EXPLAINED: Understanding the TAX ADVANTAGES of Capital Allowance when buying or leasing a new taxi

Tax can be confusing and sometimes scary at the best of times for taxi drivers, but getting your heads around the benefits of Capital Allowance can help cabbies save thousands of pounds.

Lots of newcomers and rental taxi drivers are sometimes unaware of the tax advantages when it comes to vehicle ownership and the capital allowance. Of course, every person’s situation is different, and professional help via an accountant or tax specialist may be preferable.

Gary Jacobs, CEO of Eazitax, has agreed to help us understand Capital Allowance benefits and how it can possibly help you save money on your tax bill.

What are the tax benefits to a driver buying a taxi either via a cash purchase or using PCP funding?

In truth both attracts a capital allowance (lowers your tax bill). So, in reality the only difference is the interest you will pay on a loan.... HOWEVER, interest is actually claimed as an expense in your tax return/accounts.

A driver has purchased a taxi at a total cost of £70,000 over a five-year period on a PCP agreement, can you please give us an example showing how this will impact a taxi driver’s annual tax bill?

Example based on 20% taxpayer:

You will have an option to claim 100% capital allowance in the 1st year or over 5 years.

If 100% claimed in 1st year £70,000 @ 20% = £14,000 total tax savings in 1st year.

If claimed over 5 years, £14,000 annual capital allowance for 5 years. Tax rate of 20% = £2,800 saving for 5 years plus NI savings.

Remember as well, interest payments are an expense that can be offset. Based on the payment plan, annual interest is deductible against profit and loss.

If at 7% p.a £70,000 @ 7% = £4,900. Tax rate of 20% = £980 tax savings in 1st year plus NI savings.

If the taxi is owned after the five-year period, how will the tax liability change for the driver owner?

The tax will just revert to normal because the capital allowance will be fully claimed. That’s why some people change their cars every three to five years. You can also claim a balancing allowance (basically more off your tax bill) if the cab is worth less than its written down value (accountant speak for paper value) when it is sold.

Will a taxi driver pay tax on the vehicle if or when it is sold?

Example based on 20% taxpayer:

As I mentioned above there will either be a balancing charge or balancing allowance (money owed or money back, depending on the difference between its trade in value and its paper value). Remember most hire and reward vehicles are high mileage and therefore valued less than a private car would be.

If your taxi is sold for £5,000 and 100% capital allowance claimed, then tax written value is nil.

Therefore, sales proceeds create a balancing charge.

If 20% taxpayer, £5,000 taxed at 20% = £1,000 tax (plus National Insurance if applicable).

I hope this answers your questions, I’m sorry people If this is all gobbledygook to any of you, please feel free to hassle your accountant. We are always ready with a whiteboard and sticky back plastic to those who want to go deeper.

If you want to read more about anything tax related you can always go to our resource centre and download our free Tax Jargon Buster.

Or call us and ask us to send you a free Tax Jargon Buster Book on 020 8529 2600.