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Depreciating a company car: how it works
In this article
A company car does not hit your result in one go. You put it on the balance sheet and spread the cost over the years you use it. That is not only cleaner accounting, it also prevents your profit from evaporating in one year and suddenly being high in another.
Step 1: does the car belong on the balance sheet?
For a sole trader or a partnership (VOF) a car can belong to your business assets or to your private assets. If you drive it largely for business, it belongs in the business; if you use it mainly privately, it does not. That choice affects your balance sheet and your tax return, and you cannot make it again every year. In doubt? Put the question to your accountant or tax adviser.
Step 2: the purchase price
On the balance sheet you put what the car cost: the purchase price plus the costs of getting it road-ready, and excluding VAT if you can reclaim it. If you finance it with a loan, the car is on one side and the loan on the other — your equity does not change because of it.
Step 3: depreciating
The usual method is straight-line: the same amount every year, until the car reaches its residual value. For a car a period of five years is generally used; for tax purposes a minimum period applies to a car, so your commercial depreciation sometimes differs from it.
| Year | Depreciation | Book value |
|---|---|---|
| Purchase | — | 24,000 |
| Year 1 | 5,000 | 19,000 |
| Year 2 | 5,000 | 14,000 |
| Year 3 | 5,000 | 9,000 |
| Year 4 | 5,000 | 4,000 |
| Year 5 | 0 | 4,000 (residual value) |
Use a realistic residual value
A car that is still worth something after five years is not depreciated all the way to zero. The residual value stays on the balance sheet until you sell it.What belongs in the notes
The book value and this year's depreciation are entered when preparing the accounts; how that works is explained in preparing your own annual accounts.
- The depreciation method (straight-line) and the depreciation period.
- The purchase price and the book value at the start and end of the year.
- This year's depreciation.
- Whether there is financing on the car and how it appears on the balance sheet.
Where tax rules differ
In the annual accounts depreciation is an expense; see where depreciation ends up in the profit and loss account.
Depreciation in the annual accounts is not automatically the depreciation in your tax return: tax limits apply to depreciation and there is a minimum period. If you also drive the car privately, you will deal with a private-use addition in the tax return; that is not an item in the annual accounts. These are exactly the points from which a difference in your equity or an unpleasant surprise in the tax return arises.
The terms that belong with this — depreciation, book value and residual value — are in the glossary.
Frequently asked questions
Can I depreciate a company car in one go?
What is the usual depreciation period for a car?
What happens if I sell the car?
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