The case for your company buying a "QUALEC"?

[Fred Bloggs]

Thank you. The only additional upside then is that my present car gets sold for "say" £10k and would yield therefore about £400 per annum to offset part of the BIK cost. Plus the running cost is borne by the co rather than from my taxed income.

Again, thanks.

[dude69]

Right. Now I'm getting to the kernel of the issue! So the value of the part-ex in my "year 2" scenario is profit?

it's a balancing charge on the CT return.

It's not profit on your accounts, because on your accounts the car is an asset worth £x,000, and the depreciation is an annual cost. The sale of the car at the value you have booked for it in your accounts would not represent a profit in accounting terms, because you have lost £x,000 from your assets, and also gained £x,000 in cash.

As far as HMRC are concerned however, depreciation is not an allowable expense against Corporation Tax. Your Mercedes S-Class that lost £20k last year might have reduced your company's profits, but that doesn't mean the government want to let you take it off your tax bill.

Instead the government decrees annual capital allowances based on the residual value of the asset, and based on the asset type. For low-polluting cars, the allowance is 100%. For other assets it might be 20%.

So if you buy a Mini Cooper D for £14k they will give you £14k capital allowance, reducing your CTable profits by £14k. The residual value for CT purposes is effectively zero, but on your accounts you have an asset worth approx £11.5k.

When you dispose of an asset, at that point the difference between the sale value and the capital allowances received to date is charged/debited to your CTable profits. So on sale for £8k, that would be an £8k charge.

Let's say you make sales of £82k, and your car, which at the start of the year is worth £11.5k, loses £2k of value by the end of the year, when you sell it for £9.5k. This gives your company a profit of £80k.

For CT purposes, you add the £2k back on, giving £82k CTable profits. You then need to look at the original purchase price of alll assets being disposed of (the car), and take off the capital allowance claimed against those assets to date. In this case that is £14k purchase price, and £14k capital allowances, giving zero. You take that value off the sale price of £9.5k, giving a balancing charge of £9.5k. Hence your profits for CT purposes are £82k + £9.5k = £91.5k You pay 20% CT = £18.3k. Then on your accounts you write PROFIT BEFORE TAX: £80k TAXATION: £18.3k PROFIT AFTER TAX £61.7k
You've actually received £82k + £9.5k of cash in the year, but because you have lost a car which started the year at £11.5k your profits are £80k.


Basically, the short answer is: when you buy the car, the cost is treated as an expense/loss, and when you sell it as a profit.

[Fred Bloggs]

Thanks.