UK tax incentive issue

[Peteski]

Ah now I get it, thanks. I should not have drawn a like-for-like comparison between Maintenance Cost and BIK.

For me to pay that, personally, I have to first pay Tax and NI etc., so the company's £1 spent on a recoverable expense is worth somewhat more than my own £1, but to know exactly how much needs some more careful maths

I think what blew it for us was the increasing BIK over the next few years. I think it goes up from 9% to 16% over the next 3 years. Might have been different if it had stayed low.

 

[arg]

I think what blew it for us was the increasing BIK over the next few years. I think it goes up from 9% to 16% over the next 3 years. Might have been different if it had stayed low.

All depends how long you expect to keep the car - it's going back down again in 2020!

2017-18 - 9%
2018-19 - 13%
2019-20 - 16%
2020-21 - 2%

 

[Tevvy]

Can't you run the car through a sole trader (separately to the ltd company) and still claim the 100% write down but no BIK?

 

[DrBobM]

Can't you run the car through a sole trader (separately to the ltd company) and still claim the 100% write down but no BIK?

Yes, the OP can do this.

I'm self-employed but not via a company. I buy my cars privately but claim via my tax return for finance costs, depreciation and running costs. I was still entitled to the 100% first year write down but of course the amount of tax saved was reduced according to the proportion of business v private use, in my case 50%.

 

[arg]

Can't you run the car through a sole trader (separately to the ltd company) and still claim the 100% write down but no BIK?

You need to to be making profits for the write-down to have any meaning at all.

Fine if you are already a sole trader; otherwise you are talking about restructuring your entire business just to make a small tax saving on a car!

 

[JonG]

..and FYA is often put forward as a fantastic idea - well it kind of is on a cash flow basis but it also means no allowance in subsequent years and a tax bill when you come to sell.

 

[Peteski]

..and FYA is often put forward as a fantastic idea - well it kind of is on a cash flow basis but it also means no allowance in subsequent years and a tax bill when you come to sell.

Exactly what my accountant wife said! It's not the total win that it first looks, as you say more of a cash-flow effect.

 

[Peteski]

You need to to be making profits for the write-down to have any meaning at all.

Fine if you are already a sole trader; otherwise you are talking about restructuring your entire business just to make a small tax saving on a car!

This too! Can work for legit sole traders though.

 

[WannabeOwner]

more of a cash-flow effect

It maybe be my eternal optimism with my man maths?!! but I seem to be out of step with the majority here who think that FYA is not significant, as I see it

Reduce tax (maybe only for 3 years)
Increase dividend
Pay off more mortgage

Or alternatively:

Reduce tax (maybe only for 3 years)
Make a business expansion investment (sooner than would otherwise be possible)
Increase worth of the business

either seems like a handy opportunity-cost benefit to me.

 

[arg]

It maybe be my eternal optimism with my man maths?!! but I seem to be out of step with the majority here who think that FYA is not significant, as I see it

We are saying it's "only a cash flow benefit".

You are saying "I can get major advantages out of improved cash flow!".

So not really a contradiction, just a question of whether you envisage putting that spare cash in the bank at 0.00001% APR or doing something more imaginative with it.

 

[DJP31]

Not here, but In other places where this has been discussed, there has also been a tendency to focus on the immediate benefit and forget about the tax payable when the asset is sold.

 

[JonG]

Not here, but In other places where this has been discussed, there has also been a tendency to focus on the immediate benefit and forget about the tax payable when the asset is sold.

Yes, it was especially bad with people buying BMW i8s from memory - they strutted around saying the car had paid for itself in tax savings, cost them the same as a 5 series, until some pointed out the flaw. At which point they argued they'd just buy another one when the current one went back to offset the tax they needed to pay with a new 100% FYA.

If you're cash poor the 100% FYA is great, but its not a free lunch and it's of little to no value for the cash rich, it's basically just an interest free loan from the tax man. If you're that tight you have to question buying an expensive car all together

 

[Fleetham]

So if sell/trade in after 3 years at about 50% retained value they will want 50% of the initial tax break back as I understand it from my accountant. If in 3 years still same tax break could repeat.

 

[JonG]

It maybe be my eternal optimism with my man maths?!! but I seem to be out of step with the majority here who think that FYA is not significant, as I see it

Reduce tax (maybe only for 3 years)
Increase dividend
Pay off more mortgage

Or alternatively:

Reduce tax (maybe only for 3 years)
Make a business expansion investment (sooner than would otherwise be possible)
Increase worth of the business

either seems like a handy opportunity-cost benefit to me.

There is no reduced tax over three years, you'll pay the same. You get a big discount in year 1, you get no tax benefit in year year 2 (so worse than straight line depreciation) and you'll pay more tax in year 3 as you have to pay tax on the sale price (assuming a 3 year ownership)

Your Tesla is 100k - you could take an allowance of 20k a year. reducing corp tax by about 4k
Or you could take 100% in year 1, you've taken an extra 80k, you saving is circa 16.5k extra

In year 2 you don't have the any write down so you pay 4k MORE tax in that year than if you took the write down gradually, you're now only 12.5k ahead.

And if you sell at the end of year 3 for 40k, you don't get the 4k relief you would have had, and you have to pay tax on the 40k sales price, or actually pay 8k more out of your profits in that year. Your expansion plans need to pay off pretty quick. It may be beneficial to you short term and what you have in mind, but you are effectively in debt to the tax man.

 

[JonG]

So if sell/trade in after 3 years at about 50% retained value they will want 50% of the initial tax break back as I understand it from my accountant. If in 3 years still same tax break could repeat.

Pretty much exactly that.

 

[Tevvy]

For me it works like this (figures are rough rounded)

Sole Trader - 40% tax payer

Car cost - £87.5k (80%/20% business use), done on PCP so £24k write down in year one (£20k deposit & £4k monthly payments) - therefore £9,600 tax saving.
Year 2,3,4 - £4k/year in monthly payments - £4,800 tax savings over the 3 years.
Year 5 - Final payment of £34k - another £13,600 tax savings.

I plan to keep the car for a long time (10 years). If I sell in the future I know I have to add this back in, but depreciation will minimise this I'm sure.

So net cost to me for a £87.5k car is around £59.5k. Take off the fuel saving (£3k/year X 10 years) - £30k, so net cost of £29.5k for a £87.5k car!

Man maths of course!

 

[Peteski]

I plan to keep the car for a long time (10 years). If I sell in the future I know I have to add this back in, but depreciation will minimise this I'm sure.

You might want to factor in running costs out of warranty. It might work for you or could become very expensive! Personally I would only consider owning a Tesla, or any other expensive car, under full manufacturer warranty. I’ve been bitten before by old car running costs and not going there again!