Are Capital allowances allowable on private cars used by sole trader?

Are Capital allowances allowable on private...

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Please could someone clear this up for me..
If a private car is used for self employed business I understand that costs can be posted to motor vehicle expenses at 45p/25p per business mile or the business proportion of all the running costs can be posted to motor vehicle expenses. However, can the capital allowance only be claimed if the car is introduced into the business as a capital asset rather than remaining a private vehicle just owned and used by the sole trader?

I would be really grateful for confirmation that this is correct. I cannot find a direct answer to this anywhere.

With this in mind, are the following statements correct?

"If we choose mileage basis: he claims the 45p/25p per mile rate for the whole of the tax year. Car is not introduced as an asset into the business at all and no capital allowances claimed.

If we choose full cost basis: car is introduced as an asset at market value on the first day of trading. All motor expenses and capital allowance (all with adjustment for private use of course) are claimed from then on.

Many thanks for reading this.

Replies (25)

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By johngroganjga
05th Jun 2013 08:44

Correct

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By Altna
05th Jun 2013 09:00

Car must be capital asset to claim allowances
Thanks John. I thought that must be the case but seen a lot of conflicting comments on the web, and HMRC site which dont make it clear that the car has to be introduced as a capital asset first.

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By neileg
05th Jun 2013 12:50

Couple of minor points

There is no legal difference between a sole trader and the individual so you can't introduce a car into the trade. Of course you can recognise the car in the accounts but that's not the same thing because the ownership is unchanged.

The mileage rate basis is only available if the trade turnover is less than the VAT threshold for registration. One you have chosen either the mileage rate or the apportioned full cost basis you can't switch at a later date unless the car is replaced and even if the turnover does cross over the threshold. Note that it is immaterial whether the business is VAT registered or not.

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By Altna
05th Jun 2013 14:24

Clarification please
Hmmm. So now, I am confused again.

So - if I have my own private car and am a sole trader who uses the car mainly for private use but within the business also for, say travelling to clients. What steps need to be taken to allow the Capital allowance to be claimed? Does the car need to be entered in the books of the business as a capital asset at the market value of the time it is first entered into the business OR does it not need to be entered into the business's books as it belongs to me but, for the purposes of self assessment tax could be valued at market value and capital allowance be claimed each year, without the car being entered as an asset?
Sorry to labour this point. I just want to get it totally clear in my head.
Thanks for your replies.

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By jndavs
10th Jun 2013 14:26

Car

Neileg, by this (first sentence) do you mean that a sole trader can not have business assets?

 

The car can be put through the business and capital allowances claimed if you wish, although this may not be the most tax efficient way of doing things.

Be sure to adjust for private use though.

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By tom2another
10th Jun 2013 13:52

To claim capital allaowances on an asset, a sole trader does not need to enter the asset on to "the books", After all plenty of sole traders do not produce a balance sheet as why should they? It is claimed in the computations. A car is no different to any other asset with private use, except there were limits for "expensive" cars, Nieleg is correct.

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By King_Maker
10th Jun 2013 16:18

If one takes the mileage option (45p/10p etc), it is still possible to claim interest for purchase of the vehicle (suitably restricted for any private use).

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By Bridgford Books
10th Jun 2013 21:21

Yes, interest on the loan to buy a car (for which you are claiming AMAP) is an allowable expense. Also worth noting that AMAP includes an amount to cover depreciation. So, as per the original question, if this method allows for depreciation then so must the "actual costs method" allow for depreciation i.e.capital allowances.

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By cfield
10th Jun 2013 23:25

Only one thing matters

The only thing that matters for a sole trader is whether or not he used his own car for travel that was wholly and exclusively for the purpose of the trade. If he did, then he can claim the running costs plus a capital allowance after deducting a reasonable proportion for private use.

It is unnecessarily over-complicating it to talk of introducing the car as an asset of the business. A sole trader business does not exist independently of its propreitor so it cannot own assets in its own right. Business assets are in reality the property of the owner and are simply those used wholly or mainly within the business.

It usually works out better to claim a proportion of the running costs (and a capital allowance) rather than the mileage rates, mainly because the rates were frozen for so long. Also, a sole trader can still claim a balancing allowance when he sells the car, which is one of the few advantages of remaining unincorporated.

There are VAT benefits too, as you can claim back all the input tax on garage bills and spare parts even if the car has only miniscule business use, whereas with the mileage rates you can only claim input tax on the element equivalent to the advisory fuel rates, assuming you kept all the fuel receipts.

However, if you own a very fuel efficient car with low running costs, you may be better off claiming the mileage rates. You need to do the sums first really because, once you've chosen one method, you cannot switch to the other on that particular car.

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By Steve Holloway
11th Jun 2013 07:57

Beware the flat rate scheme for VAT ...

sale of vehicle on which you have claimed capital allowances will form part of the FRS income.

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By Altna
11th Jun 2013 10:26

Your replies
Thank you for all your comments. I have this clear in my mind now :)

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By Shcharlesworth
13th Jun 2013 17:11

So what amount do you claim CA on?

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By Paul Soper
13th Jun 2013 18:18

Cars and AMR

It is worth noting that from 6 April 2013 any trader who opts for the cash basis MUST use the AMR and cannot claim capital allowances on any expenditure ( capital expenses other than land, cars and motor cycles) are just deducted as a trading expense under the Cash Basis, and even if the cash basis is not adopted ALL self-employer traders, whether inside or outside the VAT registration limit can now use the AMR on a voluntary basis from the date that the car is acquired - you cannot switch from CAs and expenses to AMR except when a car is purchased.  Now that cars are becoming more frugal with fuel, and also more reliable to boot, the AMR becomes more attractive BUT... you must maintain detailed mileage records of course.

Cash Basis clients need to maintain those records NOW and if, later this year, they move into claiming Universal Credit instead of existing tax credits etc the cash basis and AMR becomes mandatory as long as turnover is within twice the VAT limit.

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Replying to SDGREEN:
By cfield
13th Jun 2013 20:31

Cash accounting

Paulsoper wrote:

It is worth noting that from 6 April 2013 any trader who opts for the cash basis MUST use the AMR and cannot claim capital allowances

I can't imagine any sensible person using the cash basis to be honest Paul, certainly not anyone with an accountant. After all, it's only a timing difference and any short term gains will be outweighed by extra tax later when the stock is sold and the debtors pay up, which the client probably won't realise until he's spent it all. The current problem of new traders paying all their tax + 50% on account in one fell swoop would be a doddle by comparison.

Anyone without an accountant will probably carry on the same as before; ie no accruals or prepayments, home expenses way above the niggardly rates on offer under the cash scheme, interest way over the £500 limit and probably the capital repayments too. However, they will probably "know better" than to deduct the cost of stock as any businessman worth his salt knows that stock is not an overhead.

In other words, NOBODY will be using the cash scheme apart from those happy to pay their accountants double for preparing 2 sets of books. I won't be doing them, at least not on their own, as I don't consider them to be proper accounts and they will just mislead the client. Also, I wouldn't want to be around when he gets his tax bill for Year 2.

As for Universal Credit, I understand the self-employed will have to prepare monthly accounts if they want to claim this, and no losses will be allowed. I'll be steering well clear of this. Anyone who qualifies for UC won't be able to afford the fees anyway. Perhaps that's why they insisted on the monthly accounts!

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By Paul Soper
13th Jun 2013 21:45

Welcome to the real world

I wonder how much work accountants lost by ignoring tax credits, although many accountants with self employed earnings at a low level will be more familiar with them than you might imagine.  Are you really suggesting that that a) all of your small clients actually report using the full set of GAAP or you specifically adopt FRSSE in their accounts?  If you don't look for a sobering lesson at the Smith v HMRC Tribunal case where both the First Tier and the Upper Tier ruled that the accountant's failure to use GGAP exposed the client to (potentially) 20 years worth of discory assessments. Two sets of accounts - why? Most small clients provide you with cash detauls anyway and if within VAT would be well advised to register for VAT cash and annual accounting. 2 sets of books??? Get real.

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Replying to lionofludesch:
By johngroganjga
14th Jun 2013 08:07

Two sets of accounts

Paulsoper wrote:

Two sets of accounts - why?

In order to be able to advise client which of the two available bases is better for him.

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By cfield
13th Jun 2013 22:37

You're welcome to them

OK Paul, if anyone comes to me asking for cash-based accounts or monthly UC accounts, I'll happily point them in your direction.

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By Jonathan Trott
08th Oct 2013 10:18

From my point of view the capital allowances must be applicable for private cars. It is needed as we think from a normal person's point of view but the condition depends. As I have visited other sites I came to know that first we have to make our car as a capital asset. I really want some more help related to this. Please suggest me some more.

Mercedes Repair Culver City

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By johnrosa
12th Aug 2014 19:38

Business accounts are readily available, ideal for staff and airport transfers. Based near the city centre, we operate a fleet of modern and immaculately kept vehicles including estate cars, executive saloons and 8-16 seat minibuses.Nottingham Taxi Services

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By newhuntscotland
26th Mar 2015 17:15

purchase of new car

I will have a new car from 1st april 2015.  I am a sole trader using car to carry stock and will cover about 25000 business miles p/a . I have given up on idea of trying to reclaim vat on car purchase as hmrc tell me it must be 100% business use (i think 25000 miles is pretty full on business use) Am I right in thinking that as my turnover for last 12 months was less than 70,000 I can use mileage method for this vehicle for it's lifetime, i.e 0.45/0.25p per business mile. This would represent taking 8250 in expenses p/a.. Can I claim anything else in costs ? For my own records do I just show car as vat inclusive cost @ 1st april 2015 on my balance sheet and reduce it by 20% a year for 5 years.  Once I use the mileage method do I forget about accounting for depreciation and capital allowances 8% for my car.  Haven't a clue how to account for capital allowances

 

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By JimH
18th Oct 2015 11:32

Something to add to discussion
I came to this thread, refreshing for CAs on a privately used vehicle. Don't rule out planning opportunities. It's possible to save a 65 year-old retiree a considerable sum with a cash basis election. Delaying the taxation on income to a receipts basis has eliminated Class 4 NIC and taxed at basic rate much of what would have been taxed/NIC'd at higher rates on an accruals basis for a client of mine.

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By MLGMAAT
20th Oct 2017 16:22

Just joining this discussion and wondered if someone can answer a question I have on this subject.
I've just taken over the accounts for a small sole trader whose previous accountant was claiming a portion of captial allowances against each year for the business use of the vehicle. If the sole trader then sells the car, am I supposed to make an adjustment for the disposal proceeds in their P&L or is this not necessary because it was originally purchased for private use with only a small portion of business use? I've tried the HMRC website on this but its not very clear. Thanks

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Replying to MLGMAAT:
By Ruddles
20th Oct 2017 20:07

Why do you think you’d find an answer to an accounting question on HMRC’s website?

They have enough difficulty getting tax right.

(And you’re a little late in joining the discussion.)

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Replying to MLGMAAT:
By johngroganjga
21st Oct 2017 16:52

The capital allowances are nothing to do with the accounts. If the capital allowances have been restricted for private use, so must the balancing allowance or charge on disposal be.

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RLI
By lionofludesch
21st Oct 2017 18:28

That's three times this thread has been zombied.

Is this a record ?

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