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<b>Budget 2006:</b> Modernising company cars. By Nichola Ross Martin

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23rd Mar 2006
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The government is to consult on a radical change in the tax treatment of 'expensive cars', red tape and environmental considerations.

The Government has been considering a range of options for modernising the current restrictions on relief for expenditure on business cars which would both address the concerns raised by business and ensure consistency with the government's wider objectives on the public finances and the environment.

A Partial Regulatory Impact Assessment published with the 2006 Budget suggests that modernisation can be best achieved by introducing a new car pool for all cars with a writing down allowance of less then 25%, and a range of first year allowances for cars depending on CO2 emissions. The Government is also willing to revisit the case for abolishing or modifying the lease rental restriction, but only as part of an overall package.

A consultation document has been issued to seek views. It gives three options for reforming the current capital allowance rules for cars:

  • Option one
    Abolish the current restrictions and treat all cars in the same way as most other plant and machinery in the general pool.
  • Option two
    Introduce a new car pool for all cars with a writing down allowance of less than 25%.
  • Option three
  • Introduce a new car pool for all cars with a writing down allowance of less than
    25 per cent, and a range of first year allowances for cars depending on CO2 emissions.

    The third is the government's preferred option.

    In addition, the government is willing to revisit the lease rental restriction, but Exchequer constraints mean this could only be achieved as part of an overall package.

    All these options attempt to meet the reform objectives by changing the tax regime, as this is the source of the compliance costs. Non-tax measures were not considered, as they would not achieve this reform objective.

    The main purpose of the consultation document is to seek views on the government's preferred option. In particular, the government would be grateful for views on and any assistance businesses or others can give in estimating:

  • The extent to which the government's preferred option offers compliance cost savings compared with the current rules. In particular, the Government would appreciate any detailed evidence business can provide that would help quantify the size of the compliance cost savings.
  • The most effective banding structure to maximise both environmental incentives and reduce the compliance burden. In particular, would the option be more coherent if the bands were aligned with either the current Vehicle Excise Duty bands or based on a variant of the company car tax bands?
  • The effect the environmental incentives could have on businesses' car purchasing strategies
  • The extent to which changing the Lease Rental Restriction rules, so that they only applied to the first lessee or only to the final end user of a leased vehicle, would reduce market distortions and reduce compliance costs?
  • Whether the compliance cost benefits for the self-employed car owner, who is subject to the private use adjustment rules, would be more limited than those for unincorporated businesses that are not subject to those rules and for companies?
  • Whether, for those self-employed who only have cars that they partly use for private purposes, these measures would act as a sufficient incentive to buy cars with low CO2 emissions?
  • The consultation document is available electronically at www.hmtreasury.gov.uk/consultations.

    Nichola Ross Martin

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