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Budget 2007: Capital allowances on cars. By Rebecca Benneyworth

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22nd Mar 2007
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The consultation considered last summer on the changes to the capital allowance regime for cars produced much welcome response from concerned parties. The document issued in March 2006 proposed a change to the system of capital allowances on “expensive” cars, and consequent changes to the leasing restriction on similar vehicles.

The follow up consultation document now issued takes the proposals a stage further by fixing on the preferred option and providing more information about the actual rates of allowances planned, although not all of the figures are discernable from the material now available.

The plan is to provide a three phase system of allowances on purchased cars by businesses.

  • First, to retain the 100% system of first year allowances on car emitting no more than 120g/km
  • Second to allow cars emitting from 121g/km to 165g/km (bands C and D for VED purposes) to be included in the main plant and machinery pool
  • Third to have a separate pooling arrangement for cars emitting more than 165g/km, with a lower rate of WDA available on these less environmentally efficient cars.

Including bands C and D cars in the main plant pool will allow only 20% capital allowances on a writing down basis on these cars, as other Budget proposals reduce the WDA rate on the main pool to 20% from 2008/09. It is not clear whether the system of small business first year allowances available on additions to the main pool would apply to cars once the rules change, but in the absence of any indication to the contrary, one must assume not.

There is no indication as to what rate of allowances would be applied to vehicles in the high emissions pool, but to be worth discriminating between the two it is likely to be 15% as a maximum. There is some argument for suggesting that it would be 10%, as that is the new rate to apply to long life assets from 2008-09, and this would keep things simple.

As for the treatment of leased cars, the proposals once again adopt an emissions based approach:

  • Cars with emissions of up to 165g/km would suffer no restriction at all, irrespective of price;
  • Cars with emissions of more than 165g/km would suffer a simple uniform percentage disallowance on the leasing payments deductible from profit. All indications are that this would be a “two speed” system only, with no higher rate of disallowance for higher emitting cars. This keeps the new scheme simple, which is one of the primary objectives.

The consultation document highlights a number of unknowns, and there are still details which are not publicised, on which comment might be appropriate:

  • Whether cars costing less than £12,000 should be included in the reform. The intention was to reform the “expensive cars” rule, but it would seem sensible if all cars were subject to the same capital allowances rules, although this has not so far been proposed.
  • How cars used by the self employed, and in particular cars with partial private use should be taxed. This would seem to indicate that these proposals are not immediately intended to apply to the self employed, although this is not made clear in the consultation.
  • The treatment of diesel cars, which have lower emissions, under this regime. It is assumed that this opens the door for a “penalty” to apply to diesel cars, although in the interests of simplicity this cannot be a sensible option.

The document does not comment on the treatment of existing vehicles at the date of change (which date is not yet proposed, but one might expect it to be April 2008 to tie in with other changes to capital allowances). They might remain within the old regime, or be swept up into the new regime.

Those making comment might also like to reflect on the fact that the time taken to achieve a full tax write down for a car in a pool of expenditure, on which the write down is given at only, say 10% per annum, will not in any way reflect the actual cost to the business of the car over its life. The loss of balancing allowances on very expensive cars with high emissions will be the most significant aspect of these changes for business.

Example computations

A business purchasing a car costing £18,000 with emissions of 160g/km, running it for three years and selling it for £8,500 at the end of its life would benefit from capital allowances at a rate of £3,000 per annum, followed by a balancing allowance in the final year. Comparing this to a rate of 20% writing down allowance in a pool of cars, this would provide the following:

If the car had emissions in excess of 165 g/km the position would be worse. Assume a rate of 10% writing down allowance is given on high emission cars:

Finally, taking a much more expensive high emission vehicle, the change is much more pronounced : A car purchased for £60,000 and sold for £30,000 after three years would give the following:

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