Capital Allowances For Cars: How Much Tax Relief?

 

The tax system plays a role in encouraging certain types of behaviour that are regarded as desirable and discouraging others that are not. This policy approach can be seen in the taxation of company cars, where drivers of lower emission vehicles are rewarded with lower tax bills. It is also in evidence for capital allowances purposes where lower emission vehicles attract higher allowances, providing earlier relief for the cost of the car against profits.

 

It is important to note that capital allowances are calculated by reference to the actual expenditure on the car, rather than by reference to the list price, as for benefit-in-kind purposes. Capital allowances are now available where simplified expenses are claimed.

 

Expenditure on cars is not eligible for the annual investment allowance. However, by choosing a new low emission car, it is still possible to achieve a 100 per cent deduction against profits in year one. A 100% first-year allowance is available for expenditure on new and unused cars that satisfy certain emissions criteria. As the rules currently stand, the expenditure must be incurred before 31 March 2021 (however, this deadline may be extended as it has in the past, most recently in 2016 from the previous deadline of 31 March 2018).

 

The emissions criteria which must be met in order to qualify for the 100% first-year allowance depends on the date on which the expenditure is incurred. Where the car is purchased on or after 1 April 2015 and before 1 April 2018, the first-year allowance is available if the CO2 emissions are 75g/km or less. Where the expenditure is incurred on or after 1 April 2018 and before 1 April 2021, the emissions must be 50g/km or less to qualify for the first-year allowance.

 

It is not necessary to claim the 100% first-year allowance where the expenditure qualifies for it – a writing down allowance may be claimed instead if this is beneficial, for example, if claiming the first-year allowance would result in a loss. It is also possible to claim less than the full 100%, thereby tailoring the claim to achieve the best result.

 

First-year allowances are only available for expenditure on new and unused cars – expenditure on second hand cars does not qualify for the first-year allowance, even if the emissions criteria are met, although writing down allowances are available.

 

Where the first-year allowance is available or not claimed, expenditure on cars that are used wholly for business purposes is allocated to the main pool if the car is a low emission car. This applies equally to new and second-hand cars. Where the expenditure is incurred on or after 1 April 2015 and before 1 April 2018, cars with CO2 emissions of 130g/km or less are allocated to the main pool. Where the expenditure is incurred on or after 1 April 2018, but before 1 April 2021, cars with CO2 emissions of 110g/km or less are allocated to the main pool. 

 

Expenditure in the main rate pool attracts a writing down allowance of 18%. As with first year allowances, writing down allowances do not need to be claimed, or not claimed in full. 

 

Where the car’s CO2 emissions are too high for inclusion in the main pool – i.e. above 130g/km where the expenditure is incurred between 1 April 2015 and 31 March 2018, and above 110g/km where the expenditure is incurred between 1 April 2018 and 31 March 2021 – it is allocated to the special rate pool. Those choosing higher emission cars are `punished’ by the system, as they only receive a writing down allowance of 8%. Consequently, the period over which relief for the expenditure is given is longer for higher emission cars.

 

A car that is used for both business and private purposes must be allocated to a single asset pool. The allowances, calculated at either 18% or 8% depending on the car’s CO2 emissions, are proportionately reduced to reflect the degree of private use. 

 

A first-year allowance of 100% is to be given for expenditure on electric charge points which is incurred on or after 23 November 2016 and before 1 April 2019 for corporation tax purposes, and before 6 April 2019 for income tax purposes.

 

The CO2 emission level of the car will determine the capital allowances available and the speed with which relief for the expenditure is given.