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.