From 6 April 2020 cars will have their CO2 emissions based on new more realistic levels. HMRC has already announced new scale charges for company cars but how will the new CO2 ratings affect other tax liabilities and deductions?
New CO2 emission rates
For several years the accuracy of CO2 emissions figures produced by vehicle manufacturers for the EU market has been questioned because the testing methods produced unrealistically low results. Following a lengthy review, the government now requires manufacturers to use the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) instead of the New European Driving Cycle (NEDC) for CO2 emissions testing. From April 2020 the higher CO2 emission figures will impact on car -related taxes.
Tax changes
The main change affects employers who provide company cars and their employees. We’ve already told you about the changes to tax and NI charges which will apply from 6 April 2020 ( yr.20, iss.2 pg.2 ). But of course there are other taxes and charges that might be affected, such as vehicle excise duty (VED) (road tax), deductions from profits for the cost of cars (capital allowances), and VAT road fuel scale charges.
VED rates
The government has decided that it won’t amend the VED rate bands to reflect the switch to the WLTP emissions figures. This means that some new cars that would have fallen into one VED band will fall into a higher one on or after 1 April 2020. However, the rate of VED payable on cars registered before that date isn’t affected.
Capital allowances (CAs)
Unless the government in power after December 2019 imposes a change, the rate of CAs tax deductions will continue to depend on the date the car was purchased as new.
Low CO2emission cars bought until 31 March 2021. If they have CO2 emissions of 50g/km or less (according to the NEDC figure up to and including 31 March 2020 and the WLTP figure for cars registered later) your business can claim a tax deduction equal to 100% of the cost of a car for the tax/accounting year in which you purchase it. Tip. To qualify for the 100% CAs tax deduction, you must have bought and registered the car brand new at that time and it must be unused except for delivery mileage.
Higher emission cars bought after 31 March 2021. CAs for cars which don’t qualify for the 100% deduction are given at one of two rates: 18% per annum if it has CO2 emissions of 110g/km or less (130g/km for cars bought up to April 2018); or just 8% per annum for higher emissions. Tip. If you plan to buy a car soon after the WLTP rates take effect, the rate at which you can claim a tax deduction might be less favourable than before April. Consider bringing the purchase forward to improve the tax deduction.
VAT on car fuel
HMRC hasn’t yet decided on the VAT road fuel scale charges for fuel your business buys which is used by you or one of your employees for private journeys. We’ll have to wait to see if it takes account of the switch to WLTP.
Whilst there are no plans to change the rate bands for capital allowances, vehicle excise duty or VAT road fuel scale charges, the new CO2 ratings might mean that cars bought and registered after 31 March 2020 might be subject to higher charges. If you’re considering a car in the near future, buying it on or before 1 March 2020 might save you tax.