In his 2016 budget, delivered back in March, The Chancellor announced that the Capital Allowance (CA) tax break for low emission company cars will continue, but subject to tougher limitations. With this information in mind, how should you plan the purchase of new vehicles to maximise tax relief?
If your company purchases a car which is used for work purposes, e.g. provided as a perk to an employee, the business 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 cars CO2 emissions, and for a limited period a third rate of 100% of the cost in the year of purchase can be claimed for low emission costs where CO2 emissions do not exceed 75g/km.
Rates of Allowances
The CAs rates which apply for 2016/17 and 2017/18 are displayed below.
- CO2 Emissions: Less than 75g/km – 100% Rate of CAs
- CO2 Emissions: Between 75g/km and 130g/km – 18% Rate of CAs
- CO2 Emissions: Greater than 130g/km – 8% Rate of CAs
When Can You Claim The 100% Rate?
As the figures above demonstrate, 100% CAs are allowed if the car purchased has CO2 emissions of less than 75g/km. However, there are two further conditions:
1. You must claim the 100% allowance against the profits in the financial period in which you buy the car.
2. The car must be brand new and unused (apart from delivery mileage).
The 100% CAs tax break was due to end on 31st March 2018 meaning that low emission cars purchased after this date would only qualify for 18% CAs. The good news for business owners is that the chancellor extended the 100% rate until 31st March 2021, but there are a couple of catches.
For purchases of cars after 31st March 2018 (and before 1st April 2021) the 100% CAs rate will only apply where the car has emissions of less than 50g/km (instead of 75g/km)
From 1st April 2018, the emission threshold for the 18% rate of CAs will also be cut from 130g/km to 110g/km.
In view of these changes, consider rescheduling the replacement of your company cars to take advantage of the more generous rates of CAs which will apply to purchases up to 31st March 2018. His can make a dramatic difference to the timing of tax relief and therefore your business’ cashflow as the examples below demonstrate.
Example 1 – Purchase before 1st April 2018
You intend to replace four of your 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. You can obtain a tax deduction of £100,000 in your financial year ended 31st March 2018, therefore reducing your corporation tax of
£19,000 (£100,000 x 19%)
Example 2 – Purchase after 31st March 2018
The facts are the same as the example above, except that you stick to your plans for replacing the cars in July 2018. You obtain a tax deduction of £18,000 on your 2018 accounts, reducing your CT bill by just £3,240. It will take a further eleven years for you to gain 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 1st April 2018 because after that 100% capital allowances 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.
If you have any queries on the above, or would like to discuss this in more detail, please contact Sarah Salton on 01925 761 600 or email her at firstname.lastname@example.org