Company Cars - Time for a change?

From 1 April 2009 (6 April for partnerships and sole-traders) the capital allowance regime regarding cars has fundamentally changed, moving from a value-based system to one which uses CO2 emissions.

Previously any car that cost over £12,000 had to be in its own pool and the WDA restricted to a maximum £3,000 irrespective of that cost. When that car was sold normally a large balancing allowance was received, as it was worth substantially less than the tax written down value.

From April 2009, however, the tax treatment for cars purchased is based on the emissions figure, as follows:

• Up to 110g/km qualifies under the Enhanced Capital Allowance rules for 100% allowance.
• 111g/km – 160g/km qualifies for the standard 20% WDA and must be posted to the General Pool within the Capital Allowance computation. (This also applies to cars registered prior to 1 March 2001 without a qualifying emissions certificate, such as kit cars)
• 161g/km only qualifies for the special 10% rate WDA and must be posted to the Special Rate Pool within the Capital Allowance computation. (This also applies to cars registered on or after 1 March 2001 without a qualifying emissions certificate, such as kit cars)
• For car leasing restrictions, new leases commencing April 2009 onwards will either require no restriction if the emissions are 160g/km or lower (i.e. would qualify for 20% or 100% allowance) or for emissions at 161g/km or above (i.e. would be posted into the Special Rate Pool) a fixed 15% of the lease payments made in the period. Leases that were entered into prior to 31 March 2009 are treated under the old rules and restricted on the value basis.

So what does that mean to the average businessman/ woman? Initially not a lot. The real sting in the tail won’t be felt for at least a year or so for the vast majority of clients and that is when a car acquired under the new rules, with emissions of 111g/km or more, is sold. Whereas previously for cars costing over £12,000 there would likely be a balancing allowance benefit, now, since cars are all within either the General or Special Rate pool, any remaining balance has to be carried forward and claimed at 10% or 20% as appropriate over the life of the business. 

An example of the difference is as follows:

ABC Limited wishes to acquire a car for £50,000, with CO₂ emissions of 225 gm/km.  It is likely to sell the car after four years by which time the proceeds will be £20,000.  If it had bought it in March 2009, it would have received a capped WDA of £3,000 pa for three years, followed by a balancing allowance in year four of £21,000 upon sale.  The total net cost of £30,000 (purchase price less sale proceeds) will have been relieved in four years.  Buying now gives £13,550 WDA for the first three years of ownership (an increase on the £9,000 before), but with no balancing allowance on sale it will take eight years to relieve the first £20,000 of that £30,000 cost to the business, and a further 20 years to relieve the next £10,000!

However, if the business concerned is not a corporate entity (e.g. partnership or sole-trader) it could now be advantageous to generate a small element of private use of a car. Imagine our above example was for a partnership not a limited company and the car was for the use of one of the partners. In such a scenario, where there is private use, the car has to be kept separate so that there can be a restriction of the allowances claimed. This remains the case post April 2009 and therefore by ensuring that the partner has personal use we can still identify and therefore claim any balancing allowance at the point the car is disposed of.

Also cars generating emissions of 160g/km or under, which are acquired on a lease contract, now have the lease payments qualify for full tax relief. This may mean that this type of asset financing becomes more popular again. This of course should only be part of the decision making process and the rest of the deal must be commercially viable.

As every business and individual's circumstance is different, if you are considering a change in business vehicles please contact us on 01376 326266 or email cars@lambert-chapman.co.uk

 

Date:24 August 2009

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