There are just a few months to go until one of the biggest taxation changes to affect fleet cars since the launch of CO2-based benefit-in-kind tax.

 

A major rewrite of the rules surrounding capital allowances for company cars has created tax incentives worth hundreds of thousands of pounds for running low emission cars.

The new 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.

Writing-down allowance

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,” says Alison Chapman, automotive tax partner, Deloitte.

“From April 1, 2009, corporation tax relief will be 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.”

A tiny number of fleets may be able to take advantage of an additional tax break, which offers 100% first-year capital allowances on vehicles with CO2 emissions of 110g/km and below.

This continues until at least 2013.

For companies that lease their cars, a similar system will apply.

A company will be able to 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 any higher.

All these changes will affect cars that are put on to the fleet after April 1, 2009.

Emissions benchmark

According to British Vehicle Rental and Leasing Association figures, 40% of cars currently on lease emit more than 160g/km of CO2, but it expects this to decline with the new rules.

The organisation estimates that the proportion of sub-161g/km cars will reach 80% by April, when the new rules come into effect.

But fleets must review their policies and procedures carefully if they are going to target this emissions benchmark.

Fleet managers should bear in mind that changes to the basic vehicle specification during ordering can have an impact on the final CO2 figure.

Time to prepare

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.”

Any fleet managers that have not started preparing their fleets for these changes are advised to start now.

If nothing else, remember the magic emissions number of 160g/km – it’s the key to keeping your business costs under control.

 

 


Why lease rates could rise

The new rules could spell a significant rise in leasing rates, according to Alastair Kendrick of international accountants Mazars.

Currently, leasing companies get a balancing allowance on the disposal of vehicles, which means they get the full value of tax relief within the fleet cycle.

But under the new rules they will no longer get a balancing allowance. Instead they claim capital allowances on a reducing balance basis, which will still be being claimed many years after the car has been defleeted.

“Leasing companies will be out of pocket for longer,” says Mr Kendrick.

“I’ve seen one calculation, which I believe to be correct, that it will take 43 years to receive full tax relief.

“That means leasing companies will have to charge more to their customers to recompense for the money they are waiting for.”

And he pointed out that leasing companies will have to ‘take a punt’ on what the tax rate will be in 43 years’ time.

BVRLA’s guide to tax changes

Old

Cars up to £12,000 capital cost are written down at 25% per annum in a general pool.

New

Cars emitting 111g/km-160g/km written down at 20% pa in general pool. No balancing allowance. Cars emitting up to 110g/km can have their cost fully written off against taxable profits in the first year.

Old

Cars more than £12,000 capital cost written down at 20% pa to a maximum of £3,000 pa. Individual balancing allowance or charge on disposal.

New

Cars emitting more than 160g/km written down at 10% in a new special pool on a reducing balance basis. No balancing allowance.

Old

For cars more than £12,000 capital cost, part of the finance element is disallowed against lessees’ business expenses.

New

For cars emitting up to 160g/km, the disallowance is removed. If a car emits more than 160g/km,
then the disallowance applied is 15%.

  • Additional reporting by John Maslen and Sarah Tooze