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taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I am a sole trader. I bought a very low emission car in

Resolved Question:

I am a sole trader. I bought a very low emission car in March 2014 on a First Year Allowance. The cost of the car was £15500.00 (I use it for 50% business use)
I now want to trade in the car for another one. I have been offered £7500 trade in for my car, and the new one (pre-registered 6 months old) will cost £15000.00. - Emission is under 130
How will this affect my accounts? I understand that the trade in value will be a 'balancing charge' - but don't know how that effects everything else. Does that push up income for the year - and subsequently, how does that affect my Working Tax Credit - does it affect the income figure for that also?
... and am I best using the cost of the car (50% of it) as a writing down allowance @ 18% pa, or would I be better off using 45p per mile (I do roughly 2500 business miles per year)
The other scenario is that I can buy a brand new car on PCP - would that be treated the same way?
Submitted: 1 year ago.
Category: Tax
Expert:  taxadvisor.uk replied 1 year ago.

Thank you for your question..

Although you have been offered £7,500 for your car, as business use is only 50% the balancing charge will be 50% of the trade in value only ..

If you were to replace it with another vehicle, you would show both balancing charge and capital allowance in the same set of accounts so your profit would be reduced by net capital allowance on the vehicle.

As you are doing relatively low business mileage you may be better off claiming capital allowance and running costs of the vehicle as opposed to 45p per mile mileage claim.

Whether you bought a car outright or on PCP accounting treatment would be the same. You would have to look at absolute values to see what impact it has on your net income but the process and principle is the same.

More information on capital allowances on business cars can be found here

https://www.gov.uk/capital-allowances/business-cars

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 1 year ago.
Hi - so, as an example - The balancing charge would be £7500/50% which would be £3750.
The Capital Allowance would be £15000/50% which would be £7500. This amount would be written down by 18% per year, and the remaining balance each year until it gets to £1000, and then it is written off?
Would I be adding the difference to my profit for the year - and does that affect Working Tax Credit income figures?
And, in the first year - if I were to do this now, would I have to pro rata the amounts as we are 5 months in to the tax year?
Expert:  taxadvisor.uk replied 1 year ago.

Thank you for your reply.

If you were to replace your vehicle then in the same set of accounts you will show

- capital allowance on the replacement car

- balancing charge on car traded in

You will be deducting from your profit writing down allowance every year and not adding to your profit

In the first year of replacement , you would take full amount and not pro rate the amounts.

More information on capital allowances and balancing charges can be found on helpsheet 252 here

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323611/hs252.pdf

I hope this is helpful and answers your question.

Expert:  taxadvisor.uk replied 1 year ago.

Would I be adding the difference to my profit for the year - and does that affect Working Tax Credit income figures?

Capital allowance would reduce your income for working tax credit calculation.

Customer: replied 1 year ago.
Thanks for your reply - I understand that Capital Allowance reduces income for working tax credit calculation, but in the first year where there is a balancing charge, does that figure increase income for working tax credit calculation?
Expert:  taxadvisor.uk replied 1 year ago.

My understanding is you are offer £7,500 as part exchange for another car. This normally happens at the same time. ..correct me if I am wrong.

Increase of income by £3,750 is not going to make a lot of difference on working tax credit figure.. you can check it by using the calculator here
https://www.gov.uk/tax-credits-calculator

I hope this is helpful.

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