Tax / company vehicle query

catfandoo

Hi all, I was wondering if anyone could help me with a worry I have..

I run a self employed business, this year I decided to buy a new commercial vehicle for my business, the vehicle cost 26k inc VAT,
the manufacturer had on an offer where you pay half now, then the rest over 3 years interest free. The 0% over 3 years really appealed to me, I was able to claim the full amout of VAT back right away ( as advised by dealer) I was told I could then claim the full amount payed each month over the next 3 years as there is no VAT in this figure ( even though it is half the orignal price inc VAT, ie 13k) Is this right?

My second worry is now after speaking to a friend who advised me I can't claim the cost over the next 3 years, (put it down as a monthly expense) rather I should have put down the full cost of the vehicle the first year. Surely this works out the same in the long run? who is right here..would the TAX man have something to say about this?

Thanks in advance

bni

I would think the credit deal would be immaterial to treatment of when the cost was incurred, as it simply a interest free loan on the reminder of the purchase price and clearly evidenced by the fact that you have already reclaimed the whole amount of VAT so cost incurred in this year.

Buying vehicle is not an "expense" as it has an economic useful life of longer than a year and so it is treated as an asset and depricated (or written down) over a certain period (say 5 years) in your accounts. For tax purposes, to complicate things the treatment is slightly different and you are allowed capital allowances against your profits depending on the type of asset.

Read more here:
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1086383994

Different rules for capital allowances apply depending on if it is classed as a "car" or not (see http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1086394511&type=RESOURCES).

There is an Annual Investment Allowance (AIA) which would be applicable if it is not a "car", which allows you to claim up to 25k at 100% in the first year, so essentially treating the vehicle purchase the same as an expense. This allowance is specifically to help make it easier for small business so they don't have to deal with depreciation and capital allowances.

So I would imagine you would either have claimed the full cost under the AIA in the first year or if more beneficial use the standard rules for capital allowances and have the cost set off against tax over several years.

The monthly payments on the vehicle though would be loan repayments and only effect your balance sheet and not your profit/loss and would not change the tax position.

catfandoo

Many thanks for that Bni, your help is much appreciated.
As I don't have an accountant...the capital allowance/deprecciation is a bit daunting for me..
I think the most straight forward way is to try and claim it all in the first year under the AIA, it is a commercial vehicle (Nissan Navara) and under 25k after VAT claimed back. It would be ok to do this even if in effect I have only payed half the vehicle at this point? I assumed spreading the cost over 3 years would help bring down my TAX ..but obviously did not realise the capital allowance aspect....what a minefield!

phill99

This is where paying £300 a year for a decent accountant pays dividends.

bni

Yes, based on what you said earlier you could claim the full cost under AIA in this year. It would simply things for you, but you would have to have quite high net profits to offset it against (unless it would be beneficially to have a loss that could be set against larger profits in recent tax years or in the coming one).

If you instead opt for not using the AIA, you would write down the value of the van by 18% (current rate) every tax year, called a Writing Down Allowance (WDA), until it gets to below £1000 when the remainder can be written off in one go. So you would benefit from a regular allowance to lower your taxable profit in the coming years, like this:

Starting value: £21666

Year 1: WDA 18% of £21666 = £3899
Year 2: WDA 18% of £17767 = £3198
Year 3: WDA 18% of £14569 = £2622
Year 4: WDA 18% of £11947 = £2150
Year 5: WDA 18% of £9797 = £1763

And so forth..

catfandoo

Thanks very much for all your help bni, much appreciated :T