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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15977
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Sole Trader- Capital Allowance question , I have been

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Sole Trader- Capital Allowance question
I have been unemployed since 1st Dec 2014.
On 1 Sep 2015, I will commence work as a consultant for a financial services company. They wish to employ me as a consultant rather than an employee but if things go well, they are prepared to make me a full time employee from 1st Jan 2016.
I have therefore notified HMRC that I will be a sole trader from 1 Sep 2015.
I will need to buy a vehicle for my commute to work which could be a motorcycle or a car- I understand that there are different rules for these different types of vehicle in terms of the capital allowances that can be claimed in the year of purchase.
My question is whether I will be able to claim a capital allowance for the vehicle purchase if it transpires that I have sole trader status only for 4 months and then become an employee.
Many thanks in advance for your help.

Will you be working at a fixed base or will you be travelling to see clients at their homes etc?
Customer: replied 2 years ago.

I will be working at a fixed base being the offices of the company concerned.


Leave this with me while I draft my answer.
Customer: replied 2 years ago.

Thanks Tony, I await your response.

Hi again.

Work to office and office to home travel is not classed as business travel so you will not be able to claim any mileage allowance or fuel costs related to such travel as deductible expenses and any capital allowances or lease rental claims will also be subject to a private use deduction..

Given that you may be self-employed for a very short period, claiming capital allowances may not be a good idea. Writing down allowances are given on a reducing balance each year. When an asset is sold the price it is sold for is offset against the written down value and there may be a clawback of capital allowances.

Put simply, you only get capital allowances for the net cost of an asset. So, if you buy a car for £10,000, claim £1,800 in capital allowances and then sell the car for £9,000 or withdraw it from the business at a value of £9,000, then there will be a clawback of £800 in capital allowances as the net cost of the car to you was £1,000. Any capital allowances would need to be reduced by a percentage to reflect private use of the car.

If you leased the car, you would be able to offset the lease costs less a percentage to reflect private use.

For a period of four months, unless you will have significant business use, the purchase or lease of of a car will not give you much in the way of tax relief.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Many thanks for your reply.

Fully understand re: the inability to claim mileage allowance/ fuel costs with respect to my daily commute.

Re: capital allowances, I am still confused.

The possible sequence of events that is likely to happen is as follows:

1. I will buy a new car in Sep/ Oct 2015 which I will solely use for the daily commute between my home and a fixed base. I saw on the HMRC website that if the vehicle purchased is new and has CO2 emissions of less than 75g/ km then 100% of the purchase price can be claimed as a first year allowance.

2. In Jan 2016, it is possible that I will become a full time employee of the company for whom I will be consulting in the period 1 Sep 2015 to 31 Dec 2015. If this were to happen, on 31st Dec 2015 I would contact HMRC to inform them of my change in status from sole trader to employee.

3. From 1st Jan 2016 onwards, I would continue to use the vehicle for my daily commute between my home and the same fixed base, it would not be sold and therefore there would be no concept of a "net cost" of the asset.

So, using the data in the example that you provided:

1. If I bought the new car in Sep/Oct 2015 for £10,000, if it had CO2 emissions of less than 75g/ km and if it were solely used for my commute, could I claim a first year allowance of £10,000?

2. If my employment status then changed on 1st Jan 2016 from sole trader to employee but if I continued to use the car for my daily commute, would this change or affect in any way the first year allowance claim of £10,000 that I had made during the 4 month period of being a sole trader?

1 You could do that but as your business will cease after less than 12 months, the allowance will be restricted proportionately, quite apart from the private use restriction. See pages 13 and 14 here. 2 The fact that the business will cease means that the car will be withdrawn from the business. Therefore, a clawback of first year allowances will occur. In fact, as the business won't last a year, there never will be a first year allowance as the car will be brought into the business and and removed from it within the same accounting period. HMRC will not allow you to claim a first year allowance for a vehicle and and allow you to keep it all when you withdraw it from the business, after which it is just your private car. That would amount to the government subsidising a private vehicle. As I said in my previous post, home to office is not business travel, it is private travel.
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