Business Motoring – Tax Aspects

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 Chancellor announced in December 2012 an increase in the limit from £25,000 to £250,000 for a period of two years from 1 January 2013. Prior to 6 April 2012 (1 April for companies) the AIA was £100,000 per annum. As the chargeable accounting periods of most businesses will span the 1 April 2012 or 1 January 2013, a pro rata calculation of their maximum AIA entitlement will be required.  Complex legislation provides details of transitional provisions where a business has an accounting period that straddles either or both of these dates.

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.

Capital allowance boost for low-carbon transport

A 100% first year allowance is available for capital expenditure on new electric vans from 1 April 2010 for companies and 6 April 2010 for an unincorporated business.

Writing Down Allowances (WDA)

From April 2012 the writing down allowance rates were reduced to 18% on the main rate pool and a rate of 8% which applies to some higher emission cars which are part of the special rate pool. It is necessary to calculate hybrid rates where the accounting period straddles April 2012 which will give a rate between 20% and 18% in the main rate pool (or between 10% and 8% in the special rate pool) for that period.

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. The 100% write off is only available where the CO2 emissions of the car do not exceed 95 grams per kilometre (g/km) for purchases from April 2013. For purchases prior to April 2013 the 100% write off is only available on cars with emissions of 110 g/km or less. 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 2013 onwards
  • or between April 2009 and April 2013
  • or prior to April 2009.

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

For purchases from April 2013

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

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%.

For purchases from April 2009 to April 2013:

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

  • Cars between 111 -160 gm/km are placed in the main pool and will qualify for an annual allowance of 18%.
  • Cars in excess of 160 gm/km are placed in the special rate pool and will qualify for an annual allowance of 8%.

If a used car is purchased with CO2 emissions of 110 g/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

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.

For purchases before April 2009 the following rules apply:

Cars costing up to £12,000 were included in the main plant pool and get the annual 18% (previously 20%) reducing allowance only.

Cars costing more than £12,000 (so called expensive cars) usually had to be allocated to a separate single asset pool. Each qualifies for the annual allowance of 18% (previously 20%) but with a maximum annual allowance on each car of £3,000.

Any cars used by the self employed with part non business use were also separately allocated to a single asset pool so that any private use element can be restricted. This does not apply to employee provided cars.

Example

A company purchases two cars for £20,000 in its 12 month accounting period to 31 March 2014. The dates of purchase and CO2 emissions are as follows:

White car Blue car
1 May 2013 1 May 2013
125 145

 

Allowances in the year to 31 March 2014 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 2015 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:

  • cars which cost more than £12,000 prior to April 2009
  • 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 (160 gm/km for leases entered into prior to April 2013.)

A different system of adjustment applies to cars where the lease agreement was entered into prior to April 2009.

Example

Contract signed 1 April 2013 by a company:

The car has CO2 emissions of 146 gm/km and a £6,000 annual lease charge. The disallowed portion would be £900 (15%) so £5,100 would be tax deductible.

Contract signed pre 1 April 2012 by a company:

The car has CO2 emissions of 146 gm/km, a retail list price of £20,000 and an annual lease charge of £6,000 There would be no adjustment due as the CO2 emissions are less than the relevant CO2 limit of 160gm/km.

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! A disallowance still applies if the vehicle is an expensive car.

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 of £3,000 for the unrestricted private use plus an additional £564 for 2013/14 for private fuel.

 

How we can help

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