Reply to: The case for your company buying a "QUALEC"?

[Fred Bloggs]

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]

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]

Dude, any chance you could break it down for us dimmers to make it easier to understand, with all the BIK costs?

The car benefit charge for a full year is obtained by multiplying the price of the car for tax purposes (in most cases, its list price plus accessories less capital contributions) by the 'appropriate percentage'.

The appropriate percentage is 9% for electric, 10% for petrol and 13% for diesel cars of <=120g CO2/km.

This is income. The cost as income tax is then:

non-tax payer: zero
basic rate: 1.8%, 2%, 2.6% per annum
higher rate: 3.6%, 4%, 5.2%
This percentage is of the new cost.

There has been previous discussion of this on these forums, including workings showing whether it is worth it or not. It does not really work out UNLESS you want a brand new car, even with the 100% write-down, because you are still paying depreciation. An £8k Honda Accord is still going to be substantially cheaper in terms of sticker cost, if not necessarily running costs. A Mini Cooper D costs about £14k. That's going to cost you £2,128 in tax over 3 years. Depreciation is not too bad because of the car's image and low tax, say £5k. You get tax relief on that depreciation, in effect, so £1k back. So the cost is about £6,128 before VED, petrol, servicing, etc. As a private buyer, you don't pay the £2,128 BIK, but you do effectively pay the grossed-up cost of the £5k depreciation. That would be £5k / 0.6 = £8,333. So you save about £2,000. This is predicated on you having to take 40% taxed income out to pay for the car. Whether that is accurate is somewhat imponderable due to spousal dividends, capital distributions, etc. As a basic rate tax payer the numbers are £6,250 as a private owner, versus £5,064 through the company.

The more depreciating your car (in actual pounds lost), the better the equation looks in favour of getting 100% write-off, so a less desirable car would work out better still, though this is obviously a false economy in that you are losing more money.

Essentially the BIK % should be less than the actual real-world depreciation - the BIK is really a tax on you not having to suffer that cost. At 10-13%, that's below all cars' real-world depreciation. Higher band cars can go towards 40% BIK, which is just stupid.

[Fred Bloggs]

That's crazy. You buy for £12k. Save £2.4k tax.

Sell for £10k, adding £10k to your profits in year 2, paying £2k tax year 2. So the car has cost £1,600 + BIK cost.

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?

[Ruprect]

That's crazy. You buy for £12k. Save £2.4k tax.

Sell for £10k, adding £10k to your profits in year 2, paying £2k tax year 2. So the car has cost £1,600 + BIK cost.

You have had the 100% capital allowance. Therefore if you dispose of the asset for any cost above zero, the balancing charge is 100% of the sale price. Basiclaly you will want to keep for about 3 years, remembering that BIK charge does not go down as a vehicle loses value - it's based on purchase cost.

Dude, any chance you could break it down for us dimmers to make it easier to understand, with all the BIK costs?

[dude69]

I am getting close to talking myself into opening a dialogue with my accountant on this. Relating to your question- I would plan on buying a QUALEC in year 1 and part exchanging it every year after. So in year 2 the residual value of the car belongs to the company, I would think......... How this would be regarded for profit and loss and taxation I have no idea. There is also the VAT angle that I'm confused about, could there be a VAt reclaim made too as it is a capital asset purchase?

That's crazy. You buy for £12k. Save £2.4k tax.

Sell for £10k, adding £10k to your profits in year 2, paying £2k tax year 2. So the car has cost £1,600 + BIK cost.

You have had the 100% capital allowance. Therefore if you dispose of the asset for any cost above zero, the balancing charge is 100% of the sale price. Basiclaly you will want to keep for about 3 years, remembering that BIK charge does not go down as a vehicle loses value - it's based on purchase cost.

[Fred Bloggs]

Thanks. So does the car have any "value" as an asset in my company for subsequent years?

I am getting close to talking myself into opening a dialogue with my accountant on this. Relating to your question- I would plan on buying a QUALEC in year 1 and part exchanging it every year after. So in year 2 the residual value of the car belongs to the company, I would think......... How this would be regarded for profit and loss and taxation I have no idea. There is also the VAT angle that I'm confused about, could there be a VAt reclaim made too as it is a capital asset purchase?

[Hiram King Of Tyre]

I was looking for something on Euro 5 emissions, the Diesel TT fals into this category

[Ruprect]

<sorry for stupid question>

would you have to buy the car outright rather than something like contract hire...?

<end sorry for stupid question>

Presumably it can only be classed as an asset if the company actually owns it...

[techno]

<sorry for stupid question>

would you have to buy the car outright rather than something like contract hire...?

<end sorry for stupid question>

[Ruprect]

Any of the accountants care to comment on this? Sounds good to me...

[gadgetman]

Thanks. So does the car have any "value" as an asset in my company for subsequent years?

The profits would be reduced by the cost of the car. So if the car costs £16k, you would save £3.2k in CT. Subsequent years, zero.

If you get in before April 5th (1st?), there are quite a few more cars eligible, namely those between 111g and 120g of CO2.

[dude69]

I'm not sure if I've grasped this completely.

In simple terms, for a qualifying car, would this scheme mean at the end of my company year, the complete value of the car would be offset against my profit and therefore reduce my corporation tax by 16k?

Does the write down mean that the car would have no value, in terms of my accounts, for the following company year?

Presumably the BIK figures quoted are for 20% and these would double if you are liable for 40% tax?

The profits would be reduced by the cost of the car. So if the car costs £16k, you would save £3.2k in CT. Subsequent years, zero.

If you get in before April 5th (1st?), there are quite a few more cars eligible, namely those between 111g and 120g of CO2.

[oracleslave]

I'm in a diesel BMW at the moment

Does that make typing and driving difficult or do other road users make allowances as you're a beemer driver?