Capital Allowances for Self Employed – Motor Vehicles
By Cheaper Accountant, May 3 2017 05:55AM
This article has been written as a follow on from the last time we updated the blog and provided advice to the readers of our blog on the motor expenses – full cost method. Today we are addressing our sole trader clients and this blog post has been written with them in mind. If you operate a limited company then this article doesn’t directly relate to you and a different set of rules will need to be followed and applied to what is outlined below. The personal use of a limited company asset such as a company car is a very different topic all together and crosses into the territory of a taxable benefit.
What are Capital Allowances?
Capital allowances are used to allow a business owner to deduct the cost of using an asset for business purposes, such as a motor vehicle, across a number of years. Rather than using the full purchase cost of the asset as an expense against taxable profits, capital allowances are permitted to be used to reflect the decline in value of the asset over a number of years.
Business Use vs Private Use
You will need to accurately understand and calculate your business use and private use of any asset. Continuing with the example of a motor car used during the course of business: let’s assume that it is used 50% of the time for business mileage and 50% of the time for private or personal mileage. This would result in a 50% reduction to the capital allowance claimed.
How are Capital Allowances Calculated?
You purchase a motor vehicle for £10,000 with CO2 emissions of less than 130g/km and as such qualifies for a writing down allowance of 18%. The vehicle is used 50% of the time for business and 50% of the time for personal trips.
Step One – Calculate the Full Capital Allowance
£10,000 x 18% = £1,800
Step Two – Reduce by private use factor
£1,800 x 50% = £900
Step Three – Record as an expense against company profits
The figure of £900 can be recorded as an expense reducing the sole traders’ taxable profit.
This blog has presented a simple example and explanation of the capital allowances that apply to reflect the cost of a sole trader using a motor vehicle during the course of business. This isn’t always a simple process in practice and if you need help with your capital allowances or other accounting matters then don’t hesitate to contact us.