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June 2004
Q:
I have just started a taxi business. I borrowed £5,000 from a friend (an interest-free loan, which I repay when I can) to buy the vehicle. Can I claim capital allowances on the cost of the vehicle? Can I claim anything for the loan? As regards expenses, can I claim a mileage allowance (and if so, how much?) or do I need to keep petrol, oil etc receipts and claim actual expenses against takings?
A:
Your query raises a number of issues, each of which are dealt with below.
Capital allowances
The loan from your friend has been used to buy a vehicle for use as a taxi. You should be eligible to claim capital allowances on this vehicle. There is a one-off ‘first year' allowance for certain expenditure of 40% (or 50% if incurred between 6 April 2004 and 5 April 2005). Motor cars do not normally qualify for the first year allowance, but there is an exception broadly in the case of cars for carriage of the public as part of a trade. The normal rate of allowance thereafter is 25% per annum, calculated on the remaining balance each year. There is a restriction in capital allowances for private use.
A special 100% first year allowance is available for expenditure incurred on cars with low carbon dioxide emissions (i.e. not exceeding 120 g/km) and electric cars until 31 March 2008, subject to certain conditions (e.g. the car must be unused, not second hand). This relief should apply to taxis in most cases.
Loan from friend
Interest paid on the loan from your friend to purchase the vehicle would qualify for relief (or at least the business element, if there was any non-business use of the taxi). Unfortunately, it is not possible to claim tax relief for ‘notional' interest if your friend has decided not to charge any interest. Similarly, there is no tax relief for the repayment of loan capital.
Expenses
To enable tax relief to be claimed for the actual running costs of your taxi, you should keep expense receipts and invoices where possible. Business records must normally be retained for five years from the 31 January following the tax year to which the tax return relates. For example, for the 2004 tax return (usually to be completed and submitted to the Inland Revenue by 31 January 2005), records of income and expenses from self-employment must be retained until at least 31 January 2010. Some guidance on record keeping can be downloaded from the Revenue's website:
http://www.inlandrevenue.gov.uk/pdfs/sabk4.htm#a2
If you use the taxi for non-business purposes as well, you should keep mileage records to enable your vehicle costs to be apportioned between business and non-business use. Tax relief can only be claimed for the business element of expenses.
Alternatively, as a self-employed individual you may be able to use mileage rates to compute vehicle expenses, instead of keeping detailed records of actual expenditure. The Revenue's own internal guidance manual confirms that mileage rates may be used for a vehicle used as a taxi or hire car. The mileage rates you can apply to business journeys are as follows:
Up to 10,000 business miles – 40 pence per mile
Over 10,000 business miles – 25 pence per mile
To qualify for the mileage rate alternative, your annual business turnover must be less than the VAT registration threshold (currently £58,000) when the vehicle is first used. In your case, the business has just commenced and therefore has no turnover history so it may be worthwhile keeping records of actual motor expenses, at least for the first year. If turnover for the first year is below the VAT threshold and the mileage rate is used, you must continue using it until the vehicle is replaced, even if your business turnover increases and exceeds the VAT threshold in later years.
Mileage rates are intended to cover the costs of running and maintaining the vehicle (e.g. fuel, oil, servicing, repairs, insurance, car tax and MOT expenses). The actual costs of toll fees and congestion charges are claimed separately, if incurred on business journeys. However, mileage rates also contain an element for depreciation, which means that you cannot additionally claim capital allowances in respect of your taxi.
One final point
There is a general requirement for newly self-employed taxpayers to notify their liability to pay Class 2 National Insurance contributions to the Revenue within 3 months from the last day of the month in which self employment commenced, subject to a possible £100 penalty. There is a further need to notify the Revenue of chargeability to tax by 5 October following the end of the relevant tax year. The maximum penalty for late notification (which is distinct from the above penalty) equals the amount of tax payable. In both cases, this notification requirement can be satisfied by completing a form to register self-employment, which is available on the Revenue's website (http://www.inlandrevenue.gov.uk/startingup/register.htm).
Registration is also possible by telephoning the helpline for the newly self-employed (08459 15 45 15). Professional advice in the early stages of your self-employment may be money well spent.
Mark McLaughlin
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