For the self-employed, cars can still be a good reason why it is better to stay as a sole trader rather than incorporate as a limited company. It depends very much on what sort of car you drive and how much business mileage you do. If you drive an expensive car with CO2 emissions above 160 g/km and do at least 60% business mileage, it may well be beneficial to remain as a sole trader. That is because you can still claim a balancing allowance when you sell the car whereas a company could not. However, this only applies to cars purchased after 1st April 2009. For cars purchased before then the old rules will remain in force for a transitional period of 5 years.
Example
Frank buys a car on 6 th April 2009 for £25,000 and uses it 60% for business. CO2 emissions are above 160g/km. He keeps it for 5 years and then sells it for £7,500. As a sole trader he would claim capital allowances as follows:-
Year 1
10% WDA = £25,000 x 10% = £2,500 x 60% = £1,500
Special rate pool balance = £25,000 x 90% = £22,500
Year 2
10% WDA = £22,500 x 10% = £2,250 x 60% = £1,350
Special rate pool balance = £22,500 x 90% = £20,250
Year 3
10% WDA = £20,250 x 10% = £2,025 x 60% = £1,215
Special rate pool balance = £20,250 x 90% = £18,225
Year 4
10% WDA = £18,225 x 10% = £1,823 x 60% = £1,094
Special rate pool balance = £18,225 x 90% = £16,402
Year 5
10% WDA = £16,402 x 10% = £1,640 x 60% = £984
Special rate pool balance = £16,402 x 90% = £14,762
Balancing Allowance
Special rate pool balance - £14,762
Less: Sale proceeds - £7,500
Remaining balance - £7,262
Balancing allowance = 7,262 x 60% = £4,357
Over the 5 years, Frank obtains capital allowances of £10,500.
If Frank trades as a limited company instead he would be able to ignore private use so no 40% abatement would apply but the company would not obtain a balancing allowance when the car is sold. Therefore, total capital allowances would be £10,238 when the car was sold. However, the company would be able to continue claiming 20% of the special rate pool balance (less the sale proceeds) each year until such time as it fell below £1,000 when it could claim the small pools allowance. Therefore, the company could obtain the equivalent of a balancing allowance eventually.
A marginal result in this case, demonstrating that breakeven occurs around 60% business use and 30% re-sale value. Very high business use and good second hand values may point towards staying as a sole trader, although we would stress that there are many other issues to take into account when deciding on the legal form of your business, chiefly the amount of profits you expect to make, your own cash requirements, the need for limited liability and the legal obligations of running a company. Cars are usually just a small part of the equation.
