How Capital Allowance rules reward low CO2 cars

Capital Allowance was arguably the biggest taxation shake up to the company car market when it was introduced in April 2009. The major rewrite of the rules surrounding capital allowances for company cars created tax incentives worth hundreds of thousands of pounds for companies running low emission cars.

The rules are designed to incentivise cars that emit 160g/km or less of CO2 by allowing companies to offset a much greater part of the value of the car against their tax bill compared to cars outside the benchmark.

The rules are slightly different for purchased and leased cars, but have the same CO2 target.

For companies that purchase their fleet vehicles, for any car with emissions above 160g/km, they will only be able to write down 10% of its value each year.

However, if the car has emissions of 160g/km and below, the writing-down allowance will double to 20%, allowing the company to claim back the cost of the vehicle more quickly.

In both cases, the percentage claimed back will be on the reducing value of the car, so a company will be able to claim less each year as time passes.

It will still be offsetting the value of the car against tax years after it has left the fleet. CO2 emissions can no longer be treated as simply a driver issue - corporation tax relief is significantly affected by the CO2 emissions of the car.
The new rules push some of the tax relief into the future so that, in some cases, a large part of the tax relief is delayed until years after the car is sold. There is clearly a cost associated with this. Reduced tax relief means more tax to pay now.

There is an additional tax break for those fleets running the most CO2 efficient cars: vehicles with CO2 emissions of 110g/km and below can write down 100% of its value in the first year. This continues until at least 2013.
For companies that lease their cars, a similar system applies.

A company can offset 100% of the qualifying part of the lease against profits if the vehicle emits 160g/km or less.
It will only be able to offset 85% (as there is a 15% disallowance) if the vehicle emissions are higher.
Fleet managers should bear in mind that changes to the basic vehicle specification during ordering can have an impact on the final CO2 figure.

John Lewis, director general of the BVRLA, warned: “I think fleet managers should be careful about those cars falling close to the 160g/km and 110g/km tipping points.

“Some extras – maybe different tyres or automatic transmission – will affect the car’s emissions, possibly putting it over the break point. "Believing a car to be a sub-110g/km vehicle and finding out later that it is a 110g/km-plus vehicle would be particularly painful.”

Click here to download the CO2 Emissions Tool.