Changes to Capital Allowances

Changes to capital allowances, in particular that relating to cars, was announced during last year’s budget and will come into force on 1 April 2009 for companies, and the 6 April 2009 for unincorporated businesses.
 

Given the notice period, arguing that there was not enough time is no excuse for being ill prepared except that the detail of the changes has yet to be legislated. This means that the details may differ when the next finance act is finally drafted. The Budget 2008 proposed to bring the capital allowances regime in line with how cars are treated in other regimes, such as fuel scale charge, Vehicle Excise Duty (VED), private fuel benefit, company car benefit, for example, based on car specific CO2 emissions. Most individuals, businesses and corporate entities will already have had some exposure to this type of scaling before.

 

The current system

If your business buys, owns or leases a car, for simplicity, the current system separates cars into two categories. These are expensive cars, costing more than £12,000, and cars costing less than £12,000. The written down allowance (WDA) is calculated on a reducing balance method at 20%, restricted to £3,000 per annum for expensive cars. The exception is that cars with CO2 emission below 100g/km are eligible for the first year allowance of 100%. There are adjustments if a car has some private use and capital allowances are appropriately restricted. Other adjustments are regarding the length of period, adjusting for longer and shorter periods.

 

The proposed changes

The changes are to give capital allowances to cars dependent upon their CO2 emission. Fortunately the changes do not go as far as creating a seven-band system, as per the VED bands, however, the changes are still significant. There will be two car pools; the ‘heavier polluters’ with CO2 emission above 160g/km and ‘greener cars’ those with CO2 emission of 160g/km or below. The ‘heavier polluters’ will be placed in a special pool and only receive capital allowances of 10%. The other cars will receive capital allowances of 20%. First year allowance on 100% for cars with CO2 emission below 100g/km will remain until 2013. Cars with a private use element will need to go in a separate pool with the appropriate restriction, as per the current rules. In addition, as before there will be an adjustment for longer and shorter periods. Cars that are purchased or leased before the effect of theses changes will continue to be subject to the existing rules, with expensive cars being given a transitional period of five years.

 

Leasing cars and motorcycles

A restriction of 15% is to be applied to cars with CO2 emission above 160g/km. In addition, hire cars that were previously exempt from the expensive car rules will fall within this new regime and there is talk of including vehicles like taxis. Another change is in relation to motorcycles falling outside the definition of a car, allowing them to qualify for the ‘Annual Investment Allowance’ (AIA) of £50,000 and the new ‘write off’ allowance available for small pools not more than £1,000. The ‘AIA’ is available to all businesses regardless of size. Please note that cars do not qualify for the ‘AIA’.

 

Definition of a car

The Capital Allowances Act 2001, Section 81 says:
"In this Part "car" means a mechanically propelled road vehicle other than one

(a)  of a construction primarily suited for the conveyance of goods or burden of any description, or

(b)  of a type not commonly used as a private vehicle and unsuitable for such use.”

 

Part (b) has, in the past, led to vans being treated as cars if there has been any private element usage. Though no changes have been announced, there is a hope that an appropriate revision will be made in the 2009 budget to remove vans falling within this net. In addition, another complication arises as many vans do not have official CO2 emissions. Due to this absence these non-categorised vans will be deemed to be emitting over 160g/km, and therefore be classified as ‘heavier polluters’.

 

Examples of changes to relief

These examples demonstrate the advantages/disadvantages that may be gained under the new system.

 

Example 1.

A business purchases a car worth £20,000 with a CO2 emission below 161g/km and above 110g/km. The capital allowance for the first year would be £4,000 and £3,200 next year. Under the old regime, only £3,000 could be claimed each year, giving the business accelerated capital allowances and cash-flow advantage.

 

Example 2.

A business purchases a car worth £40,000 with CO2 emission above 160g/km. The capital allowance for the first year would be £4,000 and £3,600 for the next year. Under the old regime, only £3,000 could be claimed each year, again giving the business accelerated capital allowances and a cash-flow advantage.

 

Example 3.

A business purchases a car worth £14,000 with CO2 emission below 161g/km and above 110g/km. The capital allowance for the first year would be £2,800 and £2,240 for the next year. Under the old regime, £3,000 could be claimed for the first year and then £2,240 for the next year. Though the difference is small in the first year, it still gives disadvantage.

 

Tax advantages

The capital allowances advantage for ‘heavier polluting’ cars is for cars valued over £30,000; below this value the advantage disappears. For ‘greener cars’, i.e. cars with CO2 emission below 161g/km and above 110g/km, the calculations give more mixed circumstances, detailed below:

 

  • for cars valued over £15,000 falling within this category there is a definite incentive under the new regime
  • for cars valued above £12,000 and below £15,000 falling within this category there is a definite disincentive under the new regime
  • for cars valued below £12,000 falling within this category there is no change when compared with the old regime.

 

This falls in line with government initiatives on tackling the environmental issues, gently nudging with tax advantages. What your business must evaluate is whether there is an opportunity to streamline the profile of your vehicle fleet to take advantage of these changes to capital allowances. In the current global economic conditions, this saving may provide some financial assistance to organisations.

 

 

 

 

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