Capital allowances on company cars

For many years the tax system has restricted the annual tax write-off to £3,000 per car for ‘expensive’ business cars, defined as costing more than £12,000. However, the government is intending to abolish the current restrictions and introduce new rules that will be easier for businesses to administer and will also have a beneficial environmental impact.

The proposals, which are still at the consultation stages, are that:

• the existing 100% first year allowances for cars with CO2 emissions up to 120g/km be retained
• the general plant and machinery capital allowances pool would be used for cars with CO2 emissions between 121 and 165g/km
• a new car pool would be introduced with a lower percentage tax write off known as a writing down allowance (WDA), than the general plant and machinery pool for other cars.

As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000. This means the £3,000 per annum cap on the WDA for a car would disappear.

In April 2008, the annual WDA available for the general pool would be 20% of the unrelieved expenditure in the pool. So a car costing £40,000 potentially gives a business a tax write-off in the first year of £8,000 rather than £3,000. A further advantage of the pooling concept will be that the business does not have the administrative burden of computing separate allowances for each car.

So what’s the catch? Well there is not one necessarily, but there may be if you favour an expensive, highly depreciating car for your business. Under the current system, relief may be restricted to £3,000 per annum, but when the car is sold a significant balancing allowance may be due, giving an additional tax deduction for the ‘loss’ on the disposal of the car. Under a pooling concept the sale proceeds reduce the unrelieved expenditure in the pool. The business will continue to claim WDA rather than a balancing allowance being given.