What’s the difference between the accounting of and the taxation of company cars?

How company cars are treated differently for accounting and taxation purposes

I’M confused by the accounting and taxation methods of the cars we own. Are the terms interchangeable? I could do with some help.

Colin Tourick – a taxation and business car specialist at Colin Tourick Associates – is just the person to give you the clarification you require.

ACCOUNTING and tax are both handled by accountants but are actually quite separate things.

Accounting is concerned with the way you record and report the assets, liabilities, profits and losses of your business, and is governed by Accounting Standards.

Taxation is concerned with how to calculate and pay your tax liability and is governed by statute, case law and HMRC practice.

In many cases these distinctions don’t usually matter. Businesses pay tax on their profits, after all, and their profits are shown in their accounts.

However, your accounting profits are only the starting point for calculating your business’s tax liability, because the law requires that some adjustments should be made to your accounting profits when calculating your taxable profits. And if you own your business cars, some of those adjustments affect you.

So, let’s look first at the way a company records the purchase and sale of a company car in its books. On buying the car it records the arrival of an asset. During the years it owns the car the company writes off (“depreciates”) part of the value of the car in its books. A company can decide its own level of depreciation; some will choose 25% pa on a reducing balance basis, others might choose 20% pa straight line, and so on. When it sells the car the company records the sale proceeds. If there’s a difference between the sale proceeds and the written down value of the car this is treated as a profit or loss on sale.