These VAT rules apply whether you are a sole trader or a limited company.

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1 Cars and Vehicles VAT You will not be able to reclaim any input VAT on the purchase of your car, (nor will you have to charge any output VAT on sale, unless you are in the very unlikely business of making a profit, [selling price less purchase cost], on sale of cars) You can, however, reclaim input VAT on: Repairs and maintenance costs Fuel costs but for business mileage only and therefore subject to an adjustment for private usage if you reclaim input VAT on all (i.e., both business and private) of your car fuel costs 50% of the input VAT on any contract hire or operating lease costs, (an arrangement by which you do not own the vehicle, but hire it from a third party owner under an operating lease) These VAT rules apply whether you are a sole trader or a limited company. For general taxation, the rules will differ depending on sole trader or limited company status. Sole trader What you can deduct and claim for will depend on accurately recording your business and private mileage each year. This is something that you will find rather irritating, but it has to be done! It is also an Inland Revenue requirement! The concepts of what is deductible are best illustrated by a worked example, for which we will assume that in year 1 you drive 18,000 miles, split as follows: Business miles 10,800 60% Private miles 7,200 40% Total 18, % Your car costs, (new to you), 15,000, financed by a hire purchase loan of 10,000, on which you pay interest of 800 in year 1. Your running costs for year 1 are: Road tax 150 Insurance 750 Repairs 1,500 Fuel 2,900 Total 5,300 Your tax deductions can then be analysed like this:

2 Capital, depreciation and interest costs capital and depreciation cost 15,000 tax depreciation or capital allowances limited to the lower of 25% or 3,000-3,000 adjusted for private use 40% - 1,200 tax claimable amount 60% 1,800 tax value of car carried forward to year 2 12,000 interest costs interest paid 800 interest disallowed ½ of purchase cost in excess of 12,000 ½ x (15,000 12,000) x ,000 allowable interest 720 adjusted for private use 40% tax claimable amount 60% 432 Running costs These are pro rated between business and private use total running costs 5,300 adjusted for private use 40% - 2,120 tax claimable amount 60% 3,180 Total deductions in year 1 5,412 An alternative concessionary method for sole traders, offered by the Inland Revenue if your sales turnover is less than the VAT turnover limit of 60,000 is to claim an overall deduction on a mileage basis, similar to that for employees, like this: Business miles driven 10,800 10,000 miles at 40 p per mile 4, miles at 25 p per mile 200

3 Total deductions in year 1 4,200

4 These mileage rates include all costs, including interest and depreciation and capital allowances, but the trade off is simplicity. Limited company Here there are two routes, either the company provides you with a company car or you provide your own car, and your limited company reimburses you for your business motoring costs Company car For you A benefit in kind based on a combination of the new list price of the car (not what you may have bought it for second hand) and the car s CO2 emission rating The taxable benefit in kind works out at a minimum of 15% of the new list price for a car with a low CO emission rating and runs up to a top rate of 35% of the new list price for a car with a high CO2 rating So for your car with a new list price of 15,000 and an average CO2 rating of 190 g of CO2 per km, then the benefit in kind would be: 15,000 x 25% = 3,750 You will pay income tax on the benefit of 3,750 at either 22% or 40% The company will pay Class 1A National Insurance contributions at 12.8%, totalling 480 p.a. Fuel for private motoring is not usually a tax efficient benefit. The benefit for 2007/2008 would be 14,400 x 25% (the CO2 emission %) and would involve an additional taxable benefit of 3,600. You would need to drive around 10,000 or more private miles each year for this to be tax efficient. So, your limited company should only pay for business mileage Any car or car fuel benefits are reported by the limited company on a form P11D each year You then report your taxable benefit on your personal tax return For the limited company making the same assumptions as for a sole trader Capital, depreciation and interest costs capital and depreciation cost 15,000 tax depreciation or capital allowances limited to the lower of 25% or 3,000-3,000 adjusted for private use 0% - nil tax claimable amount 100% 3,000 tax value of car carried forward to year 2 12,000

5 interest costs interest paid 800 interest disallowed ½ of purchase cost in excess of 12,000 ½ x (15,000 12,000) x ,000 allowable interest 720 adjusted for private use 0% - nil tax claimable amount 100% 720 Running costs These are not pro rated between business and private use total running costs [excluding private fuel costs of 960 ] 4,340 adjusted for private use 0% - nil tax claimable amount 100% 4,340 Total deductions in year 1 8,060 Provide your own car You can claim for your business mileage costs, so that if you drive 10,800 business miles in a year, then your limited company can reimburse you, tax free 4,200. No other deductions are available and if your limited company reimburses you for, or pays for, motoring costs in excess of 4,200, then the excess is subject to income tax and national insurance. So, for example, if you claim 70p per business mile from your limited company because you run a Jaguar, the reimbursement being 7,560, then the excess of 3,360 is taxable. and finally, company vans or pick ups You might take a liking to using a double cab pick up! Would your clients like this too? Assuming yes on both counts, then your limited company can: reclaim input VAT on purchase claim full capital allowances of up to 50% on purchase in year 1, (with no 3,000 restriction as for cars)

6 claim all the running costs as tax deductible

7 For you, as a director or member of staff, the benefit in kind is only 3,000 p.a. plus 500 p.a. for private fuel, although the benefit in kind charges do not apply if the only private use is home to work commuting and vice versa. This is a pretty good deal, but do bear in mind that your double cab pick up should have a payload capacity of over 1 tonne in order to qualify.

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