Tax on cars

From 2009/10 (i.e. from 1st  or 6th April 2009) the notion of an ‘Expensive Car’ will disappear for tax purposes. Instead of there being single asset pools for these vehicles, based on purchase cost to the business, cars will be added to the 10% or 20% pools depending on their CO2 emissions:

Over  160 g/km – 10% pool

110-160 g/km – 20% pool

Below 110 g/km – 20% pool but with 100% FYA (the significance of adding the 0% unrelieved expenditure to the pool is that any proceeds on the sale of the vehicle will be deducted from the pool on disposal)

The effect of pooling cars is that balancing adjustments will not be received on disposal and this will have a big effect on businesses that regularly replace expensive cars.

There is a transitional 5 year period where existing single asset pool cars are treated under the old rules. Thereafter these cars will be pooled.

Capital Allowances – Companies

A couple of examples below highlight that cases need to be assessed on their individual circumstances:

1) A company buying a £15,000 car in either March or April 2009, with the intention of keeping it (say) 5 years. CO2 emissions 159 g/km, disposal proceeds £4,500:

Mar-09 Old Regime
Year 1 2008-9

£15,000 @ 25% capped at

£3000
Year 2 20% £12,000 £2,400
Year 3 20% £9,600 £1,920
Year 4 20% £7,680 £1,536
Year 5 Balancing allowance £6,144 less £4,500 £1,644
£10,500
Apr-09 New Regime
Year 1 2009-10 20% £15,000 £3,000
Year 2 20% £12,000 £2,400
Year 3 20% £9,600 £1,920
Year 4 20% £7,680 £1,536
Year 5 £4,500 reduction to pool, 20% £6,144 £329
£9,185

2) A company buying a £45,000 car with the intention to keep it 3 years. CO2 emissions 195 g/km, disposal proceeds £22,000:

Old Regime
Year 1 25% £45,000 capped £3,000
Year 2 20% £42,000 capped £3,000
Year 3 Balancing allowance, £39,000 – £22,000 £17,000
£23,000
New Regime
Year 1 20% £45,000 £9,000
Year 2 20% £36,000 £7,200
Year 3 £22,000 reduction to pool, 20% 6,800 £1,360
£17,560

In both examples, the residue of expenditure in the pool continues to attract annual writing down allowances in future years, meaning that the differences between the tax allowances claimed under the old and new schemes will be recouped eventually, but not for many years.

Capital Allowances – Unincorporated Entities

The rules for unincorporated entities mirror those for companies, but, due to the nature of unincorporated entities, there is one exception. It is possible for unincorporated businesses to own vehicles that have an element of private usage. Typically this applies to cars driven by the business proprietors. Cars with private use adjustments will continue to be dealt with via single asset pools, meaning balancing adjustments on disposal will still be available.

Consider a car costing £16,000, which will be kept for 5 years, with CO2 emissions of 165 g/km and expected proceeds of £5,000 on disposal:

New Regime
No private use
Year 1 10% £16,000 £1,600
Year 2 10% £14,400 £1,440
Year 3 10% £12,960 £1,296
Year 4 10% £11,664 £1,166
Year 5 £5,000 reduction to pool, 10% £5,498 £550
£6,052
New Regime
10% private use
Year 1 90% of 10% £16,000 £1,440
Year 2 90% of 10% £14,400 £1,296
Year 3 90% of 10% £12,960 £1,166
Year 4 90% of 10% £11,664 £1050
Year 5

Balancing allowance 90% of £10,498 – £5,000

£4,948
£9,900

As with the company example above, the difference in allowances claimed will be recouped over a number of years.

Motorbikes

Under the first year allowance (FYA) scheme motorbikes were treated as if they were cars. Under the new regime, they will be excluded from the definition of cars, meaning that they will be eligible for the annual investment allowance (AIA).

Company Cars and Benefits in Kind

We all know that providing company cars is generally considered to be less cost / tax efficient than providing employees with additional money to provide their own car. Whilst this rule of thumb continues to hold largely true, consider a car like the Toyota Aygo. A basic model costs c£6,950 and has CO2 emissions of 108 g/km. As such:

Employee: – Benefit in kind £695, equating to £278 (Higher rate) or £139 (Basic rate) tax per annum

Employer: – Ers NI £89 per annum – 100% first year tax relief on the vehicle – RFL £0 (CO2 < 100 g/km) or £35 (CO2 101-120 g/km) per annum

The only question is, how do you convince your sales reps that they want a 1.0 litre Toyota Aygo?!

Other manufacturers are also working on cheap, low emission cars and something like 106 of these are below the 110 g/km threshold for FYA’s) and more below the 120 g/km (for the minimum benefit in kind charge). See:(http://www.comcar.co.uk/newcar/companycar/poolresults/110tax.cfm)

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