If you use a car for business purposes, you may have wondered whether you can claim the costs as allowable business expenses. More specifically, if you borrowed money to buy a car, you may well be asking ‘are car loan payments tax deductible?’
The answer to this is possibly, but it depends on a number of factors.
Are you self-employed?
The first question you need to answer is whether or not you are self-employed. If you are not, then you will not be able to claim any tax relief on car loan payments.
Are you buying the car for business purposes?
If you are buying a car for business use, then you may be able to claim the cost as an allowable expense. If the car is solely for personal use, you are not permitted to claim in this way.
For example, if you visit clients in your car, then you do use it for business purposes. Conversely, if you do some sort of work at home and only use your car for non-business travel, then you cannot claim tax relief on any expenses related to the cost of running a car. This also applies if you only use the vehicle to commute to work.
Her Majesty’s Revenue and Customs (HMRC) lays out very strict criteria that govern how cars used for business are treated for tax purposes.
You may claim the cost of a car as a capital allowance. This means you can deduct some of the car’s value from the profits of your business before paying tax. This will therefore reduce your tax bill. To be classed as a car by HMRC, the vehicle must not be designed for transporting goods, and it must be suited to private use.
Types of allowance
The rate that can be claimed depends on two factors - the date of purchase, and the CO2 emissions. These will determine whether first year, main rate or special rate allowances apply.
If you use the car for purposes that are not business-related, then how much you can claim depends on how much of its use is for business.
Cars for employees
If the car is provided for an employee, capital allowances can be claimed on the entire cost. If the employee can also use it for personal purposes, it may also need to be declared as a benefit.
What type of accounting do you use?
There are different types of accounting, and HMRC decides whether you are eligible to claim the costs of a car loan depending on which type you use.
You use traditional accounting if you record your income and expenses according to the date you invoiced the customer, or were billed. So if you invoiced a customer before the end of a tax year on 5th April, but were not paid until after the new tax year started on 6th April, that amount would be recorded for the previous tax year. If you use traditional accounting, it is possible to claim car costs as a capital allowance.
Cash basis accounting
Cash basis accounting differs from traditional accounting in that income is recorded according to the date received, rather than the date of the invoice. For the above example, the amount would be recorded for the current, rather than previous, tax year. Those who use cash basis accounting can also claim the cost of a car as a capital allowance.
Some business owners choose to use simplified expenses. If they do this, then flat rates apply to business costs for cars or other vehicles. The business mileage would be recorded, then at the end of the tax year the flat rate amounts would be included in the Self Assessment tax return. The car cost cannot be claimed as a capital allowance if simplified expenses are used.