Most businesses can apply for capital allowances as a form of tax relief for items they have bought for the purposes of business.
Handily, this includes cars.
So if your business buys a vehicle as a company car for an employee, then the car can be written down against taxable profits.
There’s a general ‘pool’ for plant and machinery. But cars are treated slightly differently.
The government wants to encourage the least polluting cars so it has banded the allowances available depending on the CO2 emissions of the car in question.
For example, ultra-low emission cars – those vehicles with emissions below 50g/km – such as electric cars and plug-in electric vehicles (PHEVs) are available with 100% first year writing down allowances.
Cars with CO2 emissions between 51g/km and 110g/km have writing down allowance of 18% each year on a reducing balance basis. So, for example, your business could claim £5400 on a £30,000 car in the first year; then £4428 the following year; and so on.
However, cars with emissions above 110g/km are treated less kindly. These attract a capital allowance of only 8%. And, surprisingly, many cars are in this bracket – all Ford Fiesta petrol models, for example. So it’s not reserved just for exotic cars, as you might expect.
But from the new tax year that starts in April 2019, such cars will have their capital allowances reduced even further – from 8% to 6%.
So there will be much less tax relief for such vehicles.
WHAT SHOULD I DO TO AVOID REDUCED CAPITAL ALLOWANCES?
If you continue to buy your company cars, then you really need to consider the cleanest cars possible with the lowest CO2 emissions.
Electric cars, if they are appropriate, are a good idea because of the accelerated allowances available. They also provide drivers with the lowest exposure to benefit in kind company car tax. So all round they are a good idea – if, perhaps, still a little expensive, even with the reduced Plug-in Car Grant available.
IS THERE ANOTHER WAY TO GET BETTER ALLOWANCES?
If you wish to buy your cars, then no. However, leasing may well prove to be more tax-efficient for your business.
Leased cars – those on a contract hire rental – have a different type of allowance. This is called the Lease Rental Allowance.
The Lease Rental Allowance can be deducted from a company’s corporation tax charge and are much simpler to apply.
All cars that have CO2 emissions below 110g/km have a full 100% allowance, providing for the full rental to be set aside against tax. Those cars with CO2 emissions above 110g/km have a restricted allowance of 15% applied, meaning 85% of the rental can be set aside against the taxable charge of the business.
This compares favourably with the reduced value of 6% of capital allowances available from April 2019.
Of course, leasing is different from owning a car, and it may not suit every business. Nevertheless, the allowances – and lack of capital investment – are worth considering the next time you are thinking of changing your business car.
It could make your car fleet more tax efficient.