I am currently in the process of setting up on my own and have my first potential client. He is a sole trader, working from home. My query is regarding capital allowances.
In the 2013/14 tax year he purchased a new car on finance (in September). I am trying to calculate whether he would be better off claiming capital allowances, or using the HMRC's simplified expenses scheme where he can claim 45p/mile for the first 10,000 miles and 25p/mile thereafter. For the 2013/14 financial year he did a lot of mileage so I suspect the former would be more tax efficient however moving forward I am not sure if capital allowances may be more appropriate. (I know you can't interchange between the two, hence why I am trying to calculate now which method would be better long term!)
My question is - if the car is bought on finance, is the figure I use for calculating the capital allowances at the end of the tax year the total capital cost of the carorthe amount of capital the client has already paid off (he is only paying a couple of hundred per month)? I know you can't include finance costs in the capital allowance calculation but I assume if you use the capital allowances method you can claim them separately, along with fuel, insurance, tax etc.
Finally, if you go down the capital allowances route do all receipts need to be kept for petrol / repairs etc? The potential client doesn't appear to have any receipts so if this is the case - the decision has been made for him!
First questions to ask are, is the vehicle used solely by the business and who's name is on the finance? If it is a private purchase, i.e. he has bought it as a family car then your options for putting all the costs through the business become more limited. You can't for example run the entire capital cost through as the vehicle is not an asset of the business. It is merely used by the business. Nor can you run the finance costs through in their entirety for the same reason.
Given it is a sole trader working from home I'm guessing the car is used for family as well as business.
Next question is did he keep a mileage log - can he prove the miles? If so I'd go for a standard mileage claim.
Otherwise you have the issue of who gets to guess what. It is not the bookkeepers place to guess the mileage covered by a vehicle - the owner must provide the information so if there is no log you have a few choices
1. The owner tells you what percentage of the mileage is business (annual service will have a mileage recorded, use that as the end of year figure if nothing else is available) you then calculate the business miles and apply the rate as usual.
2. The owner provides you with every fuel receipt, insurance costs, service costs the works and again you pro rata on the percentage of business to total miles. Balance goes into the Directors loan account.
3. He provides you with no usable and provable information - you claim nothing!
I'm assuming he does keep all his business spending separate from personal because actual cost claims are a nightmare if they mix accounts!
If the vehicle was bought by the business, for the business and no family/personal mileage is involved then it gets a bit simpler - bring the car in as a fixed asset and record a loan for the finance. Remember that only the interest part of each loan repayment is an expense the rest goes to loan repayment account and you balance off the amounts each year to show the outstanding loan figure. All costs for fuel, servicing, repairs, insurance etc.. can go through in the normal way as expenses. Depending on whether your trader is working on a cash or accrual footing will determine if you need to worry about September being part way through the year and carrying some of the insurance and finance costs over. As he is a sole trader I am assuming the usual tax year as his 'working year'.
There are other thing you may need to take into account but that should get you started :)
