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 typically a piece of kit purchased by a
business that will be used by that business to generate a
profit over a period of time, perhaps more than one year,
as opposed to an item that is consumed within the financial
year. Items in the category of fixed assets may be 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 full 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.
Vehicles, including taxis are generally excluded from the
50% first year allowance and may not be claimed in the taxi
driver accounts. In addition the 25% writing down allowance
is restricted to a maximum of 3,000 pounds p.a. The writing
down allowance continues until the value of the vehicle is
written off for tax purposes or is sold.
When a vehicle is sold if the 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 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 what constitutes 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 subsequent years in the taxi driver accounts.
Other vehicles used as taxis 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 pounds 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.
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Terry Cartwright, qualified UK accountant, designs Taxi
Driver Accounts Software http://www.diyaccounting.co.uk/
with automated capital allowance calculations for Taxi
Drivers wishing to save money and produce the self
assessment tax return
http://www.diyaccounting.co.uk/taxi.htm
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