We get asked all the time if cars and vans can be claimed as business expenses so we thought it was wise to provide some insight! Every year each self-employed and Ltd Company is entitled to something called an Annual Investment Allowance (AIA). This allowance has been temporarily increased from £200k to £1m until December 2021. The AIA entitles self-employed and Ltd Company businesses to reduce their taxable profits by the value of capital expenditure incurred during the year. This capital expenditure is different to business overheads and expenses and is generally items such as plant, machinery, computers and vans. If a business purchases such items which are classified as capital expenditure items, these can be entered on a personal or business tax return up to the AIA of £1m currently or £200k outside of the temporary increase. The value of such capital expenditure items then reduces taxable profits in the year that the cost is incurred therefore a smaller profit is left over to be taxed at either the personal tax % or the Corporation Tax % depending on if it is a self-employed business or Ltd Company. Some examples of items that would fall under the AIA are - - Computers - Office Furniture - Vans, Lorries, Trucks - Cranes, Diggers, Forklift Trucks - Business Machinery On this basis, lets share an example. If a self-employed sole trader business purchased a van during the tax year and it cost £10,000, when completing their annual personal tax return, they would declare in the AIA field that £10,000 has been spent on qualifying purchases. If the sole trader had a taxable profit of £20,000 before allowing for the van purchase, the taxable profit would reduce by the cost of the van leaving £10,000 as the new taxable profit for the calculation. Please note that if the van is used for both personal and business use, the % of personal use cannot be included in the AIA calculation. For example if the van in the example above was used 60% business and 40% personal, only £6,000 would be deducted through the AIA in this particular case. One big exception to the AIA are cars. When a car is purchased it is dealt with differently. There are three different allowances you can claim when you buy a car for business purposes. The year the car was bought, and whether it is new or second hand also have a bearing on the allowances you can claim. First-year allowances - applies to some vehicle with low CO2 emissions. You'll be able to claim 100% of the cost. Main rate allowances - applies to most vehicles. You'll be able to claim 18% of the costs in each year. Special rate allowances - applies to vehicles with CO2 emissions above 50g/km. You'll be able to claim 6% of the cost.
For cars purchased after April 2021 the following rates apply - New and unused, CO2 emissions 0g/km or less, or car is electric would fall under First-year allowances New and unused, CO2 emissions between 1g/km and 50g/km would fall under Main rate allowances Second hand, CO2 emissions between 1g/km and 50g/km, or car is electric would fall under Main rate allowances New or second hand, CO2 emissions above 50g/km would fall under Special rate allowances In short, machinery, computers and vans can be offset in full in the year they are purchased (except personal use %) and business cars can be offset either in full under certain circumstances but mostly at a % of the cost over a number of years. For more information, please do not hesitate to contact us directly.