What is Depreciation?
Depreciation is the difference between the purchase price of a vehicle and the residual
value obtained when the vehicle is sold.
For company cars bought outright, this will simply be the difference between the actual
invoice price and residual value.
For all leased/contract hired cars, commerical vehicles and pool cars depreciation
is calculated slightly differently. For such vehicles, depreciation is adjusted for
the VAT recovered on the purchase price paid. This has the effect of reducing the
depreciation for leased/hired company cars compared to outright purchase.
Accounting for Depreciation
For accounting purposes depreciation is spread over the accounting years of the useful
life of the vehicle, a process sometimes known as 'Amortisation'.
Typically, 25% of the cost of the vehicle is treated as depreciation during each accounting
year and set against profits. This means that after 4 accounting years the cost of
the vehicle has been written off for accounting purposes and no further depreciation
is charged in the accounts.
In this case the vehicle is described as 'fully amortised', that is the whole value of the vehicle has been written off for accounting purposes.
When the vehicle is eventually sold or scrapped the sale price of the vehicle is treated
as income of the business. The effect of this approach is that, overall, only the
actual depreciation cost (e.g, the difference between the purchase price and disposal
value) has been set againt profits.
Tax Rules for Depreciation
Special rules apply to spread the impact of depreciation across tax years for business
tax relief purposes.