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New rules on capital allowances and cars

The tax treatment of cars under the capital allowances system changed with effect from 1 April 2018. The new rules, which are designed to encourage the take-up of low CO2 emission vehicles, are likely to have a significant impact on many businesses. Here we consider the changes in more detail.

‘Capital allowances’ is the term used to describe the deduction we are able to claim on your behalf for expenditure on business equipment, in lieu of depreciation. The allowances available depend on what you are purchasing, and there are special rules for cars. Unlike expenditure on most plant and machinery, expenditure on cars does not qualify for the £200,000 annual investment allowance (AIA) and instead only benefits from the writing down allowance (WDA). Any expenditure not covered by the AIA (or enhanced capital allowances) enters either the main rate pool or the special rate pool, attracting WDA at the appropriate rate (see below).

What’s changed?

Whether the expenditure enters the main rate pool or the special rate pool depends on the vehicle’s CO2 emissions. Prior to 1 April 2018, expenditure on cars with CO2 emissions not exceeding 130 g/km was allocated to the main pool, which attracts a WDA rate of 18%.

Meanwhile, expenditure on cars with emissions over 130 g/km entered the special rate pool, which attracts an 8% WDA.

However, the government has now lowered the CO2 emissions thresholds for capital allowances, thus restricting the available tax relief. The changes apply to business expenditure on cars which is incurred on or after 1 April 2018. From this date, expenditure on cars with CO2 emissions not exceeding 110 g/km enters the main pool, while those with emissions over 110 g/km now enter the special rate pool.

It should be noted that the reduction in the emissions threshold from 130 g/km to 110 g/km will not apply to expenditure incurred under car hire contracts entered into before 1 April 2018 (corporation tax) or 6 April 2018 (income tax) for the purposes of the lease rental restriction.

In addition, from 1 April 2018 the 100% first year allowance for expenditure on cars has been reduced for cars with CO2 emissions of 75 g/km or less, to just 50 g/km.

Reviewing your expenditure

There are only a few vehicles which meet the 50 g/km test, so not identifying the change could be costly. Businesses may therefore want to take the opportunity to review their expenditure on business cars and consider some of the alternative, more tax-efficient, options that may be available. There may, for example, be savings to be made from using goods vehicles, which are subject to different tax rules. We can discuss the various options with you and help you to weigh up the pros and cons.

We can help you to make the most of the tax reliefs available to your business – please contact us for advice.