Capital expense: car

[arcon5]

Can the whole sum be depreciated and can it simply be done with straight line method? For example, £2k car with salvage value of £200, 3 years simply at £600/year.

Also if I buy a car £800 with an expected life of 10-12 months can I just run it as an expense if the car is the tool of the trade?

 

[SBlundell]

You can depreciate cars in the accounts at whatever rates you like - indeed if you think a car will be effectively worthless at the end of a year you should write it down completely.

However, it makes no difference for tax purposes because depreciation is replaced with capital allowances in the business' tax computations which are pre-determined by the legislation.

 

[Leslie66]

There no point depreciation being on the self assessment then if it makes no difference for tax purposes?

 

[arcon5]

What legislation and how does it require cars to be accounted for?
Surely it does have an affect on tax, being it reduces the tax liability?

 

[Scalloway]

How cars are treated for Capital Allowances

http://www.hmrc.gov.uk/capital-allowances/plant.htm#7

 

[SBlundell]

being it reduces the tax liability?

Ydepreciation is replaced with capital allowances in the business' tax computations

Nope, for example:

Profit £2,000
Add depreciation £1,000
Less cap allowances £(500)
Profits chargeable to tax = £2,500

So increase depreciation by say £3,000

Loss £(1,000)
Add depreciation £4,000
Less cap allowances £(500)
Profits chargeable to tax = £2,500

Scalloways already quoted the legislation

 

[arcon5]

Why would you add depreciation to your profit level ?

If I read the article correctly, I can claim 20% per year on a downward scale such as

2000 car | £400
1600 | £320
Etc
Is that right?

But what happens if I dispose of the asset after saying 18 months? Or even 10 months?

 

[Scalloway]

If you dispose of the car you will either get a balancing charge or a balancing allowance.

Eg

WDV for tax.......£1,600
Sale proceeds ...£1,500

Balancing allowance will be £100.

If you got £1,700 there would be a balancing charge of £100 to make up for the fact that you made a profit.

 

[SBlundell]

Why would you add depreciation to your profit level ?

You have to reverse or 'addback' certain expenses in your accounts for tax purposes. So profit of £2,000 for example, was after depreciation had been charged in the accounts of £1,000. Therefore, £1,000 was 'added back' to give the pre-depreciation profit figure of £3,000.

 

[arcon5]

Okay I think I understand, so rather than just adding back could you not just exclude the depreciation in the first place?

So although there are rules as to how much you can write off as a capital allowance, you do effectively account for the whole purchase price over the life of the asset as at the end you will write down a loss or profit on it?

So in theory if the asset was disposed off in the same tax year I could simply put the whole sum through as a balancing allowance and reduce the tax liability like that?

 

[SBlundell]

Okay I think I understand, so rather than just adding back could you not just exclude the depreciation in the first place?

Effectively yes - although you should start with profit per the accounts (although if you're a sole trader you could make that argument).

So although there are rules as to how much you can write off as a capital allowance, you do effectively account for the whole purchase price over the life of the asset as at the end you will write down a loss or profit on it?

Yes

So in theory if the asset was disposed off in the same tax year I could simply put the whole sum through as a balancing allowance and reduce the tax liability like that?

Possibly but not necessarily - often cars nowadays go into one of the two 'pools' of assets - effectively meaning you don't get a balancing charge / allowance unless the whole trade has ceased (although when it becomes a small pool you can write the whole amount off instead). Again, rules differs slightly for sole-traders where you have private usage assets etc.

 

[US_US_Taxes]

How many miles are you doing each year?

Given that you can charge 45p for the first 10,000 miles it may be more financially sensible to charge per mile.

Just a thought.

 

[arcon5]

40k+

Problem though is two fold

I'm already claiming expenses on it and don't think you can change this after the fact. Expenses was used for end of year 2013 aswell.

It would wipe our my bottom line, so if I move house or something and they want to see my books it will show a loss