Tax treatment of business cars

We find that most business owners are well aware of the personal tax and National Insurance costs of running company cars. What they may not know is the way by which the company or business receives tax relief for the cost of the vehicle and this year’s Budget changed the tax rules making it harder for businesses to off-set the cost of the car against their tax bills.

Cars which emit 130g/km of CO2 or less will benefit from the changes as they qualify for an enhanced writing down allowance – a statutory tax deduction for depreciation which is linked to a car’s CO2 emissions.

Emissions below 95g/km of CO2
Electric cars and vehicles with emissions of 95g/km or less benefit from 100% first year writing down allowances. In simple terms the business gets full tax relief against the cost of the vehicle in year one. Sounds good, but at the time of writing this article I am not aware that any of our clients have such a vehicle in their business.

Emissions between 95g/km and 130g/km of CO2
These cars qualify for a writing-down allowance of 18%, or in simple terms 18% of their value can be off-set against tax (companies, partnerships and sole traders alike). The 18% is claimed on a reducing balance basis year on year and unlike the old regime, no balancing allowance (tax relief for any remaining unrelieved cost) is claimable on disposal; the balancing allowance is only granted when the business permanently ceases. This means that unless a business keeps its cars for many years, it is probable that full tax relief will not be received for a car until many years after it has been sold or scrapped!

Emissions above 130g/km of CO2
The underlying tax rules are similar to those for cars below 130g/km, but cars with CO2 emissions of 131g/km and above can only have writing-down allowances of 8% of their value off-set against tax. Again, no balancing allowance is available until the business permanently ceases.

Therefore, companies stand to recoup more than double the amount on a car with CO2 emissions lower than 131g/km compared with a similar car with higher emissions.

Also, in practical terms, this means it can take over 40 years to obtain full tax relief on the purchase of a business car, even if the business has a policy of trading-in its vehicles on a regular basis.

Unincorporated Businesses
There is a way for sole traders and partnerships to accelerate tax relief, ensuring a balancing allowance arises on disposal. Although this work-around comes with its own tax cost. The way to achieve the balancing allowance is to ensure that the business only claims allowances for the ‘business use’ of the car. For instance if Simon only uses his car 70% of the time for business use and the remainder is private, then only 70% of the annual allowance of 18% or 8% is claimed on his tax return. The car is then treated differently in the tax return and a balancing allowance can be claimed on eventual sale, albeit only 70% of the allowance is claimed.

Leased Vehicles
The leave rules fall into two distinct categories, cars with emissions below 130g/km and those with emissions above that figure:

i) Emissions below 130g/km All of the lease payments are allowable

ii) Emissions above 130g/km 85% of the lease costs are allowable

Clearly, for low emission cars the lease rules are attractive in that all of the payments are allowable and even for high emission cars an 85% allowance is quite generous.

Conclusion
The knock-on effect of the car tax changes will be that cars emitting 130g/km and below will be more popular while those above the threshold may lose popularity thanks to the tax changes.

Manufacturers are well aware of the tax changes and many are releasing decent sized engines with CO2’s of less than the 130g/km. We are also finding more clients turning to leasing business cars, in part due to not being able to claim balancing allowances until a business permanently ceases trading.

Author – Neil Roberts.

The area of company car taxation and car benefits in kind is a particularly complex one and the above is only an outline of the rules, should you want any advice on your specific position, please contact one of our specialist tax team at your local office – click here for details of our offices.