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Company invests in expensive cars

How to treat the annual costs of maintaining the cars and profit on disposal

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Client is a company that has bought several ridicuously expensive cars in the hope of selling for a profit in years to come. No income generation but there are annual costs of maintenance, insurance, storage etc. and the usual accountancy fees, office costs etc. The cars are only periodically started and driven round the block to make sure they don't sieze up. The company will therefore only ever generate a loss, until such time as the cars are sold. My questions are:

1. How do I treat the on-going costs relating to the cars in the corporation tax computation? Do I disallow them so they are not carried forward? Would they ever be relievable if they were carried forward, assuming the company started another activity? Assume post 1/4/17.

2. When the cars are evertually sold (obviously no capital allowances have been claimed), will there be corporation tax on the chargeable gain or will the gain be exempt as disposal of a wasting assets?

Many thanks in advance.

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By 356B
17th Jul 2019 16:23

HMRC will treat this as trading, so the ongoing costs are allowable.
See:https://www.pwc.co.uk/who-we-are/regional-sites/yorkshire-north-east/pre...

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17th Jul 2019 16:26

Buying with a view to a profit = trading so CGT rules don't apply.

Ongoing costs are therefore trading expenses. Final sale will create a trading profit or loss, as the figures dictate.

Problem is HMRC will (possibly rightly!) think that Mr Client is funding his 'toys' through the business and the trip round the block is private use. Suggest he keeps a mileage log to prove minimal use.

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By CMH
17th Jul 2019 17:11

I hadn't considered this to be a trading activity as the assets (cars in this case) are being held for capital appreciation. They are currently held on the balance sheet as investments.

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to CMH
18th Jul 2019 09:17

CMH wrote:

I hadn't considered this to be a trading activity as the assets (cars in this case) are being held for capital appreciation.

You initially said they are being held for sale. And what is the companies business if not buying and selling cars?

In any case what you will have is a profit (or loss) on disposal of a fixed asset, which is subject to CT...

https://www.gov.uk/tax-when-your-company-sells-assets

and

Where an entity intends to sell a tangible fixed asset in the near future, the asset should continue to be held in fixed assets in the balance sheet unless that asset is being transferred to stock for sale in the ordinary course of the company’s business. The asset is not reallocated to current assets under FRS 102. The asset will be derecognised at the point of sale or disposal and any profit or loss on disposal recognised accordingly.

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By CMH
17th Jul 2019 22:08

Have found a previous post that says “cars are exempt from CGT, but not because they are wasting assets - it's because they are a private motor vehicle and specifically exempt (s263 TGCA). If the exemption was because they were wasting assets then they could become chargeable if capital allowances were or could have been claimed”. Therefore, my client realises a gain on selling the cars then the gain is exempt from tax in any case? Would appreciate any thoughts on this and the treatment of the annual maintenance costs.

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18th Jul 2019 10:39

HMRC will only treat this as trading if they are stupid. There is a very good chance of making a loss, but if a profit is made so be it. Profits arise out of hope, rather than being inevitable.

However, in the more likely event of a loss, you will have a loss that can't be relieved if CGT treatment is applied due to the exemption in TCGA 1992, s 263.

The periodic maintenance costs are not then deductible, because they are not an expense incurred wholly and exclusively for any business. Neither are they a management expense and TCGA 1992 s 39(2) will preclude them from being a deduction in computing any chargeable gain or allowable loss.

Note that the exemption in s 263 does not apply for income tax purposes, if the company is treated as trading, and neither will it apply for the purposes of CT on chargeable gains if the company invests in, say, racing cars or similar.

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By CMH
18th Jul 2019 12:21

Thanks for your reply Vile. So you are saying (a) this is not a trading activity and therefore the periodic maintenance costs cannot be offset as an expense, and (b) neither can they be used to offset a chargeable gain or increase a chargeable loss. So they are added back in the tax computation as disallowable expenses?Can you clarify the tax treatment if the cars are sold at a profit? Is the gain covered by the exemption in TCGA 1992, s 263? Many thanks for your advice on this, it is much appreciated.

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to CMH
18th Jul 2019 12:32

I did not say that it wasn't a trading activity. I said it would be stupid for HMRC to seek to treat it as a trading activity.

The client might want to treat it as a trading activity in order to get relief for the expenses and any losses, but any profits will then be taxable.

If it is treated by all parties as not being a trading activity, the outcome is as you suggest, but both gains and losses fall within the s 263 exemption.

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By CMH
18th Jul 2019 12:34

Ah, I understand your comment about the exemption in s263 relating to taxi cabs, racing cars, single seat sports cars etc. I will confirm my client's cars are "normal motor cars". If so, and if sold at a profit, there will be no CT payable on the gain?

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to CMH
18th Jul 2019 12:41

Not unless HMRC retrospectively seek to treat it as a trade. It was a bit stupid putting it in a company, quite frankly; much easier to argue that it's a hobby/investment if held personally.

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By CMH
19th Jul 2019 08:23

Assuming cars sold at a profit, these ongoing annual maintenance costs should be carried forward in tax computation and will either be relievable against the profit if argued as trading, or will reduce a capital gain if accepted as not trading, albeit the gain falls within the S263 exemption. Would you agree?

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to CMH
19th Jul 2019 10:38

Notwithstanding s263, which makes the point academic, I disagree that the annual maintenance costs would be deductible in computing a capital gain. VNN has already given the reason above.

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