Tax changes that save you money! Helping you understand the changes to vehicle corporation tax…
From 1 st April 2009, important changes are being made to the tax treatment of cars which will impact all organisations that buy, own or lease cars. These changes are the most significant changes to the tax treatment of vehicles since the company car tax was linked to emissions in 2002.
The new rules will make it more tax efficient to buy or lease a company vehicle that emits 160g per kilometre of CO2 or less, and more expensive to buy or lease one that emits 161g/km or more.
Under the current rules, corporation tax for business cars is divided into three main parts:
- Cars with emissions of 110 g/km CO2 or less attract a 100% first-year writing down allowance (regardless of vehicle cost).
- Cars which cost less than £12,000 are put in a pool and attract a writing down allowance of 20% on a reducing balance basis subject to a maximum of £3,000 per annum.
- Cars costing more than £12,000 are deemed to be “expensive cars”.A separate calculation is performed for expensive cars on a vehicle by vehicle basis and the writing down allowance is subject to the maximum of £3,000 per annum.
Under the new tax regime, the cost of the car will not determine the taxation treatment; instead it will move to an emissions based system. The corporation tax rules are again divided into three main parts:
- Cars emitting 110 g/km CO2 or less will continue to receive a 100% first year allowance. This will remain in place until 2013.
- Cars emitting more than 110 g/km CO2 and below 161g/km CO2 will receive a 20% writing down allowance on a reducing balance basis.
- Cars emitting 161g/km CO2 or more will receive a 10% writing down allowance on a reducing balance basis. The new regime will increase the amount of tax paid in the early years and therefore will increase the operating cost of cars emitting 161 g/km CO2 or more, whether leased or purchased outright. The maximum writing down allowance of £3,000 per annum has been removed.
Why are things changing?
The changes are due to the government’s targets to lower CO2 emissions and to encourage consumers and businesses into more environmentally-friendly and fuel efficient vehicles.The Chancellor of the Exchequer, Alistair Darling, has set the agenda to encourage businesses to own and use cars emitting the least amount of CO2 by linking the writing down allowance to the CO2 rating of the vehicle. Car manufacturers have also been set a target of reducing average emissions of new cars to 130g/km by 2012. The changes aim to simplify the administration process for fleets and reduce fuel and tax bills by encouraging switching to lower emission vehicles.
Capital allowances and balancing
charges in a rental business
You can claim capital allowances for the cost of plant and machinery such as vehicles, tools, ladders, computers and business furniture that belongs to you .
If you purchased the assets or equipment using an alternative finance arrangement the capital allowances cost is the original cost of the asset. The original cost does not include any alternative finance payments which are the charges made by your finance provider over and above the original cost of the asset or equipment.
First year allowances are available for most expenditure on plant and machinery apart from expenditure on motor cars (with the following exception) or assets which you lease out.
First year allowance is available for cars with low CO2 emissions, equipment for refuelling vehicles with natural gas or hydrogen fuel, or designated energy-saving or water efficient equipment acquired for use in your business or for leasing out.
When you use a car for your rental business, capital allowances may be claimed. If a car costs more than £12,000, the yearly 25% writing down allowance is restricted to £3,000. A separate calculation must be made for each such car – they are not pooled. When you sell the car, the difference between the sale price and the value brought forward is allowed as a balancing allowance (added to other capital allowances for the year) or, if a profit, is taxable as a balancing charge, subject, in either case, to any necessary restriction for private use.
Your accounts are drawn up for the year to 5 April 2008.
You spend £15,000 in that year on a car that is used in your rental business.
- The business usage is agreed at 30%
- Cost of car £15,000
- Writing down allowance @ 25% (restricted) £3,000
- Value to carry forward £12,000
- The writing down allowance you can claim is £3,000 x 30% = £900.
For more details about this aspect of tax relief
For details of Vehicle Benefit Taxation and how it effect you