Offsetting Lease payments against Sole Trader Profits.

Mega_Maniac

I have been trying to wrap my head around this, at the moment I have just started out in a business where registering as a sole trader will become beneficial to me. I was having a discussion with a colleague about the best way to get a car when registered as a sole trader and he said that he can offset 80% of the lease of his car against his business profits as a sole trader.

So if the car cost him £300pm he could claim back £270 of this.

The bit I am unclear about is how this is offset against business profits, and what money goes where and what is actually paid for at the end of the day...

What my colleague seemed to be saying was that he essentially only ends up paying 20% of the lease after he has claimed back the rest, or £30pm. This seems a bit too good to be true, but then I don't know the first thing about this really so I was hoping to seek a simple explanation of what happens to the money.

Any help would be greatly appreciated, and if I have explained anything badly just let me know and I'll try to clarify.

Mega_Maniac

Ok, in trying to wrap my head around this I think I have a basic idea, but I can only find things that apply to small business rather than sole trader, but let me try and give an example of what seems to make most sense to me...

If I earn £30,000 a year as a sole trader working in the TV industry, I need to offset anything that is not pure profit. So If I had no expenses whatsoever I would pay normal tax on the full £30,000 (ignoring actual expenses for the moment to keep this simple in my head).

The above lease example would cost £3,600per annum, of which I can offset 80% against my profits, or £2,880.

This means that my taxable profits would be £30k minus £2,880. So £27,120.

If that is all correct that essentially means I am simply saving tax against the lease. The lease is paid for in full, and if for example tax is at 24% I am able to claim back £691 (roughly).

Does that all sound about right?

edit: it also seems the 80% thing is for cars over a certain economical bracket, but to keep it simple lets say that I'm buying a car in this bracket

neilmcl

Sounds to me that you need to speak to your accountant.

colino

While most small businesses would, allowably, have this car on the books as a business tool and defer the costs that way, you need to see an accountant.

arcon5

You say for example, you pay £30 per month after charging it to the business.... but remembering any profits the business makes are yours anyway, you are still paying £300 irrespective of how you look at it. But by putting a sum through the books, it means your tax liability will be reduced, in the same way an expense reduced the tax liability - so put £300 through the books, you save £60 tax (assuming you've hit the 20% threshold of course, which you seem to have).

Also, if you're making £30k per year, operating as a Ltd company would save you money by paying yourself short of £10k (tax-free allowance) and the rest as dividends - as NI isn't paid on dividends, thus saving 11% (or whatever the figure is).
Also, by doing this, you will make a small class 1 NIC payment on approx £2,500 of the £10k paid under PAYE - so if you ever become unemployed you'd be able to claim contribution-based JSA. As SE you pay class 2 and 4 instead.

Cars can be quite complicated in accountancy though. So worth clarifying this with an accountant. I believe though an operating lease (vehicle returned to owner at the end) means you can put 100% of the rental agreement through the books as each payment is made. Other types of agreements which see you owning the vehicle or the opportunity to buy it would usually be treated as a capital expenditure item.

Mega_Maniac

I dont wish to sound offensive in saying this, but seriously saying "see an accountant" kind of defeats the entire purpose of using a free advice forum to seek initial basic advice.

I'm fairly sure "see an accountant" or "see a lawyer" or perhaps a more broad "speak to an expert" could answer 90% of the questions asked here, but it doesn't help.

Arcon5 - Thanks, yea that confirms what I thought, you are essentially still paying for it, but as its via your business it avoids the tax you would normally pay.

Thanks for the advice on the Ltd company thing as well, I have only just started out in this industry and I need to wait for a few months at least to be sure I will get regular work in the future before committing to anything like a 3 year lease. Obviously when I properly set everything up I will seek the advice and services of an accountant to make sure I get the best option but its good to have some initial advice to help me understand things :T

colino

Perhaps I was writing in shorthand that you didn't pick up. Running a car through the books is one of the easiest to manage offsets that you have the joy of when running your own show. Other than at the extreme ends of the scale, running a Roller as a company car when you are paying (from the limited company) £7696, there really aren't any bars from what you run and how you run it. As you have already set up a business but apparently haven't yet decided on Sole Trader or incorporation, this is just one part of the jigsaw that I think you are not aware of. Most people are plenty capable of maximising income from their small business, others will save money by taking advice, or handing it over, to an accountant.

arcon5

Mega_Maniac wrote: »

I dont wish to sound offensive in saying this, but seriously saying "see an accountant" kind of defeats the entire purpose of using a free advice forum to seek initial basic advice.

I'm fairly sure "see an accountant" or "see a lawyer" or perhaps a more broad "speak to an expert" could answer 90% of the questions asked here, but it doesn't help.

Arcon5 - Thanks, yea that confirms what I thought, you are essentially still paying for it, but as its via your business it avoids the tax you would normally pay.

Thanks for the advice on the Ltd company thing as well, I have only just started out in this industry and I need to wait for a few months at least to be sure I will get regular work in the future before committing to anything like a 3 year lease. Obviously when I properly set everything up I will seek the advice and services of an accountant to make sure I get the best option but its good to have some initial advice to help me understand things :T

To be fair, if you get it wrong and you are picked out by an inspector, the cost of an accountant could be cheaper than the fines if you've wrongfully expensed the car

But yes, you can get an answer for free, phone HMRC - they should be able to tell you exactly what you can claim for.
Or try http://www.accountingweb.co.uk/anyanswers - there are a lot of professionals there.

Are you using the car for personal use also? If so there is further complications with Benefit In Kind (BIK).

How many business miles do you do? In some circumstances the most tax efficient way of doing it would be to claim mileage at the approved rates set out by HMRC.

Mega_Maniac

I think perhaps I wasn't really clear from the outset that I am not yet set up as self employed/sole trader/business at all.

The current job I am on I am on for long enough to be on PAYE, I can set up as self employed as I provide the major equipment for the job but it was all very last minute and for simplicities sake I just remained on PAYE.

Essentially I am just trying to wrap my head around the basics of being self employed so when I come to do it (probably in the next few months when I am more aware of how stable the work will be) I will know how to approach it.

This bit about the car came up because I happened to have this discussion with a colleague and I think he thought you could write off the entire cost.

Its all much clearer now, and actually the advice here has given me a better basic understanding of the self employed tax situation. :T

arcon5

Being self employed has some major disadvantages.
You will pay class 2 and 4 NIC as opposed to class 1 you pay under PAYE - this affects your elegibility to certain state benefits and certain aspects of the state pension.
I've been self employed for about 5+ years and when I become unemployed I wasn't elegibility for JSA for example.

You can opt in for class 3 NIC which will counter some of the affects of SE.

Personally I would set up a Ltd, register the company as an employer and pay you a basic salary of £10k then the rest as dividends.
Reason being, you will pay class 1 on about £2500 of this + employers NIC. The dividends are free from NIC. So profits of about £15k+ can see major tax benefits even after the £500/year accounting fee.

arcon5

By the way, at £3500 per year for a lease, I'd be asking myself whether I'm getting value for money compared to other arrangements that would see you own the vehicle at the end.