when you purchase your car, the purchase becomes an allowable expense only via capital allowances as HMRC controls the rates and therefore time span at which the values can be claimed back.

In the case of the first year 100% allowance it would mean you can claim the full value of the purchase as an allowable expense in the respective tax year and therefore there will be no need to claim smaller chunks of this over the lifetime of the asset e.g. 20% each year over 5years if that's how long you envision the car to be of value in the business.

This means that like any other allowable business expense, the capital allowance value will reduce the amount of taxable profits for the tax year and therefore you end up paying less tax in the respective tax year, however as you have fully used up that allowance in that first year, you can not reduce the taxable profits in subsequent years.

For accounting purposes however, you have to show the value of the asset purchased on the balance sheet and reduce its value over time gradually whilst the asset is still in use and has value e.g. the 5 years by depreciating it each year e.g. 20% per annum.

Depreciation is therefore not allowable as it has been substituted by capital allowances.

There are different types of depreciation calculations and percentages can also vary based upon each business. To prevent businesses using different or inconsistent calculations to work out taxes and potentially trying to avoid paying taxes when it suits them, HMRC has implemented a standardised way for businesses to claim the wear and tear via capital allowances. Also by adjusting the first year allowances and thresholds, the government has found a way to encourage growth and investments in new assets when it requires businesses to spend more.

Thank you so much for explaining this so clearly, really appreciate it. I now understand why it is called First Year allowance too.

 

[Nathanto]

We were going to buy a Tesla through our Ltd company to use the 100% First Year Allowance. However our accountant has said that from second year based on the depreciated value, the corporation tax saving will slowly be paid back every year and overall there is no actual saving.

I'm assuming that this company car isn't one that your customers will ever see otherwise any savings could be far outweighed by the reputational damage-by-association of pulling up in a brand new Tesla.

The Trump/Musk presidency is only a few weeks in and the backlash against Musk/Tesla has already started and I think is only going to grow.

The problem for businesses is that it's a marmite situation like Brexit; half your customers will think Musk is god's gift while the other half think he's the devil incarnate. Pull up in a Tesla for the latter and your potential customer's first impressions are not going to be great.

I've always thought that people instinctively look for objections why they shouldn't buy something so you need to be making decisions with your eyes wide open before you you potentially give them one more reason not to buy from you.

 

[NortonBishop]

So what if the car is never sold and the Company continues to trade?

The point as far as I read the post, is that the OP has been advised that even if they do not sell the car they will need to pay back to HMRC £2.5K every year to use the tax relief claimed as mentioned in #5 in the thread

Well, the maths is difficult and debateable to calculate with a term of, "never" but if the car was disposed off after 50 years for £0 then the saving in CT by using the First Year allowance is zero. It's just a cash flow advantage to get the relief up front.

First Year allowance should really be seen as "First and only year, allowance"

The OP certainly doesn't save £10k in CT as they will pay more in subsequent years than they would have with a standard writing down approach available to all cars (generally).

 

[DWS]

Well, the maths is difficult and debateable to calculate with a term of, "never" but if the car was disposed off after 50 years for £0 then the saving in CT by using the First Year allowance is zero. It's just a cash flow advantage to get the relief up front.

First Year allowance should really be seen as "First and only year, allowance"

The OP certainly doesn't save £10k in CT as they will pay more in subsequent years than they would have with a standard writing down approach available to all cars (generally).

As an Accountant were you never taught to take advantage of tax relief at the earliest opportunity?
What happens if there are no future profits?
To say that the OP ‘certainly doesn’t save 10k in C/Tax’ is an assumption not fact!

 

[NortonBishop]

As an Accountant were you never taught to take advantage of tax relief at the earliest opportunity?
What happens if there are no future profits?
To say that the OP ‘certainly doesn’t save 10k in C/Tax’ is an assumption not fact!

It's certainly good practice to improve cashflow wherever possible and - assuming tax rates don't rise in subsequent years - a business will be more profitable by earning interest or saving borrowing costs by getting all the tax relief in year one.

On your assumption / fact point I can't think of a scenario where the OP does ever save £10k of tax by taking advantage of the first year allowance.

That's not to say that it is not worth taking advantage of the first year allowance for cashflow reasons but one shouldn't be buying a car assuming a £10k tax saving when in fact the tax relief is there regardless.