You may have heard the Chancellor’s announcement in November
that he intends to change the capital allowances system for
business expenditure on cars. As these proposals are to take
effect from April 2009, we thought you would be interested
in hearing what the changes will involve.
The existing rules
Under the existing capital allowances system, expenditure
on cars is generally treated in one of four ways:
- If a car costs more than £12,000, it is subject
to a separate tax computation. This restricts the annual
tax allowance (known as a Writing Down Allowance or WDA)
to a maximum of £3,000 – known as the ‘expensive
car’ rule.
- If a car costs £12,000 or less, then the expenditure
is placed in the main capital allowances pool which obtains
a WDA of 20%.
- If a car has CO2 emissions of 110 grams per kilometre
(g/km) or less, a low emission car, then a 100% First Year
Allowance (FYA) may be due on the total cost of the car.
- If the proprietor of a self employed business uses a
car for private as well as business purposes, then the
car is treated as a separate single asset so that the private
element of any FYA (low emission cars only) or WDA can
be adjusted in respect of that private use.
The new rules
The new rules for cars apply to expenditure incurred on
or after 6 April 2009 (1 April 2009 for companies). There
will be no difference in the treatment of petrol and diesel
cars.
The 100% FYA for expenditure on cars with CO2 emissions
of 110g/km or less remains up to 2013 but the old ‘expensive
car’ rules are abolished.
The rate of WDA for expenditure on other cars will also
be determined by the car’s CO2 emissions. The new rules
provide that expenditure on cars with CO2 emissions:
- not exceeding 160g/km will be pooled in the main capital
allowance 20% pool: and
- over 160g/km will be pooled in the 10% pool.
The 10% pool was introduced for capital allowances from
1 April 2008 to accommodate various special categories of
plant expenditure including relevant cars from April 2009.
Electric cars will be placed in the 20% pool.
Cars with private use
Expenditure incurred on a car that is provided or used partly
for non-business purposes will continue to be treated as
a single asset calculation. The WDA of this single asset
will be determined by the CO2 emissions of the car as above
and the allowances will continue to be adjusted so that only
the proportion of the allowances relating to business use
is allowed.
Other cars
Cars that were first registered before 1 March 2001 do not
have CO2 emissions data on their registration documents.
It is proposed that expenditure on such cars will be allocated
to the main 20% pool.
Where cars are registered on or after 1 March 2001 but do
not have an approved CO2 emissions figure, the proposal is
that they will either be allocated to the 10% pool or, if
used partly for private use, treated as a single asset with
a rate of 10% WDA.
Cars acquired before 1 or 6 April 2009
Expenditure on cars costing less than or equal to £12,000,
incurred before either the 1 or 6 April 2009, will continue
to be pooled in the general 20% pool, regardless of the car’s
CO2 emissions.
Expenditure on cars costing more than £12,000 and
incurred before either the 1 or 6 April 2009 will continue
to be subject to a separate calculation for each asset and
subject to a 20% WDA. This treatment will continue for a
transitional period.
For these cars, WDAs will continue to be capped at £3,000
per annum for that period. If the car is disposed of before
the end of the transitional period, a balancing adjustment
will be available. However, any balance of unrelieved expenditure
on the asset after the transitional period will be taken
to the main 20% pool.
The transitional period will end on the last day of the
business’s first chargeable period ending on or after
5 April 2014 (31 March 2014 for companies). It is being referred
to as a five year transitional period but depending on the
accounting period of the business may be longer.
Example
A company bought a car for £25,000 in its accounting
period ending 31 December 2008. This expensive car is subject
to a separate calculation outside the main 20% pool as it
is pre-April 2009 expenditure.
The allowances will be calculated under the old rules with
an annual WDA of 20% not exceeding £3,000 for the 7
periods to 31 December 2014.
The transitional period will then end on 31 December 2014
(the last day of the first accounting period to end after
1 April 2014). At 31 December 2014 any unrelieved expenditure
will be transferred into the 20% pool.
Expenditure on cars by the self employed, purchased prior
to April 2009, with private use, will continue to have separate
calculations for each car. The WDA of 20% will continue after
the transitional period has ended until the car is disposed
of.
What is the effect of these changes?
Assume John’s company purchases a new BMW 520 car
for £25,000 and uses it for 4 years before it is sold
for £12,000. The table below shows the differences
that may arise during the ownership period.
| |
Current rules |
More than 160g/km
CO2 - relief at 10% |
Up to 160g/km CO2 -
relief at 20% |
| |
£ |
£ |
£ |
| Year 1 - cost |
25,000 |
25,000 |
25,000 |
| Allowance |
3,000 (max) |
2,500 |
5,000 |
| Amount to carry forward |
22,000 |
22,5000 |
20,000 |
| Year 2 - allowance |
3,000 (max) |
2,250 |
4,000 |
| Amount to carry forward |
19,000 |
20,250 |
16,000 |
| Year 3 - allowance |
3,000 (max) |
2,025 |
3,200 |
| Amount to carry forward |
16,000 |
18,225 |
12,800 |
| Year 4 - sale |
(12,000) |
(12,000) |
(12,000) |
| Ballancing allowance |
4,000 |
None |
None |
| Year 4 - allowance |
- |
623 (6,225 x 10%)* |
160 (800 x 20%) * |
*Further WDA @10%/20% will continue in subsequent years
following the period of disposal on the same reducing balance
principle.
Of course, if John ran a self employed business and used
the car privately, the situation would be rather different.
Although there would be a reduction in the WDA each year
to reflect any private usage, there would be a balancing
allowance when the car is sold.
And finally - car hire
Currently businesses generally face a reduction in the amount
of rental payments allowable as a deduction for expenditure
incurred on the hiring of a car if the retail price of the
vehicle, when new, exceeds £12,000. The disallowance
is by reference to a rather convoluted calculation.
Where a lease commences on or after the 6 April 2009 (1
April 2009 for companies), the reduction in the amount of
car lease rental payments will be applied only to expenditure
on cars with CO2 emissions over 160g/km. The new rules will
disallow a flat rate of 15% of the amount of the deduction
that would otherwise be allowed.
So much for simplification!
As you can see, there are a number of fundamental changes
to the tax relief on business motor expenditure. If you would
like to talk about these changes, or any other tax issue,
please do feel free to get in touch.
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