The government is committed to a move away from CO2 emitting cars. Reduced emissions thresholds have restricted the relief available for many company cars, whilst generous incentives exist for “green” vehicles. How will you be impacted in 2021/22?
What is a “car”?
For many, business cars are key assets. However, their treatment can be complex where capital allowances (CAs) are concerned.
It’s important to know what’s classified as a car for CAs purposes. A car is defined in s.268A Capital Allowances Act 2001 (CAA) as a mechanically propelled road vehicle other than:
- a motorcycle
- a vehicle of a construction primarily suited for the conveyance of goods or burden of any description; or
- a vehicle of a type not commonly used as a private vehicle and unsuitable for such use.
However, cars are not the only vehicles that you may purchase, with commercial goods vehicles, motorcycles, and vans being other notable examples.
Treatment for capital allowances
The treatment of business cars for CAs isn’t straightforward. A car used in a business may qualify for a first-year allowance (FYA) in some instances, or it may end up being a main or special rate pool item. For other vehicles, the availability of the annual investment allowance (AIA) can also be considered.
Pro advice. For sole traders or partners, no CA claim is allowed on a vehicle where the flat rate mileage has been claimed, or where a qualifying vehicle’s costs have been deducted as an expense, i.e. under the cash basis.
First-year allowances
FYAs have only been available for motor vehicles in specific circumstances, namely where there is a purchase of a car with low CO2 emissions, i.e. an electric car or low emission car; goods vehicle with zero emissions; or plant or machinery for electric vehicle charging points, i.e. expenditure on plant or machinery installed solely for the purpose of charging electric vehicles.
Pro advice. All purchases must be unused and not second hand for the relevant FYA to be available.
Pro advice. There are some exclusions on the availability of FYAs for zero-emission goods vehicles. These can be found in s.45DB CAA 2001.
HMRC confirmed in its December 2020 Agent Update that the availability of FYAs on such purchases would be extended until April 2025. The extension aims to encourage businesses to move away from CO2 emitting cars, and feeds into the government’s strategy to end sales of new petrol, diesel and hybrid cars/vans by 2035 or earlier.
However, for business cars, from April 2021 the 100% FYAs are only available where there is a purchase of a new electric car or a new car with zero CO2 emissions.
Pro advice. Previously the threshold was 50g/km, so ensure that when you’re looking at buying, say, hybrid cars are informed that these will no longer qualify for FYAs.
Annual investment allowance
Cars are not eligible for the AIA. However, other assets, such as goods vehicles and plant and machinery for electric charge points, are. Currently, the AIA threshold sits at £1 million. This will change from 1 January 2022 when it reverts to £200,000. Note. Cars are also excluded from the new 130% super-deduction.
Writing down allowances
If a piece of qualifying plant and machinery is not relieved by the AIA and/or no FYA is available, then it may be relieved through the main or special rate pools.
From April 2021 the main rate pool (written down at 18%) is available where the car purchased has CO2 emissions not exceeding 50g/km.
Pro advice. The car can either be new or second hand to be eligible for the main rate pool, provided its emissions are below 50g/km.
Cars purchased from April 2021 with CO2 emissions exceeding 50g/km may be relieved in the special rate pool, which is written down at 6%. Again, the car can be new or second hand.
Previously, the CO2 emissions band for cars was 51g/km to 110g/km for the main rate pool, and over 110g/km for the special rate pool.
Pro advice. These changes in CO2 thresholds from 2021/22 can make a significant difference to the amount of relief available for cars, ensure you are aware of them before you commit to buying vehicles.
Example. Ann purchases a new car for £10,000 for exclusive use in her business in June 2021. Its CO2 emissions are 75g/km. The car is eligible for special rate allowances at 6%, i.e. writing down relief of £600.
Had Ann purchased the same car a year earlier, in June 2020, the car would have been eligible for relief at main rate allowances at 18%, i.e. writing down relief of £1,800.
Pro advice. The reduction in relief may affect your clients’ buying strategies, e.g. they may look to buy an approved used car instead, using the lower price to offset the loss of tax relief.
Pro advice. Sole traders and individual partners in partnership that use a car for partially private use must apportion CAs based on business use. Such assets should be tracked in a single asset pool.
Pro advice. The main and special writing down rates apply from 1 April for limited companies, and from 6 April for sole traders and partners.
Car leasing
You may opt to hire a car rather than purchase it outright.
From April 2021 most car hire costs are restricted to 85% of the costs for tax purposes where the car has CO2 emissions exceeding 50g/km (mirroring the changes in the capital allowances regime).
Pro advice. Hire costs for cars with emissions below 50g/km are not restricted in this manner.
Car benefits
Although unrelated to CAs, it’s worth highlighting another area that can be challenging, specifically the calculation of a benefit in kind arising on the private use of a company car.
For all new cars registered from 6 April 2020, the CO2 emissions figure (for benefit in kind purposes) is based on the Worldwide Harmonised Light Vehicle Test Procedure (WLTP). For cars registered before 6 April 2020, CO2 emissions are measured under the New European Driving Cycle (NEDC).
As part of the introduction of the WLTP, the benefit for cars registered from 6 April 2020 was 2% lower in 2020/21 compared to cars measured under NEDC, i.e. registered before 6 April 2020. In 2021/22, there is a 1% difference, and from 2022/23, the benefit percentages will realign.
Pro advice. Where a company car is a hybrid, and has CO2 emissions of 1g/km to 50g/km, its value is determined by its “electric range”, i.e. the distance the car can go on electric power before its batteries need to be recharged.
If you are thinking about purchasing a new company car, highlight the benefits of choosing a lower emission model – particularly if first year allowances may be available. If you do not want to buy a fully electric model, understand that cars with CO2 emissions exceeding 50g/km will only attract writing down allowances at 6% for 2021/22 onwards.
The next step
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.