Tax Relief on Cars
Expenditure on a car is capital expenditure and is therefore not a deductible expense in the profit and loss account of a trade. Instead, tax relief is obtained by claiming capital allowances in the tax computation.
The rate of capital allowances which may be claimed is based on the CO2 emissions of the vehicle and whether the vehicle is new or second hand.
From 1 April 2021 the capital allowances which can be claimed on cars on a writing down basis are as follows:
|New & Unused||Electric and zero emission||100% FYA|
|New & Unused||Between 1g/km and 50g/km||18% WDA|
|Second hand||50g/km or less||18% WDA|
|New & Unused/Second hand||Over 50g/km||6% WDA|
At present these rates are frozen until 2024/2025.
New and unused cars which are electric and/or have zero emissions qualify for 100% first year allowance (FYA). This means that a deduction equal to the full price of the car can be made in the year of purchase.
For sole traders and partnerships it may be necessary to make an adjustment to any capital allowances claimed in the year to allow for any private use of the vehicle, tax relief cannot be obtained for the private use element of the car.
Care should also be taken when claiming the 100% FYA as in the year of disposal of the vehicle a disposal value will be placed on the car. If the vehicle is disposed of at a value higher than its tax written down value a balancing charge will arise. If 100% FYAs have been claimed the written down value will be zero and the difference between the balance and the disposal value will be added to the taxable profits for the year. This can be alleviated if a replacement car is purchased which also qualifies for FYA.
A car is a vehicle which is designed primarily for the private carriage of passengers. Different reliefs are available for commercial vehicles. http://www.pattonrainey.co.uk/?p=548
The rules for reclaiming VAT on a motor vehicle are the same for all cars, regardless of the CO2 emissions – input VAT cannot be reclaimed where there is an element of private use of the vehicle.
The VAT may only be reclaimed where the vehicle is used 100% for business use, including the VAT on cars used primarily as a taxi or by a driving instructor. You may be able to reclaim the VAT on a pool car if certain conditions are met.
The above information only addresses the tax relief which may be obtained when purchasing a car and does not deal with any benefit in kind which may arise if the vehicle is made available to an employee or director of the business.
Please contact our office if you require more advice regarding any accounting or tax issues.