How company cars are treated differently for accounting and taxation purposes
I’M confused by the accounting and taxation methods of the cars we own. Are the terms interchangeable? I could do with some help.
Colin Tourick – a taxation and business car specialist at Colin Tourick Associates – is just the person to give you the clarification you require.
ACCOUNTING and tax are both handled by accountants but are actually quite separate things.
Accounting is concerned with the way you record and report the assets, liabilities, profits and losses of your business, and is governed by Accounting Standards.
Taxation is concerned with how to calculate and pay your tax liability and is governed by statute, case law and HMRC practice.
In many cases these distinctions don’t usually matter. Businesses pay tax on their profits, after all, and their profits are shown in their accounts.
However, your accounting profits are only the starting point for calculating your business’s tax liability, because the law requires that some adjustments should be made to your accounting profits when calculating your taxable profits. And if you own your business cars, some of those adjustments affect you.
So, let’s look first at the way a company records the purchase and sale of a company car in its books. On buying the car it records the arrival of an asset. During the years it owns the car the company writes off (“depreciates”) part of the value of the car in its books. A company can decide its own level of depreciation; some will choose 25% pa on a reducing balance basis, others might choose 20% pa straight line, and so on. When it sells the car the company records the sale proceeds. If there’s a difference between the sale proceeds and the written down value of the car this is treated as a profit or loss on sale.
The taxman is totally disinterested in everything I’ve written in the above paragraph. He doesn’t want companies to decide their own levels of depreciation, so he imposes his own, called capital allowances.
Every year the taxman allows the company to write off part of the value of the car in its tax computations, based on the CO2 emissions of the car. Company cars with emissions of 110g/km and below can be fully written off for tax purposes in the year of purchase but for cars with higher emissions the allowances are quite meagre.
The cars are pooled together and the pools attract capital allowance (‘writing down allowances’) at the rate of 10% pa for cars emitting >160g/km and 20% for cars emitting >110 g/km and up to 160g/km, on a ‘reducing balance basis’.
Once the car has been sold the sale proceeds go into the pool to reduce its value. However, in most cases this will leave part of the value of the car still in the pool and the company will carry on getting ever-reducing levels of writing down allowances on this value, for many years.
Editor’s note: For the self-employed and partnerships, once you’ve calculated the capital allowance for the year you should reduce this by the private use percentage.
Read this article, too
It’s worth a look at this as well: We’re a small company: what’s the best way to run our business cars?