There are significant changes ahead to the tax treatment of business cars, Paul Harrop explains.
HM Customs and Revenue (HMRC) proposes changes to vehicle corporation tax using a CO2 based system.
These changes, which are likely to become legislation in April 2009, apply to write-down and balance allowances as well as the expensive car allowance applied to lease vehicles.
These dictate the amount a company can claim against annual profit, in turn reducing the level of corporation tax.
From April 2009, the ownership cost of vehicle classed as non-expensive (those vehicles with a capital cost of less than L12,000) will increase as a result of these changes. As a result, many businesses can benefit by reviewing how they fund their vehicles.
Taxation changes will affect the vehicle owner irrespective of whether it is purchased or leased.
Write-Down Allowance
Previously a company was able to claim depreciation, for corporation tax purposes, to a level of 20% of the opening value up to L3,000.
The 2009 rules will allow a business to claim the same 20% of the opening value, for vehicles below the 160g/km emissions bracket, and just 10% for vehicles above the 160g/km tax bracket.
Like many leasing providers, we are awaiting the final details from the Government. It is now understood that these changes won’t affect vehicles registered before the April change.
This means that a vehicle costing L14,000 with a CO2 output of 170g/km would have an allowed depreciation of L1,400 rather than the L3,000 previously allowed.
Using these figures, and applying a corporate tax rate of 30%, the new rules result in an increase in tax for that year of L480.
Balancing Allowance
The change in the balancing allowance treatment has the greatest impact. Previously a business could claim the entire depreciation – from the “tax allowed” written-down value to the actual sale value in the year of disposal. In future, a business can only claim the amount under the allowances of the altered write-down allowance.
Write-down allowances will cover much longer time periods, lasting well past the date when the vehicle is sold and passed into new ownership. If the vehicle in the previous example was sold for L800, the business could have claimed the additional appreciation of L3,000. The new proposals will result in an additional business tax burden of L900.
Expensive Car Disallowance
This was once the key reason for businesses to purchase their executive cars. The amendments move the variable disallowance to a fixed rate based on CO2 emissions, therefore allowing expensive cars to be efficiently funded via contract hire.
These three changes mean that the cost of running an average vehicle will increase.
Crucially, while the ownership cost will spread across an extended period, leasing the vehicle will now allow a user to optimise the corporation tax relief by realising the depreciation element of the rental earlier than before. Businesses should review the funding of their vehicles, considering the CO2 output and the revised timeframe in their selection.
