New rules on company cars
Spring 2009
New rules for tax relief on business cars will affect cars bought or leased from April 2009. As a result, deciding when to change your car may make a big difference to the timing of the capital allowances.
Under reforms announced in the 2008 Budget and fleshed out in Pre-Budget Report last November, writing down allowances for cars are to be based on a car’s carbon dioxide (CO2) emissions and there will no longer be special rules restricting allowances for cars costing more than £12,000. The changes will affect cars acquired after 31 March 2009 for companies and after 5 April 2009 for sole traders and partnerships.
Cars currently attract a writing down allowance of 20%. From April, only cars with CO2 emissions of not more than 160 g/km will be added to the main capital allowances pool and receive allowances at that rate. Cars emitting more than 160 g/km will go into the special rate pool and attract allowances at only 10%.
Time to buy now?
Buying a higher emitting car before April will therefore preserve the higher rate of relief, but even for more expensive cars with emissions up to 160 g/km it may be better to buy now. At present, if you buy a car costing more than £12,000, it is not pooled and writing down allowances are calculated on each vehicle separately. Although the allowance is restricted to £3,000 each year, when you sell or otherwise dispose of the car, you receive tax relief, in the form of a balancing allowance, on the remaining cost less disposal proceeds. So the whole capital cost to you of the car is allowed for tax over its lifetime.
The new rules remove the £3,000 limit but, because the expenditure is pooled, it will continue to be written down at 20% or 10% even after the disposal of the car. For expensive cars that depreciate faster than the rate of capital allowances, this means there may be a significant shortfall in allowances compared to the cost of the car over its life.
For sole traders and partnerships, where there is any element of private use, cars will remain outside the expenditure pools so that the private use deduction can be calculated. So if you buy an expensive car after 5 April 2009 for mixed business and private use, you will benefit from the abolition of the £3,000 allowance limit without losing the advantage of a balancing allowance on eventual disposal. However the rate of allowance will only be 10% if the car’s CO2 emissions are above 160 g/km.
Leasing for business
Businesses that lease expensive cars should benefit under the new rules. At present, tax deductions for lease rental payments are restricted for a car costing more than £12,000, using a formula under which the proportion disallowed increases with the cost of the car. For cars leased from the April start date, the only amount not allowed for tax purposes will be a straight 15% of lease rental payments on cars with CO2 emissions above 160 g/km, regardless of the cost of the car.
Another change from April 2009 is that motorcycles will be excluded from the definition of cars and so will not be subject to these rules. Expenditure on motorcycles from the April start date will therefore qualify for the annual investment allowance, which gives immediate tax relief on up to £50,000 of expenditure a year on plant and machinery.
We can help you plan your business expenditure on cars to maximise your tax relief and advise you on how directors and employees will be taxed if you provide them with company cars.
