How to treat profit on disposal of sole trader car

Client made a profit on selling expensive car - used 80% in the business and previously claimed CAs

Didn't find your answer?

Hi,

I'd be grateful for any advice and/or reassurance as my client is making me doubt myself.

He always buys super expensive cars, usually keeps them for a year or even less, then sells them.  Usually at a loss, but this time he made a profit.

He claims 80% business use on them, we claim 6% capital allowances on them (80% of 6%) and when he sells them at a loss, we claim a balancing allowance.  They go into a single asset pool because of the part personal use.  He is a sole trader.

He is adamant that there is no tax on profits when you sell a car.  He keeps sending me links to websites that also say this, but they all talk about private cars.  I agree there is no tax on private cars, but since he's claimed costs and capital allowances on these cars, they turn into plant and machinery, and they are to be treated as (80%) business cars in my opinion, not a private car, even though he as an individual owns the cars.

I believe the treatment is as follows - balancing charge from WDV up to the original cost of the car.  Then capital gain for the difference between the proceeds and the cost.  Am I right?  I feel like I'm going round in circles with him, and he's making me completely doubt myself!  He's now asking me to send him links to prove what I'm saying.  Easier said than done as it doesn't say this anywhere in black and white, and he refuses to believe it's a business car as he owns it himself, rather than a limited company owning it.  

In any case, it doesn't make any difference to his tax, as the capital gain is less than the annual exemption, and he has no other capital gains for the year.  However, he's not accepting what I'm saying and doesn't want to recognise any profit or really even the balancing charge.  But I also want to get it correct, so if I'm wrong, I'm very happy to be proved wrong and will let him know.

If anyone can tell me I'm correct, or incorrect, and explain why, I'd be very grateful.  Bonus gratitude for any pointers to a link that spells it out!

Many thanks

Donna

 

Replies (33)

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Replying to David Ex:
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By donnameneses
30th Jan 2024 19:35

Thank you! I think that explains it well. Much appreciated.

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Replying to donnameneses:
By Ruddles
31st Jan 2024 09:09

I don't know what conclusion you reached but you might want to look at TCGA 1992 s263.

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Replying to Ruddles:
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By paulwakefield1
31st Jan 2024 09:33

What about S45?

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Replying to paulwakefield1:
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By donnameneses
31st Jan 2024 09:58

Yes, this reads to me like the business portion of the gain is taxable.

https://www.legislation.gov.uk/ukpga/1992/12/section/45/enacted

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Replying to paulwakefield1:
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By donnameneses
31st Jan 2024 09:58

Yes, this reads to me like the business portion of the gain is taxable.

https://www.legislation.gov.uk/ukpga/1992/12/section/45/enacted

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Replying to donnameneses:
By Ruddles
31st Jan 2024 10:09

It would be were it not for the existence of s263 - see my response to Paul.

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Replying to paulwakefield1:
By Ruddles
31st Jan 2024 10:08

paulwakefield1 wrote:

What about S45?


s45 is a general provision, exempting wasting assets except those on which allowances have been claimed. So you are right - the car would not be exempt under that section.

However, s263 is a specific provision, exempting cars. IMO, therefore, s263 trumps s45.

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Replying to Ruddles:
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By paulwakefield1
31st Jan 2024 10:23

Doesn't seem to be HMRC view (which I appreciate is not law). CG76906

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Replying to paulwakefield1:
By Ruddles
31st Jan 2024 10:38

I think you have mis-read CG76906. In particular, the last paragraph refers - as I read it - only to "Other road vehicles" and not to "Passenger cars" as well. What the guidance is saying is that certain vehicles are not covered by the s263 exemption, but might instead be exempt under s45, except where capital allowances have been claimed.

In any event, as you say, it is only guidance. The legislation is clear and unambiguous - s263 says that a car (sic) is not a chargeable asset, period. No mention of an exclusion where capital allowances are in point.

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Replying to Ruddles:
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By paulwakefield1
31st Jan 2024 11:23

Good point, well made. Should have read it more carefully.

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Replying to paulwakefield1:
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By donnameneses
31st Jan 2024 11:46

Thanks, both of you, for your really helpful points. I'm going to leave the capital gain out of the equation for now, and just include the balancing charge. I am going to do some further research now I have your reference points to guide me better. If I happen to discover anything different to what you have concluded, I'll let you know! Thank you again, I appreciate your help.

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Replying to Ruddles:
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By Chessaccountant
31st Jan 2024 10:49

Agreed. He really shouldn't be claiming capital allowances unless it is any of the following:
- taxi cabs
- racing cars
- single seat sports cars
- vans, lorries or other commercial vehicles
- motor cycles, scooters or motor cycle/sidecar combinations.
If the vehicles claimed are not for the above uses, then his prior year returns may have been incorrect.

I do wonder though, for AML reasons, about why he is constantly trading in his cars when this is costing him money. Is it just a vanity thing and does he have enough income to support this lifestyle?

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Replying to Chessaccountant:
By Ruddles
31st Jan 2024 10:55

Chessaccountant wrote:

Agreed. He really shouldn't be claiming capital allowances unless it is any of the following:
- taxi cabs
- racing cars
- single seat sports cars
- vans, lorries or other commercial vehicles
- motor cycles, scooters or motor cycle/sidecar combinations.
If the vehicles claimed are not for the above uses, then his prior year returns may have been incorrect.

I'm sorry, but that is just plain wrong

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Replying to Chessaccountant:
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By donnameneses
31st Jan 2024 11:02

I have no worries on the AML - his business does very well, he has plenty of money and he really loves fancy cars.

I'm pretty sure you are allowed to claim CAs on cars you use in your business though...

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Replying to donnameneses:
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By Chessaccountant
31st Jan 2024 13:35

Yes, you're right, apologies. I meant to say AIA as I was thinking about another query regarding AIA & FYA on cars, of which your query doesn't mention. SA filing deadline day and I got myself confused. :)

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Replying to Ruddles:
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By donnameneses
31st Jan 2024 09:56

Thank you. I've had a look at that, but from what I've read, that exemption disappears if the car is brought into the business by claiming capital allowances on it. Here's a couple of extracts from an admittedly not necessarily trustworthy website, but I've read it elsewhere and interpreted the HMRC manuals in the same way:

When do I have to pay tax on the sale of a business vehicle?
In theory, you'd have to pay corporation tax (or capital gains tax if you're a sole trader and use your car for business travel) if you sell the car for more than you bought it.

If you're a sole trader and you're selling a business vehicle, it's highly unlikely that you'll have to pay capital gains tax. The thought behind this is because you most probably won't make a profit (although, in my client's instance, he did make a profit).
However, you may have to pay more income tax if the sale price is higher than your writing down allowances.

https://mileiq.com/blog-en-gb/selling-business-vehicle-tax-issues-uk

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Replying to donnameneses:
paddle steamer
By DJKL
31st Jan 2024 13:18

I would not trust that, for one this is nonsense

"If the car's sale price or trade-in value is higher than your total writing down allowances, you'll have to adjust the allocation, which is called a balancing charge. And this will increase your overall tax bill."

Seems to be mixing up WDA with WDV

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Replying to donnameneses:
By Ruddles
31st Jan 2024 13:45

I would far rather trust the legislation than an uninformed blog post. As for HMRC's guidance, I interpret Disposals of normal motor cars are therefore exempt under TCGA92/S263 in only one way.

"from what I've read, that exemption disappears if the car is brought into the business by claiming capital allowances on it." Yes, s45 exemption would "disappear" if capital allowances have been claimed. But we don't need to think about s45.

As I said above, there is no such limitation re s263.

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Replying to Ruddles:
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By donnameneses
31st Jan 2024 15:27

Thank you very much for taking the time to reply, I appreciate your help!

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Replying to donnameneses:
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By richard thomas
31st Jan 2024 14:49

Ruddles is correct; HMRC's guidance is correct when read properly - 1st para only; what you quote is rubbish.

Section 263 TCGA is an absolute exemption.

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Replying to richard thomas:
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By donnameneses
31st Jan 2024 15:26

Thank you very much for taking the time to reply, I will go with section 263.

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Replying to Mentinor:
RLI
By lionofludesch
30th Jan 2024 23:07

Client's keeping an eye on things, luckily.

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Replying to lionofludesch:
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By donnameneses
31st Jan 2024 00:09

Ok, you both obviously think I've said something really stupid! Which I may well have, and if I have, I apologise. But would you be able to explain it to me, so that I can educate myself? I do genuinely want to know the correct answer as it's not something I've come across before. Thank you.

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Replying to Mentinor:
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By paulwakefield1
31st Jan 2024 09:35

Sh**ty reply to someone who is probably under year end pressure and with a relatively rare situation.

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Replying to Mentinor:
By JCresswellTax
31st Jan 2024 10:08

That is a shocking reply. You can see the background the clearly laid out thought process and they are asking for help. Must be great to be an all knowing fountain of knowledge like yourself.

Personally I'd much prefer to deal with the OP than yourself!

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Replying to JCresswellTax:
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By donnameneses
31st Jan 2024 10:29

Thank you Jane and Paul. People don't really stop to consider what they write, and the impact it will have. I've been a chartered accountant for 25 years, in practice for 13, and I still learn something new almost every day. I always try to do the best for my clients, and the right thing, and I have lots of clients who are very happy with my work. Which is more than I can say for a lot of accountants - I've seen loads of lazy and incorrect work when taking on new clients who have previously been with other accountants. I think I have a pretty thick skin, but that comment kept me awake for quite a few hours last night, trying to figure out what I'd said that was so wrong. Not particularly helpful saying something like that, but not telling me what they actually think is wrong. It's not always easy to find an answer to a very uncommon situation, especially when you don't have any colleagues. Anyway, I appreciate your comments.

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Replying to donnameneses:
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By Cat's whiskers
31st Jan 2024 11:22

You've been treated most unfairly here and have my sympathies. Don't take it personally, the one comment is from a member (troll?) who joined yesterday. Lion must be feeling the pressure of 31 Jan as he's not normally so unkind.
I'm similar to you - 25 years as a Chartered Tax Adviser and have had my own practice for 14 years - sometimes you miss colleagues to bounce ideas off. Feel free to message me if ever you want to sound out an idea :)

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Replying to Cat's whiskers:
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By donnameneses
31st Jan 2024 11:49

Thank you Cat's whiskers - I appreciate your offer and will bear it in mind, please feel free to do the same to me!

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Replying to donnameneses:
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By sparkler
31st Jan 2024 12:45

Adding my support here too. I'm a Chartered Accountant with 24 years' experience, and have had my own practice for 17 years. I too have many very happy clients, many of whom have moved from shockingly bad accountants and are delighted with the service I provide.

But as a sole practitioner, there are queries from time to time where it is really helpful to bounce off other professionals to ensure that a proposed treatment is correct, or just to get some ideas. An issue that might be commonplace to some accountants might never have been encountered by others, and this is a great place to ask such questions, with many extremely helpful contributors happy to give a little time to explain things.

I generally find the Aweb forum a helpful and supportive place, but I do make an effort to pose my questions incredibly carefully (just as you have done) as some contributors do jump on anything which looks slightly wrong, and remarks can be cutting at times which certainly puts me off posting anything that might be seen as a "silly" question. You have to be quite thick-skinned to not be affected by some replies - I have had my own wakeful nights where I have worried about potential mistakes and how I have worded things!

As with catswhiskers, I'm always happy to take a PM if you have a question you're worried about sharing.

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Replying to Cat's whiskers:
RLI
By lionofludesch
31st Jan 2024 14:54

Cat's whiskers wrote:

You've been treated most unfairly here and have my sympathies. Don't take it personally, the one comment is from a member (troll?) who joined yesterday. Lion must be feeling the pressure of 31 Jan as he's not normally so unkind.

I'll just say that googling "Capital Gains Tax on Cars" yielded over 12 million results

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Replying to lionofludesch:
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By paulwakefield1
31st Jan 2024 15:20

Which seems to me an even better reason to ask the question of one's peers.

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Replying to lionofludesch:
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By donnameneses
31st Jan 2024 15:24

Believe me, I tried googling. But couldn't find anything specific enough for my particular query. This question was a last resort, as it always is, because I know the sort of comments that often appear, amongst the many helpful ones.

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