Taxman funds car purchase!
You’ve heard that you can actually get the Taxman to fund the purchase of a new car, through a clever manipulation of the rules for awarding tax credits. What’s the full story here?
Tax credit strategy
Abatement. The maximum amount of entitlement to tax credits is reduced (abated) if your income exceeds the relevant thresholds. If Working Tax Credit is claimed, the threshold is £5,060. Above this level, maximum entitlement is reduced by 37p for every £1 of excess income. For the family element of Child Tax Credit (CTC) (basic award £545 or £1,090 where the child is under one year old) a different limit applies. This is usually £50,000 and the family element is reduced by 6.67p for every £1 of income above this level.
The game. Enhancing tax credits (by reducing the abatement) is the name of the game here. For the purposes of this article we are focusing on the effect that buying a car, i.e. through capital allowances, can have. The following is how we think you could make the Taxman pay for a car.
Taxman pays for car
Example. Sarah has a new self-employed business which is likely to become quite profitable, but at present she is investing in equipment to set it up. She works for approximately 35 hours a week. Sarah is a divorcee with two children under school age, both are with a paid childminder which costs £200 per week for 45 weeks of the year.
Sarah anticipates profits for her 2006/7 year of £18,000. She is considering investing in a car for use in the business but is not sure whether she can finance the expenditure. Her existing car would probably last for another year and she has been charging the business 40p a mile for the use of it. The new car would be a Toyota Yaris 1.4D 5-door; cost £9,865, emissions rating 113g/km which will attract a 100% first year capital allowance (FYA) for the business. The car will be used 90% for business purposes.
Buy later. On an £18,000 profit, Sarah will pay income tax and Class 4 NI of £3,631. Tax credit awards are abated by the excess of profit over £5,060 at 37p in the pound. This leaves a final tax credit award of £8,592.
Buy now. The Yaris comes with a 100% tax deduction,so if bought before her year-end Sarah’s taxable profit would fall to £9,121 (£18,000 - (90% x £9,865)). Her tax bill on this profit figure falls to £968 and her final award increases to £11,877 because income for tax credits abatement is lower.
Contribution to car by Taxman
| Buy later | Buy Now | Difference | |
| Tax and NI | £3,631 | £968 | £2,663 |
| CTC award | £8,592 | £11, 877 | £3,285 |
| Extra funds(*) | £5,948 |
(*) Net cost is £3,917 (£9,865-£5,948) - i.e. 60%. (22% + 8% + 37% = 67% x 90% business proportion = 60%).
Tax avoidance? Certainly not. There’s nothing here that would fall foul of the tax credits anti-avoidance rules (Tax credits Income Regulations SI 2002/2006). Sarah has not deliberately deprived herself of income in order to secure or increase the amount of tax credit.
Full story
The Taxman can fund a car but only if you are self-employed and entitled to a high level of working tax credit which is being abated. However…
Tip. If your income does dramatically drop, always notify the Taxman immediately in order to maximise your tax credit position. Don’t wait.
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