The former Chancellor of the Exchequer, Alistair Darling, set the agenda to encourage businesses to own and use cars emitting a lower amount of CO2 by linking the writing down allowance on hire purchase cars and the amount of disallowance on lease car charges to the CO2 rating of the vehicle.
Capital Allowances
Significant changes to thecapital allowance treatment for cars were introduced from 1 April 2009 for companies (6 April 2009 for unincorporated businesses). The writing down allowance is the amount that can be claimed in a period as a deduction against business profits.
Cars acquired since this date are now treated differently depending on their certified CO2 emissions:
- Low emission cars (no more than 110 g/km): expenditure benefits from an allowance of 100% in year of acquisition until 31 March 2013
- Medium emission cars (over 110 g/km but no more than 160 g/km): expenditure goes into the general capital allowances pool with a writing down allowance of 20%
- High emission cars (> 160 g/km): expenditure goes into the special rate pool with a writing down allowance of 10%
One of the major impacts of the new rules for cars purchased by companies under the new system is the loss of the balancing allowance. Generally, most businesses that own cars replace them every three or four years. Under the old rules, whilst the writing down allowance is restricted to £3,000 pa for expensive cars (over £12,000), when the car is disposed of there is usually a balancing allowance which ensures that all of the net cost (purchase price minus sale proceeds) benefits from tax relief.
However under the new rules, cars that do not meet the low emission car criteria listed above will either be allocated the 20% pool or the 10% pool and in both cases there will be no balancing allowance on disposal. The time delay in obtaining full tax relief may be significant.
For example, a company acquired a car for £50,000, with CO2 emissions of 190 g/km. It is likely to sell the car after four years by which time the proceeds will be £20,000. If the car was bought in March 2009, it would receive a capped writing down allowance of £3,000 pa for three years, followed by a balancing allowance in year four of £21,000 on sale. The total cost of £30,000 (purchase price less sale proceeds) will have been relieved. If it was purchased in April 2009, it would receive slightly higher writing down allowances in the first three years of ownership, but with no balancing allowance on sale it will take approximately eight years to relieve the first £20,000 of that £30,000 cost to the business, and a further 20 years to relieve the next £10,000.
For unincorporated businesses, assets with private use are each given their own pool so that the relevant writing down allowance can be reduced for the element of non-business use. This will continue to be the case with cars under the new regime. The significance of this is that it keeps the asset out of the main pools and on disposal a balancing allowance is still available. It is important to note that this would not apply to a car provided by the business to its employees.
Lease Charges
Cars under leases taken out from April 2009 will be subject to the new 15% disallowance rule where CO2 emissions exceed 160 g/km. Cars under existing leases will remain under the current regime until the lease comes to an end.
Under the old rules, the lease payments for a £50,000 car would have 38% of the payments disallowed. Under the new rules, there will be no disallowance if emissions are no more than 160g/km. Leasing may therefore be more attractive than it used to be.
In summary, the practical impact of the changes may make it more costly to provide some company cars. Employers may wish to review their car policies and possibly exclude vehicles with CO2 emissions in excess of 160 g/km from their fleet. The new rules could also change the relative after tax costs of purchase or hire.
Our car benefit calculator might be a useful source of information.
Tags: Alistair Darling, George Osborne, Payroll & Benefits, Regulations, tax planning, UK Employment
