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Where Taxpayers and Advisers Meet

First Year Allowance - offset against PAYE income from previous years?

Mohamed
Posts:4
Joined:Mon Feb 01, 2021 4:14 pm
First Year Allowance - offset against PAYE income from previous years?

Postby Mohamed » Mon Feb 01, 2021 4:28 pm

I have been in paid employment (tax paid via PAYE). The last few years my salary was over £100,000 so I also submitted a self-assessment return.

I’m currently on furlough from my employer and looking to start my own side business as a sole trader. I’m looking to buy an electric (or PHEV) car that has CO2 emissions under 50g/km and therefore eligible for First Year Allowance.

I will not earn enough this tax year to write off the cost of the car under First Year Allowance. Can I offset this cost against my previous tax years and therefore get a tax refund.

Example: I paid £33,000 tax in 2019-2020 and a similar amount in 2018-2019. Due to being on furlough, my tax for 2020-2021 will be about £8,000. If I buy an electric car costing £45,000 and ignoring all other expenses, can I offset that against my PAYE income tax paid for 2020-2021, 2019-2020 and the year before that - which means I will get a tax refund back?

Thanks in advance

bd6759
Posts:3558
Joined:Sat Feb 01, 2014 3:26 pm

Re: First Year Allowance - offset against PAYE income from previous years?

Postby bd6759 » Mon Feb 01, 2021 11:30 pm

If you are carrying on a trade on a commercial basis with a view to profit, you can in the first years of trading carry a loss back 3 years.

Capital allowances can generate or increase a loss.

You cannot claim the full price for capital allowances. You’ll need to restrict the claim to the amount of business use.

The amount of relief can be restricted depending on circumstances.

Search for HS227 for basic guidance.

Mohamed
Posts:4
Joined:Mon Feb 01, 2021 4:14 pm

Re: First Year Allowance - offset against PAYE income from previous years?

Postby Mohamed » Tue Feb 02, 2021 9:48 am

Thank you, that's really helpful.

I've had a look at the HS227 guide and it confirms that I can offset the loss generated by FYA against my income from the previous years.

robbob
Posts:3100
Joined:Wed Aug 06, 2008 4:01 pm

Re: First Year Allowance - offset against PAYE income from previous years?

Postby robbob » Tue Feb 02, 2021 9:56 am

Note you will probably have some options as to which year to set losses against (probably a choice of 3 - current previous and 3 years ago) - the tax rebate will depend on your marginal rate in those 3 years - ideally you would want to choose the year which had the highest marginal rate of tax - probably the year with most income taxed at 60% marginal rate - adjusted income between 100k and approx 125k - probably the year with highest removal of personal allowance presuming you had some left - ie if income well over 125k reduction would not kick in at 60%.

very useful losses help sheet
https://www.mylawyer.co.uk/tax-relief-for-trading-loss-a-A76058D76528/#:~:text=ways%20discussed%20below.-,Early%20Trade%20Losses%20Relief,to%20set%20the%20loss%20against.

As bd6759 clearly points out claim is restricted to business use only - you have to be careful here that tis should be reasonable over expected period of ownership - not easy to prove anything here ref intentions - onus is on you not to pimp it up though.


Ref allowable motor the samadian case is NOT your friend here so travel to and from a regular place of work will probably not be allowable as business use of car

https://www.rossmartin.co.uk/sme-tax-news/1045-not-more-travel-mix-ups

In summary unless you can identify high business use that is not akin to commuting with mileage your claim here may be limited.

If you expect decent profits and will remain higher rate taxpayer limited company route would tick all the boxes other than the extra admin hassles and probable acocuntancy fees - car claim not limited to business use with very modest p11d charge (0% this year !!!! then 1%/2% next 2 years ) - no automatic higher rate tax if you leave profits within business - much more ameniable travel claim rules (temporary workplace rules for employees much more generous as long as you dont expect to reamin at that site >2 years - or that is your first workplace while working for your company) - ability to get 100% of profits into pension - depending on level of ni you pay this may beat the sole sole trader route. This is presuming the chancellor doesnt destroy some or all of these perks in the budget - he seems to have an unreasonable beef in his bonnet (oops that doesnt sound right) about limited company trader who simple follow the rules as they have been allowed to over the years -preusmably he thinks 19% corp tax and 7.5% tax isnt enough of a hit - he decided to do nothing pre pandemic then had a go about them during pandemic - a bit discrimatory if you ask me as the tax perks for limited companies are all out in the open and known about and only exist due to the authorised apporval by the powers that be that set the rules.

Mohamed
Posts:4
Joined:Mon Feb 01, 2021 4:14 pm

Re: First Year Allowance - offset against PAYE income from previous years?

Postby Mohamed » Tue Feb 02, 2021 2:10 pm

Note you will probably have some options as to which year to set losses against (probably a choice of 3 - current previous and 3 years ago) - the tax rebate will depend on your marginal rate in those 3 years - ideally you would want to choose the year which had the highest marginal rate of tax - probably the year with most income taxed at 60% marginal rate - adjusted income between 100k and approx 125k - probably the year with highest removal of personal allowance presuming you had some left - ie if income well over 125k reduction would not kick in at 60%.
Understood, and written in an easier to digest way than the HMRC guidelines.

very useful losses help sheet
https://www.mylawyer.co.uk/tax-relief-for-trading-loss-a-A76058D76528/#:~:text=ways%20discussed%20below.-,Early%20Trade%20Losses%20Relief,to%20set%20the%20loss%20against.
Extremely helpful so thank you. That's really showed me the different scenarios clearly.

As bd6759 clearly points out claim is restricted to business use only - you have to be careful here that tis should be reasonable over expected period of ownership - not easy to prove anything here ref intentions - onus is on you not to pimp it up though.
This won't be an issue (in my opinion) as this will be a second car. I already have a small car for personal use (and to teach my daughter to drive). I'm planning to buy an EV (or PHEV) and use that for any business travel and for Uber-type driving services or hiring out to earn extra income.

Ref allowable motor the samadian case is NOT your friend here so travel to and from a regular place of work will probably not be allowable as business use of car

https://www.rossmartin.co.uk/sme-tax-news/1045-not-more-travel-mix-ups

In summary unless you can identify high business use that is not akin to commuting with mileage your claim here may be limited.
As per above, I'll use my small car for personal use.

If you expect decent profits and will remain higher rate taxpayer limited company route would tick all the boxes other than the extra admin hassles and probable acocuntancy fees - car claim not limited to business use with very modest p11d charge (0% this year !!!! then 1%/2% next 2 years ) - no automatic higher rate tax if you leave profits within business - much more ameniable travel claim rules (temporary workplace rules for employees much more generous as long as you dont expect to reamin at that site >2 years - or that is your first workplace while working for your company) - ability to get 100% of profits into pension - depending on level of ni you pay this may beat the sole sole trader route. This is presuming the chancellor doesnt destroy some or all of these perks in the budget - he seems to have an unreasonable beef in his bonnet (oops that doesnt sound right) about limited company trader who simple follow the rules as they have been allowed to over the years -preusmably he thinks 19% corp tax and 7.5% tax isnt enough of a hit - he decided to do nothing pre pandemic then had a go about them during pandemic - a bit discrimatory if you ask me as the tax perks for limited companies are all out in the open and known about and only exist due to the authorised apporval by the powers that be that set the rules.
This is an interesting dilemna and I would appreciate thoughts/input.

I considered going down the limited company route. However, I lose out on being able to claim a tax refund for 2018-2019 and 2019-2020 from full-time PAYE employement. So whilst I can make savings in the future (offsetting future car expenses/insurance against limited company profit), this means I can't claim over £40,000 in tax paid over the last 2 years in PAYE employement. Also, I'm not likely to be a higher rate taxpayer in the future. I can't see the advantage of limited company versus self-employed with regards to buying the car.

robbob
Posts:3100
Joined:Wed Aug 06, 2008 4:01 pm

Re: First Year Allowance - offset against PAYE income from previous years?

Postby robbob » Tue Feb 02, 2021 2:20 pm

I considered going down the limited company route. However, I lose out on being able to claim a tax refund for 2018-2019 and 2019-2020 from full-time PAYE employement. So whilst I can make savings in the future (offsetting future car expenses/insurance against limited company profit), this means I can't claim over £40,000 in tax paid over the last 2 years in PAYE employement. Also, I'm not likely to be a higher rate taxpayer in the future. I can't see the advantage of limited company versus self-employed with regards to buying the car.
Certainly if the car is near 100% buisness use then its not the same problem as it would have been if there have ben say 50% plus private use - most of the potential saving tends to be gained by avoiding "forced" higher rate tax - so if you will not be a higher rate taxpayer anyway you shouldnt have that problem which would reduce somewhat the need to go down the limited route.

Mohamed
Posts:4
Joined:Mon Feb 01, 2021 4:14 pm

Re: First Year Allowance - offset against PAYE income from previous years?

Postby Mohamed » Tue Feb 02, 2021 8:01 pm

Understood, thank you for all the info and prompt replies.


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