The rules for claiming capital allowances on cars are complex. But with careful tax planning it is possible to reduce your taxable profits and tax bill by claiming the full extent of tax relief available on car purchases.
Capital allowances on cars operate under different rules to capital expenditure on plant and machinery.
Capital allowances enable you to pay less tax when you purchase assets for use in your business. The allowances available to you depend on what you are purchasing – equipment, machinery or business vehicles such as vans, lorries or cars.
Whereas in most cases you can deduct the full cost of these items from your profits before tax using the annual investment allowance (AIA), cars do not qualify for AIA.
For the purposes of capital allowances, a car is a vehicle that is suitable for private use that was not built for transporting goods.
Vehicles which are not classed as cars (lorries, vans and trucks, motorcycles purchased before 6 April 2009), can still qualify for AIA.
While you cannot claim AIA on cars, you can claim capital allowances on new and second-hand cars you buy and use in your business using ‘writing down allowances’.
The Government continues to use capital allowances to incentivise financially the use of ultra low emission and electric vehicles. The Finance Bill No2 2017 proposes to introduce a first-year capital allowance for electric charge points. Keeping pace with these changes and your eligibility can through careful tax planning, result in a reduced tax bill.
Claiming capital allowances on cars – ‘Writing down allowance’
Writing down allowances allow you to deduct a percentage of the value of an item from your profits each year.
They are available where you have exceeded the limit for AIA, or where the item does not qualify for AIA, such as a car.
The amount you can deduct for a car under the writing down allowance will depend on the rate applicable to the vehicle. You should group items into ‘pools’ depending on the relevant qualifying rate.
Capital allowances on cars rates
When purchasing a new or second-hand car, the capital allowances available for tax purposes are very specific. The percentage deductible depends on the year the car was purchased and the CO2 emissions of the vehicle.
The following table summaries the rates for capital allowances on cars:
|First Year Allowance for electric cars or if CO2 emissions are 75g/km or lower||100%|
|First Year Allowance for electric cars or if CO2 emissions are 95g/km or lower||100%|
|First Year Allowance for electric cars or if CO2 emissions are 110g/km or lower||100%|
|Writing Down Allowance if CO2 emissions exceed 75g/km but do not exceed 130g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 95g/km but do not exceed 130g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 110g/km but do not exceed 160g/km||18%|
|Writing Down Allowance if CO2 emissions exceed 130g/km||8%|
|Writing Down Allowance if CO2 emissions exceed 160g/km||8%|
Note that emissions thresholds will be reduced to 50g/km and 110g/km for expenditure on or after 1 April 2018.
How do I work out how much I can claim?
Before you can claim for capital allowances on cars, you must first calculate the value of your claim.
Do this by identifying the percentage rate each car qualifies for according to the prescribed rates (see table above), and apply this to the value of the car(s). You then deduct the total figure for your claim from your profits before tax on your tax return.
The value of the car is usually the total price you paid for the item, including VAT.
You cannot recover any VAT paid when you buy a car, even if your business is VAT registered. VAT can only be recovered on vans and motorbikes.
If the car was a gift, or you owned it before you started using it in your business, you should instead use the market value i.e. the amount you could expect it to sell for.
When can I make a claim for capital allowances on cars?
For companies the claim must normally be made within two years of the end of the accounting period.
Can I claim for capital allowance rates on second-hand cars?
100% allowances are only available in relation to the purchase of new and unused cars.
If a vehicle is purchased second-hand, the 18% rate will apply even if the emissions fall within the 100% allowances category.
Can I claim capital allowances if I use the car for private purposes outside business?
You can still claim capital allowances on your car, but only for the proportion of business use of the car (or of any other asset that has private use).
Sole traders and partners who use their car outside business are advised to claim using ‘simplified mileage expenses’ (ie flat rate mileage).
Can I claim for a company car purchased for an employee?
Employees are not eligible to claim capital allowances on cars, motorbikes and bicycles used in business.
Where a car is purchased by a business and is available to the employee for their private use, there is no restriction on the allowances available to the company, nor on the running costs paid for by the business. However it becomes a taxable benefit in kind for the individual.
There will also be Class 1A National Insurance payable by the business on the value of the taxable benefit in kind.
We can advise on the costs to your business and the employee that will be generated under both options arrangements: holding a car within a company and suffering the taxable benefit in kind, or holding the car personally and charging the company a mileage charge for business miles.
What happens if I sell the car?
When you sell – or ‘dispose’ of – a car that you have claimed capital allowances on, you should include the value in your calculations for the accounting period you sell it in.
The only exemption is if you give the car away to a charity or ‘community amateur sports club’.
Disposing of the car will include the following:
- Giving it away as a gift or transferring it to someone else
- Swapping it for something else
- Receiving compensation for it – like an insurance pay-out if stolen or written-off
- Keeping it but no longer using for business
- Starting to use it outside your business
The value is what you sold the car for. You should use the market value if you disposed of the car as a gift, or sold it for less than market value to a ‘connected person’ (immediate family and business partner and family).
If you originally used writing down allowances, deduct the value from the pool you originally added the item to when purchased.
The amount left is the amount you use to work out your next writing down allowances.
Can I claim capital allowances on a leased car?
This will depend on the type of lease involved.
Payments on an ‘operating lease’ will be treated as revenue expenditure and a business element deducted from taxable income. Payments on a ‘finance lease’ will be eligible for capital allowances.
Operating leases cover those agreements where an individual pays lease payments and either extends the lease, or returns the car at the end of the contract term. The car dealer (lessor) retains ownership of the car throughout, and there must be no option to purchase the car at the end of the lease. For operating leases, the relevant portion of business expenditure can be deducted from the lessee’s taxable income.
A finance lease is effectively a loan, secured on the asset (car). Hire purchases usually fall within this type of lease as legal ownership of the car may transfer to the lessee at the end of the lease, or there may be an option of a final payment to purchase the car.
When considering capital allowances, the lessee is regarded as the owner of the car from the beginning of the agreement. The lessee can treat the car as a capital purchase and claim the allowances on the cost of the car, subject to business use element. Only the capital element of the repayments is eligible for capital allowances. Interest element can be claimed as part of general motor expenses.
If the car is not purchased at the end of the lease, it is disposed of at a pre-determined residual value. This is usually the value of the final “balloon” payment. If this is less than the written down value of the car, then a further balancing allowance may be claimed.
Advice can help
If you are unsure as to your tax position for capital allowances, seek assistance to assess your capital expenditure, including the purchase of plant, machinery and vehicles including cars.