CARS Crash course in tax deductions for cars
In the recent ice and snow your car took an unintentional nosedive into a hedge. Fortunately, the damage wasn’t too bad and as there were no other cars involved you’ve decided to pay for the repairs yourself. But can you get a full tax deduction for this? Sole trader/partnership No distinction. With an unincorporated business, the general principle is that there’s no legal distinction between the assets of the business and those of the proprietor/partners. Cars are typically used for both business and personal journeys; what’s important to the Taxman is that only the business element is allowed for tax. Private use adjustment. This is usually taken care of in the “private use adjustment”, whereby a proportion of the motor expenses are added back to the accounting profits or transferred to the owner’s drawings. In practice this is normally done on a percentage basis for simplicity, but a strict apportionment of business to private miles will usually give an accurate result (the Taxman likes to query the percentage from time to time). Rule of thumb. Whether the accident occurred on a business trip or jaunt in the country, the repair bill will be part of the overall “pool” of expenses, with any private element being taken care of as part of this overall adjustment. Closer scrutiny. For example, a trader whose car normally costs £2,000 a year to run, of which 20% is disallowable, will have a deductible expense of £1,600 (£2,000 x 80%). If he suddenly puts through a bill for repairs of £1,200 (£1,500 x 80%), the motor expenses figure in the accounts will go up to £2,800 (£1,600 + £1,200); a rise of 75%. With a distortion of this magnitude, the Taxman may want a closer look at the figures. If the trip was of a personal nature, for example the garage was in southern France and all your business is conducted in northern Scotland, he is unlikely to allow it as a deduction if he sees the invoice.
Limited company Good news. With limited liability, the rules for business and private use of assets are far stricter. If the company owns the car, it is responsible for the expense of the accident repair. Any non-business use is taken care of under the benefit-in-kind rules already, so there is no private use adjustment. Spouse’s car. What happens if you’re involved in a prang in your spouse’s car? How will the settlement of this be treated for tax purposes? The answer to this is much simpler. If you were using the vehicle on business, it can be claimed as a business expense. If not, then you can’t! Rule of thumb. If the accident happened on a business trip, then the cost will be an allowable expense. Paperwork
Tip 1. Proving you were on a business trip is the key. This can be backed up by entries in your diary, correspondence with potential customers etc. Make a note of these while still fresh in your mind.
Tip 2. There should be no difficulty in claiming the cost of an accident repair, especially if it’s for your regular business vehicle. Record that all this has been done for a bona-fide commercial reason: keeping that no-claims discount intact and holding your insurance costs down.
Tip 3. If it’s your spouse’s car that was pranged, keep a record of why you were using it at the time in case you need to back your claim up later, (e.g. your car was off the road from the accident you had the week before!)
Include the claim within motor expenses to get the tax deduction. If challenged, state that the accident occurred on a business trip and that it was done this way for commercial reasons, i.e. to keep insurance premium costs down.