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Saturday, 27th April 2024 |
| Capital allowances, leasing costs, and running costs of passenger cars are restricted in their deductibility for tax purposes. The restriction on deduction has become one of the most complex areas of the tax code. |
There are three separate sets of rules for determining how much of the running costs of a car, the leasing costs of a car, and the capital allowances on the acquisition cost of a car may be deducted by a trader in computing the profits of his trade. It goes without saying that these costs are deductible in any event only in so far as the car is used wholly and exclusively for the purpose of the trade. Private usage is not deductible in any circumstances.
Curiously, there is no similar restriction on a deduction in respect of aircraft, helicopters, or yachts used in the course of a trade. But on the one area that has attracted official hostility - motor cars - the law goes to an incredible level of detail in restricting the right to a deduction.
The present system is very costly to administer, makes little economic sense, and is probably contrary to EU rules in many respects.
Some of the anomalies can be illustrated by the following examples:
l An Irish company with a branch in Northern Ireland spent £20,000 in August 1999 on the purchase of a car for use by its salesman in the Republic of Ireland, and a similar sum for the use of a car by a salesman based in Northern Ireland. The capital allowances available in respect of that expenditure in the computation of Irish tax will be limited to allowances by reference to a figure of £16,000 in the Republic of Ireland but by reference only to a figure of £10,000 in relation to the car registered in Northern Ireland! This is almost certainly contrary to EU law as interfering with the freedom of establishment in Community States.
l A business purchases two cars in August 1999 for use by salesmen. It spends £20,000 on each car. One car is purchased new from the showrooms, and the other is purchased second-hand (having been first registered new in January 1995). The capital allowances available to the company on its two cars will be determined by reference to a sum of £16,000 in relation to the new car, but in respect of the sum of only £14,000 in relation to the second-hand car. This is so notwithstanding that each of the cars had the same cost to the company, and each was serving the same function in the company’s business.
l A company spends £20,000 each on two cars for the purpose of its trade, in August 1999. One car is purchased new in the Republic of Ireland and the other (only a few months old) is imported from Northern Ireland. The capital allowances on the car purchased in the Republic will be based on a figure of £16,000 whereas those in relation to the car imported from Northern Ireland will be based on a figure of £10,000!
In theory, a taxpayer must keep separate records of the running costs of each car in the fleet. The amount of the running expenses which are deductible is determined separately for each car. The deduction is restricted by reference to a sum which is fixed in the Finance Act each year, as a proportion of the cost of the car when it was first acquired or used by the taxpayer. The level of record keeping which is required is out of proportion to any possible requirement of equity in the tax system or any need to generate additional revenue to the State. It is an example of ingenuity harnessed to petty mindedness.
The absorbtion of the Revenue draftsmen with this area of tax is further indicated by the fact that yet another method exists for limiting the deduction in respect of car leasing charges.
The use of a company car may involve a private benefit to an employee. The tax code recognises this and charges the employee to tax on the value of that private usage. Notwithstanding the fact that the employer’s deductions for the cost of providing and running the car are restricted, no similar restriction exists when it comes to taxing the employee on private usage. This seems
inherently unfair.
The Government has indicated that it will review all business tax reliefs as corporation tax rates are reduced towards 12.5 per cent. It would be a good idea for them also to review all business tax penalties, such as the motor cars restriction regimes described above, and abolish them so as to simplify the tax system. |
Brian Daly is a partner in KPMG.
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| Article appeared in the September 1999 issue.
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