Capital tax allowances are allowances on fixed assets a business may claim as a deduction from net profit to arrive at the net taxable profit. If a taxi driver does not claim the correct capital tax allowances in the taxi accounts that net taxable profit and the income tax and national insurance payable will be higher than it need be. Hard cash lost to the government that they are not entitled to, your cash.
A fixed asset is equipment used to generate a profit over more than one year, as opposed to an item that is consumed within the financial year. Examples of fixed assets include plant and machinery, fixtures and fittings, computers and vehicles.
For most fixed assets the capital tax allowance consists of an enhanced first year allowance in the year of purchase and writing down allowance in subsequent years. This type of tax allowance spreads the allowance of the amount spent over the life of the asset rather than that item being expensed in the year the purchase was made.
For small businesses the first year allowance is currently 50%, 2007-08 and in subsequent years the writing down allowance is 25% of the balance. Special rules apply to vehicles and of particular interest when preparing the taxi driver accounts. These special rules certainly affect taxi drivers many of whom will find they are not eligible to claim the 50% first year allowance on their taxi. In the tax year 2008-09 the annual investment allowance of 100% replaces the first year allowance and the writing down allowance is reduced from 25% to 20% of the written down value for tax purposes.
Vehicles, including a taxi are generally excluded from the 50% first year allowance and may not be claimed in the taxi accounting. In addition the writing down allowance is restricted to a maximum of £3,000 p.a. The writing down allowance continues until the value of the vehicle is written off for tax purposes or is sold.
If the taxi vehicle is sold at a price below the written down value for tax purposes then an additional capital tax allowance can be claimed in the taxi driver accounts. The additional tax allowance is equal to the difference between the price at which the vehicle was sold and the net written down value for tax purposes. When a vehicle is sold at a price above the net written down value for tax purposes there is a deduction in the capital allowances which is called a balancing charge and is equal to the sales value less the written down value for tax purposes.
Commercial vehicles are treated differently to motor cars. First year allowances can be claimed against the purchase price of vans that are deemed to be commercial vehicles. The Inland Revenue website has a list of vans it deems to be a commercial vehicle and the make and model of any van thought by the owner to be a commercial vehicle should check that vehicle against the list when claiming a first year allowance.
The writing down allowance on commercial vehicles is not restricted to 3,000 pounds. Capital tax allowances on commercial vehicles is then the same as a typical piece of plant and machinery whereby a 50% first year allowance can be claimed in the first year with a 25% writing down allowance in subsequent years.
The capital allowances act 2001 makes a distinction between cars and qualifying hire cars. Cars are subject to the restrictions on capital tax allowances applied to vehicles while qualifying hire cars are not subject to these restrictions in a similar way to which qualifying vans, commercial vehicles are treated.
The definition of a qualifying hire car as opposed to a car is crucial to taxi drivers when the taxi driver accounts are being prepared either by the taxi driver or the taxi accountant. Simply using a car solely as a taxi is not sufficient to avoid the capital allowance restrictions. Using a vehicle which is deemed to be a qualifying hire vehicle is sufficient to allow a first year allowance and unrestricted writing down allowances to be claimed in the taxi accounts
To comply with the definition of a qualifying hire car the vehicle must be of a type that is not commonly used as a private vehicle and would also be unsuitable for use as a private vehicle. Hackney carriages, black cabs and limousines fall into the category of a qualifying hire car and taxi drivers using these types of vehicle may claim the 50% first year allowance and the 25% writing down capital allowance in the tax year 2007-08 and subject to the 100% annual investment allowance in 2008-09
Other vehicles used as a taxi by taxi drivers and mini cab drivers would not receive the first year allowance but would be subject to writing down allowance of 25% of the original cost in the first year and a further 25% in succeeding years all subject to a maximum of £3,000 per vehicle per annum. In addition when preparing the taxi driver accounts taxi drivers should note that if the taxi is also used for personal use then a further deduction in tax allowances is applicable according to the percentage that the taxi is used for personal business.