Business expenditure on cars – a green light for the new scheme?

The Bourne Agenda is a fortnightly blog brought to you by Bourne Business Consulting LLP, an independent tax and business consultancy with offices in London and Farnham.

Today there is increasing pressure on the government and businesses to become greener. We have seen several tax initiatives launched by the government in the area of Capital Allowances to address these pressures including the Enhanced Capital Allowances (ECA) scheme. Recently, we have seen a shift in policy on the expensive cars scheme, to encourage businesses to ‘buy green’. This blog compares the new and old rules for expensive cars to determine whether these changes will genuinely encourage businesses to go green.

The old regime

In 1961 rules were introduced that restricted the amount of tax relief that a business could claim for expenditure on cars; effectively a charge on ‘luxury’ cars. The rules meant that any cars costing in excess of £12,000 were individually de-pooled and the annual writing down allowance for each car was restricted to a maximum of £3,000.

This scheme had mixed reviews. On the one hand the scheme was administratively burdensome, tracking the different cars and pools, and the delayed receipt of capital allowances on high value cars where the £3,000 restriction postponed allowances was not beneficial. For example, on a car costing £30,000, the business would normally be entitled to £33,750 of allowances after 6 years (based on 25% writing down allowance rate, pre April 2008) however; under the expensive car rules only £18,000 of allowances would have been allowed. Over 40 years later, most cars are now deemed expensive by 1961 standards creating an increasing compliance headache. On the other hand, as many company cars are sold within a few years of acquisition this creates balancing allowances and a substantial cash flow benefit to the business.

Going green

The government has recently been open to reform on the topic of expensive cars, and launched a consultation in Budget 2006 on modernising the tax relief for business expenditure on cars. Based on responses to this it published an update in Budget 2007 and the responses to this have culminated in a technical note issued in December 2008 detailing the draft legislation.

Rather than preserving the restriction of allowances on ‘luxury’ cars, the government has moved to promote the use of more environmentally-friendly cars. Under new rules due to be introduced in Finance Bill 2009 which come into effect from April 2009, cars which have emissions of less than or equal to 160g/km of CO2 can be treated in the same manner as a car costing under £12,000 under the old rules (added to the general pool for plant and machinery and written down at the normal rate of 20% per annum post April 2008).

Cars which have emissions of over 160g/km of CO2 are now to be placed in a special rate pool which attracts a 10% writing down allowance (similar to the new pool for integral features of a building). This relieves the need for each car to be analysed separate within an individual pool, making the computation significantly simpler if multiple cars are owned by a company, but removing the ability to benefit from a balancing allowance on disposal.

Interestingly however, there is no difference in the treatment of petrol and diesel cars.

Where CO2 emission levels aren’t available

There are cases where CO2 emission data may not be available, in particular on cars:

(a)registered before 1st March 2001, or
(b)manufactured by so called ‘very small manufacturers’

In the case of (a), the government has proposed simply allocating the expenditure on these cars to the main pool achieving a 20% writing down allowance, rather than force companies to test cars themselves.

In the case of (b), the government has proposed that due to the fact that kit cars produced by these ‘very small manufacturers’ tend not to have low CO2 emissions, all expenditure in this case to be placed in the special rate pool, where it receives 10% writing down allowances.

Expenditure incurred before April 2009

Interestingly, expenditure on expensive cars incurred pre April 2009 will be subject to transitional rules whereby the old expensive car rules will continue for 5 years, and then any remaining expenditure will be transferred to the general plant and machinery pool.

A green light for the scheme?

One of the stated aims of the reform was to ensure consistency with environmental measures and the rules form part of a package of measures to encourage businesses and car users to choose cars with lower CO2 emissions. This package includes the abolition of the current capital allowance restrictions on expensive car leases, which will move to a similar scheme based on the emissions levels of the leased cars. It also means the corporate tax treatment will move closer to the benefit in kind treatment of company cars which is also now linked to CO2 emissions.

There is no denying that the new scheme will encourage businesses to offer cars with lower emissions, and possibly offer employees incentives for choosing these cars. In addition this brings the corporate tax incentives in line with the individual and this is clearly a step in the right direction. However, this is unlikely to create a significant shift in car selection for the average company director due to the traditional status symbol mentality that continues to be prevalent.

Denise Montes
Bourne Business Consulting LLP