In his 2016 Budget the Chancellor announced that the capital allowances (CA) tax break for low emission company cars will continue, but subject to tougher limitations. How should you plan vehicle purchases to maximize tax relief?
Capital allowances and cars
If you buy a car which is used for work purposes, e.g. provided as a perk to an employee, it can claim a tax deduction for the cost in the form of capital allowances (CAs) (HMRC’s equivalent to depreciation). CAs are usually allowed at one of two rates: 8% or 18% of the cost of the car per year. The rate depends on the car’s CO2 emissions. For a limited period a third CAs rate of 100% of the cost in the year of purchase can be claimed, but only for certain types of car.
Rates of allowances
The CAs rates which apply for 2016/17 and 2017 /18 are shown in the table below:
|CO2 Emissions||Rate of CAs|
|Less than 75g/km||100%|
|Between 75g/km and 130g/km||18%|
|Greater than 130g/km||8%|
When can you claim the 100% rate?
100% CAs are allowed if the car purchased has CO2 emissions of less than 75g/km. However, there are two further conditions:
- You must claim the 100% allowance against the profits in the financial period in which you buy the car (see The next step).
- The car must be brand new and unused (apart from delivery mileage).
The 100% CAs tax break was due to end on 31 March 2018 meaning that low emission cars purchased after that date would only qualify for 18% CAs. The good news is that the Chancellor extended the 100% rate until 31 March 2021, but there’s a catch.
Trap 1. For purchases of cars after 31 March 2018 (and before 1 April 2021) the 100% CAs rate will only apply where the car has emissions of less than 50g/km (instead of 75g/km).
Trap 2. From 1 April 2018, the emission threshold for the 18% rate of CAs will also be cut from 130g/ km to 110g/km.
Tip. In view of the changes consider rescheduling the replacement of your clients’ company cars to take advantage of the more generous rates of CAs which apply for purchases up to 31 March 2018. This can make a dramatic difference to the timing of tax relief and therefore your clients’ cash flow.
Example – purchase before 1 April 2018. Acom Ltd intended to replace four of its company cars in July 2018, but brought it forward to March 2018. The cars cost £100,000. Each is brand new and emits CO2 of 72g/km. Acom obtains a tax deduction of £100,000 in its financial year ended 31 March 2018, therefore reducing its corporation tax of £19,000 (£100,000 x 19%).
Example – purchase after 31 March 2018. The facts are the same as the previous example except that Acom Ltd sticks to its plans for replacing the cars in July 2018. It obtains a tax deduction of £18,000 in its 2018 accounts reducing its CT bill by just £3,240. It will take a further eleven years for Acom to get relief on £91,000 of the cost and the balance will take many more years to trickle in.
Consider bringing forward purchases of low emission cars to before 1 April 2018 because after that 100% capital allowances (CAs) will only apply where emissions are less than 50g/km instead of 75g/km. The limit for 18% (instead of 8%) CAs will also be lowered from April 2018 from 130g/km to 110g/km.