A business considering buying a car in the near future should be aware of the forthcoming changes in the capital allowances that can be claimed on the cost of the vehicle.
At present businesses purchasing a car with CO2 emissions of less than 110g/km can claim a 100% first year allowance on the cost of the vehicle which can be set against business profits. From 1 April 2013 this 100% allowance will only be available for cars with emissions less than 95g/km.
For non low emission vehicles the threshold for determining whether capital allowances can be claimed at 18%pa or 8%pa is currently 160g/km. From 1 April 2013 this threshold will reduce to 130g/km meaning “modest” cars such as a 1.6 Ford Focus will only receive the 8%pa allowance.
The position is worse for companies rather than sole traders/partnerships as cars must be included in the appropriate capital allowance pools with all other assets. This means that the effective write off period of the value of a vehicle with CO2 emissions greater than 130g/km can be 30-40 years.
For sole traders/partnerships the situation is slightly better as cars are allocated to their own individual pool and when the vehicle is sold the difference between the sales proceeds and value the car has been written down to is taken as an adjustment to that year’s profit figure.
The following example of a car with 140 g/km emissions purchased for £25,000 and disposed 3 years later for £10,000 illustrates the different treatments:
£
|
Year 1 |
|
Cost 25,000 |
|
Writing down allowance @8% (2,000) |
|
Written down value cfwd/bfwd 23,000 |
|
Year 2 |
|
Writing down allowance @ 8% (1,840) |
|
Written down value cfwd/bfwd 21,160 |
|
Year 3 |
|
Disposal proceeds (10,000) |
|
————– |
|
11,160 |
|
————— |
The balance of £11,160 will continue to be written down by the company at 8% pa. Therefore it will be a number of years before the company has received allowances for the full cost of the car.
For sole traders/partnerships the balancing figure of £11,160 can be offset against profits in the year of disposal.
The above changes mean that leasing a car rather than purchasing may be a be a more tax efficient option for a company. The whole of the monthly lease cost is immediately allowable as a deductible expense (with a 15% reduction where the CO2 emissions are 130g/km or greater). In addition 50% of the input VAT on the leasing payments can be claimed whereas no input VAT is claimable if the car is purchased.
All commercial vehicles continue to qualify for the 100% Annual Investment Allowance regardless of whether the purchaser is a sole trader/partnership or a company.