Cars

Cars for Employees

Posted by Kath Docherty on January 19, 2018  /   Posted in Cars, Employers

The current regime for taxing employer provided cars (commonly referred to as company cars) is intended:

  • to encourage manufacturers to produce cars which are more environmentally friendly and
  • to give employee drivers and their employers a tax incentive to choose more fuel-efficient and environmentally friendly vehicles.

We set out below the main areas of importance. Please do not hesitate to contact us if you require further information.

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Capital Allowances

Posted by Kath Docherty on October 16, 2017  /   Posted in Cars, Taxation

Overview

The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However tax relief is available on certain capital expenditure in the form of capital allowances.

The allowances available depend on what you are purchasing. Here is an overview of the types of expenditure which qualify for capital allowances and the amounts available.

Capital allowances are not generally affected by the way in which the business pays for the purchase. So where an asset is acquired on hire purchase (HP), allowances are generally given as though there were an outright cash purchase and subsequent instalments of capital are ignored. However finance leases, often considered to be an alternative form of ‘purchase’ and which for accounting purposes are included as assets, are denied capital allowances. Instead the accounts depreciation is usually allowable as a tax deductible expense.

Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a revenue tax deductible business expense. It is not part of the capital cost of the asset.

If alternatively a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a revenue tax deductible expense so no capital allowances are available.

Plant and machinery

This includes items such as machines, equipment, furniture, certain fixtures, computers, cars, vans and similar equipment you use in your business.

Note there are special rules for cars and certain ‘environmentally friendly’ equipment and these are dealt with below.

Acquisitions

The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.

The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. The AIA from 1 January 2016 is £200,000.

Where purchases exceed the AIA, a writing down allowance (WDA) is due on any excess in the same period. This WDA is currently at a rate of 18%. Cars are not eligible for the AIA, so will only benefit from the WDA (see special rules for cars).

Please contact us before capital expenditure is incurred for your business in a current accounting period, so that we can help you to maximise the AIA available.

Pooling of expenditure and allowances due

  • Expenditure on all items of plant and machinery are pooled rather than each item being dealt with separately with most items being allocated to a main rate pool.
  • A writing down allowance (WDA) on the main rate pool of 18% is available on any expenditure incurred in the current period not covered by the AIA or not eligible for AIA as well as on any balance of expenditure remaining from earlier periods.
  • Certain expenditure on buildings fixtures, known as integral features (eg lighting, air conditioning, heating, etc) is only eligible for an 8% WDA so is allocated to a separate ‘special rate pool’, though integral features do qualify for the AIA.
  • Allowances are calculated for each accounting period of the business.
  • When an asset is sold, the sale proceeds (or original cost if lower) are brought into the relevant pool. If the proceeds exceed the value in the pool, the difference is treated as additional taxable profit for the period and referred to as a balancing charge.

Special rules for cars

There are special rules for the treatment of certain distinctive types of expenditure. The first distinctive category is car expenditure. Other vehicles are treated as general pool plant and machinery but cars are not eligible for the AIA. The treatment of car expenditure depends on when it was acquired and is best summarised as follows:

Acquisitions from April 2018

The government has announced the following changes to the capital allowance rules for cars.

Type of car purchase Allocate Allowance
New low emission car not exceeding 50g/km CO2 Main rate pool 100% allowance
Not exceeding 110 g/km CO2 emissions Main rate pool 18% WDA
Exceeding 110 g/km CO2 emissions Special rate pool 8% WDA

From 1 / 6 April 2015 to 31 March / 5 April 2018

The capital allowance treatment of cars is based on the level of CO2 emissions.

Type of car purchase Allocate Allowance
New low emission car not exceeding 75g/km CO2 Main rate pool 100% allowance
Not exceeding 130 g/km CO2 emissions Main rate pool 18% WDA
Exceeding 130 g/km CO2 emissions Special rate pool 8% WDA

Acquisitions from April 2013 to 31 March / 5 April 2015

Type of car purchase Allocate Allowance
New low emission car not exceeding 95g/km CO2 Main rate pool 100% allowance
Not exceeding 130 g/km CO 2 emissions Main rate pool 18% WDA
Exceeding 130 g/km CO 2 emissions Special rate pool 8% WDA

Non-business use element

Cars and other business assets that are used partly for private purposes, by the proprietor of the business (ie a sole trader or partners in a partnership), are allocated to a single asset pool irrespective of costs or emissions to enable the private use adjustment to be made. Private use of assets by employees does not require any restriction of the capital allowances.

The allowances are computed in the normal way so can in theory now attract the 100% AIA or the relevant writing down allowance. However, only the business use proportion is allowed for tax purposes. This means that the purchase of a new 70g/km CO2 emission car which costs £15,000 with 80% business use will attract an allowance of £12,000 (£15,000 x 100% x 80%) when acquired.

On the disposal of a private use element car, any proceeds of sale (or cost if lower) are deducted from any unrelieved expenditure in the single asset pool. Any shortfall can be claimed as an additional one off allowance but is restricted to the business use element only. Similarly any excess is treated as a taxable profit but only the business related element.

Environmentally friendly equipment

This includes items such as energy saving boilers, refrigeration equipment, lighting, heating and water systems as well as new cars with CO2 emissions up to 75 g/km (reducing to 50 g/km from  April 2018).

A 100% allowance is available to all businesses for expenditure on the purchase of new environmentally friendly equipment.

  • www.gov.uk/guidance/energy-technology-list gives further details of the qualifying categories.
  • where a company (not an unincorporated business) has a loss after claiming 100% capital allowances on green technology equipment (but not cars) they may be able to reclaim a tax credit from HMRC.

Short life assets

For equipment you intend to keep for only a short time, you can choose (by election) to keep such assets outside the normal pool. The allowances on them are calculated separately and on sale if the proceeds are less than the balance of expenditure remaining, the difference is given as a further capital allowance. This election is not available for cars or integral features.

For assets acquired from 1 April 2011 (6 April for an unincorporated business) the asset is transferred into the pool if it is not disposed of by the eighth anniversary of the end of the period in which it was acquired.

Long life assets

These are assets with an expected useful life in excess of 25 years. These assets are combined with integral features in the 8% special rate pool.

There are various exclusions including cars and the rules only apply to businesses spending at least £100,000 per annum on such assets so that most smaller businesses are unaffected by these rules.

Other assets

Capital expenditure on certain other assets qualifies for relief. Please contact us for specific advice on areas such as qualifying expenditure in respect of enterprise zones and research and development.

Claims

Unincorporated businesses and companies must both make claims for capital allowances through tax returns.

Claims may be restricted where it is not desirable to claim the full amount available – this may be to avoid other allowances or reliefs being wasted.

For unincorporated businesses the claim must normally be made within 12 months after the 31 January filing deadline for the relevant return.

For companies the claim must normally be made within two years of the end of the accounting period.

How we can help

The rules for capital allowances can be complex. We can help by computing the allowances available to your business, ensuring that the most advantageous claims are made and by advising on matters such as the timing of purchases and sales of capital assets. Please do contact us if you would like further advice.

Business Motoring – Tax Aspects

Posted by Kath Docherty on October 16, 2017  /   Posted in Cars, Taxation

This factsheet focuses on the current tax position of business motoring, a core consideration of many businesses. The aim is to provide a clear explanation of the tax deductions available on different types of vehicle expenditure in a variety of business scenarios.

Methods of acquisition

Motoring costs, like other costs incurred which are wholly and exclusively for the purposes of the trade are tax deductible but the timing of any relief varies considerably according to the type of expenditure. In particular, there is a fundamental distinction between capital costs and ongoing running costs.

Purchase of vehicles

Where vehicles are purchased outright, the accounting treatment is to capitalise the asset and to write off the cost over the useful business life as a deduction against profits. This is known as depreciation.

The same treatment applies to vehicles financed through hire purchase with the equivalent of the cash price being treated as a capital purchase at the start with the addition of a deduction from profit for the finance charge as it arises. However, the tax relief position depends primarily on the type of vehicle, and the date of expenditure.

A tax distinction is made for all businesses between a normal car and other forms of commercial vehicles including vans, lorries and some specialist forms of car such as a driving school car or taxi.

Tax relief on purchases

Vehicles which are not classed as cars are eligible for the Annual Investment Allowance (AIA) for expenditure incurred. The AIA provides a 100% deduction for the cost of plant and machinery purchased by a business up to an annual limit. The amount of AIA available varies depending on the period of the accounts. The current amount of AIA is £200,000 and prior to 1 January 2016 was £500,000.

Where purchases exceed the AIA, a writing down allowance (WDA) is due on any excess in the same period. The WDA available is currently at a rate of 18% or 8% depending on the asset. Cars are not eligible for the AIA, so will only benefit from WDA.

Capital allowance boost for low–carbon transport

A 100% First Year Allowance (FYA) is currently available for businesses purchasing zero-emission goods vehicles or gas refuelling equipment. Both schemes were due to end on 31 March 2018 but have been extended for a further three years.

Writing Down Allowances (WDA)

The writing down allowance rates are 18% on the main rate pool and 8% which applies to many higher emission cars which are part of the special rate pool.

Complex cars!

The green car

Cars generally only attract the WDA but there is one exception to this and that is where a business purchases a new car with low emissions – a so called ‘green’ car. Such purchases attract a 100% allowance to encourage businesses to purchase cars which are more environmentally friendly. From April 2015 a 100% write off is only available where the CO2 emissions of the car do not exceed 75g/km (reducing to 50g/km from April 2018). The cost of the car is irrelevant and the allowance is available to all types of business.

When did you buy?

There have been significant changes to the basis of capital allowances for car purchases and the tax relief thereon. The allowances due are determined by whether the car was purchased

  • from April 2018 (proposed)
  • from April 2015 to April 2018
  • or between April 2013 and April 2015.

The dates are 1 April for companies and 6 April for individuals in business.

For purchases from April 2018:

The annual allowance is dependent on the CO2 emissions of the car.

Cars with emissions between 51 – 110 gm/km inclusive will qualify for main rate WDA.

Cars in excess of 110 gm/km are placed in the special rate pool and will qualify for an annual WDA of 8%.

The 100% first year allowance (FYA) will be available on new low emission cars purchased (not leased) by a business is generally available where a car’s emissions do not exceed 50 gm/km.

If a used car is purchased with CO2 emissions of 50gm/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

For purchases from April 2015 to April 2018:

Cars with emissions between 76 – 130 gm/km inclusive currently qualify for main rate WDA.

Cars in excess of 130 gm/km are placed in the special rate pool and will qualify for an annual WDA of 8%.

The 100% first year allowance (FYA) available on new low emission cars purchased (not leased) by a business is generally available where a car’s emissions do not exceed 75gm/km.

If a used car is purchased with CO2 emissions of 75gm/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

For purchases from April 2013 to April 2015:

Cars with emissions between 96 – 130gm/km inclusive qualify for main rate WDA.

Cars in excess of 130 gm/km are placed in the special rate pool and will qualify for an annual WDA of 8%.The 100% first year allowance (FYA) available on new low emission cars purchased (not leased) by a business is generally available where a car’s emissions do not exceed 95 gm/km.

If a used car is purchased with CO2 emissions of 95gm/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

Non-business

Any cars used by the self employed where there is part non–business use will still be separately allocated to a single asset pool. The annual allowance will initially be either the current 18% or 8% depending on the CO2 emissions and then the available allowance will be restricted for the private use element.

Example

A company purchases two cars for £20,000 in its 12 month accounting period to 31 March 2017. The dates of purchase and CO2 emissions are as follows:

White car Blue car
1 May 2016 1 May 2016
125 145

Allowances in the year to 31 March 2017 relating to these purchases will be:

White car (main pool as emissions less than 130) Blue car (special rate pool as emissions more than 130)
£20,000 @ 18% = £3,600 £20,000 @ 8% = £1,600

In the following year to 31 March 2018 the allowances will be:

White Blue
£16,400 @ 18% = £2,952 £18,400 @ 8% = £1,472

Disposals

Where there is a disposal of plant and machinery from the main or special rate pools any balance of expenditure, after taking into account sale proceeds, continues to attract the annual allowance.

Where there is a disposal of a car held in a single asset pool, the disposal proceeds are deducted from the balance of the pool and a balancing allowance or a balancing charge is calculated to clear the balance on the pool.

This applies to any cars used by the self employed with part non business use whenever purchased.

What if vehicles are leased?

The first fact to establish with a leased vehicle is whether the lease is really a rental agreement or whether it is a type of purchase agreement, usually referred to as a finance lease. This is because there is a distinction between the accounting and tax treatment of different types of leases.

Tax treatment of rental type operating leases (contract hire)

The lease payments on operating leases are treated like rent and are deductible against profits. However where the lease relates to a car there may be a portion disallowed for tax.

Currently a disallowance of 15% will apply for cars with CO2 emissions which exceed 130gm/km.

Example

Contract signed 1 April 2017 by a company:

The car has CO2 emissions of 136 gm/km and a £6,000 annual lease charge. The disallowed portion would be £900 (15%) so £5,100 would be tax deductible.

Tax treatment of finance leased assets

These will generally be included in your accounts as fixed assets and depreciated over the useful business life but as these vehicles do not qualify as a purchase at the outset, the expenditure does not qualify for capital allowances unless classified as a long funded lease. Tax relief is generally obtained instead by allowing the accounting depreciation and any interest/finance charges in the profit and loss account – a little unusual but a simple solution!

Private use of business vehicles

The private use of a business vehicle has tax implications for either the business or the individual depending on the type of business and vehicle.

Sole traders and partners

Where you are in business on your own account and use a vehicle owned by the business – irrespective of whether it is a car or van – the business will only be able to claim the business portion of any allowances. This applies to capital allowances, rental and lease costs, and other running costs such as servicing, fuel etc.

Providing vehicles to employees

Where vehicles are provided to employees irrespective of the form of business structure – sole trader/partnership/company – a taxable benefit generally arises for private use. A tax charge will also apply where private fuel is provided for use in an employer provided vehicle. For the employer such taxable benefits attract 13.8% Class 1A National Insurance.

Vans

No charge applies where employees have the use of a van and a restricted private use condition is met. For details on what this means please contact us. Where the condition is not met there is a flat rate charge per annum. These benefits are £3,230 for the unrestricted private use plus an additional £610 for private fuel 2017/18 (£3,350 and £633 for 2018/19).

How we can help

If you would like further details on any matter contained in this factsheet please contact us.

Tax and the Company Car

Posted by Kath Docherty on January 19, 2017  /   Posted in Cars, Employers

One of the most frequently asked questions we receive is in relation to the use of cars for business purposes and how this will affect the tax liability.

Here, we will look at the various options available for business owners when it comes to work transport.

The current system of tax relief and benefits in kind are all linked to the CO2 emission of the car. There are a number of initiatives now underway to reduce emissions from vehicles. Thinktank Policy Exchange have reported that 70% of nitrogen dioxide emissions in London are caused by diesel cars and vans.

The tax system has long been used to incentive behaviour. With air pollution and congestion becoming key issues within London and other major cities, the government has put in place a system which encourages company car buyers towards efficient green vehicles.

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