News

Back to News

12/12/2008 Taxman offers green incentive for company cars

Organisations that choose cleaner vehicles will now be improving their balance sheet as well as their corporate social responsibility (CSR) credentials. The Energy Saving Trust estimates that British businesses could save £2.6bn by switching to greener fleets.

However, the changes announced in the last budget also represented another key government agenda - reducing red tape. The chancellor has responded to calls from business organisations to simplify company car accounting.

Capital allowances for cars

The current capital allowance scheme for business cars is being scrapped in favour of an all-new system for new cars registered from 1 April 2009.

Capital allowances allow companies to offset the cost of items used for their business against their tax bill. The changes will affect companies who buy vehicles outright and fleets that lease their company cars.

Currently, capital allowances on company cars work in two ways, with vehicles under £12,000 written down in a general pool, at 25% on a reducing basis. Those of £12,000 and over are treated individually and their annual writing down allowance is capped at £3,000. However, for these cars a balancing adjustment can be made in the year of disposal. This effectively means that full tax-relief is given for any depreciation suffered during the period of ownership.

Firms leasing cars can claim the full cost of leasing against tax for cars costing up to £12,000. After this, the proportion of the rental cost that can be claimed falls as the value of the car increases. For example, a company can claim 80% of the rental cost of a £20,000 car, but only 75% of the rental cost of a £24,000 one. This is called the lease rental restriction (LRR).

The emissions incentive

From April 2009, a CO2 emissions threshold of 160g/km replaces the £12,000 'expensive car' benchmark used at present. This emissions-based breakpoint will be used to encourage businesses to choose cleaner cars.

Cars registered from 1 April next year with CO2 emissions above 160g/km will enter a new depreciation pool and receive a 10% writing down allowance, while those at or below 160g/km will sit in the general 20% pool. In effect this means that organisations buying a vehicle emitting 160g/km or below outright will be able to offset twice as much of the cost of its depreciation against their corporation tax bill. The creation of the 10% reducing balance pool means that there will be no balancing adjustment available for any cars, regardless of their emissions.

There is an even greater incentive for firms able to operate cars that emit less than 110g/km of CO2. The government has said that, until 2013, it will allow companies to write off the full cost of these cars in the first year.

The government has decided to eliminate the LRR for cleaner cars, meaning that from next April, companies will be able to offset 100% of their leasing payments against their tax bill if a vehicle is below the 160g/km threshold, irrespective of its capital cost.

The LRR will remain for cars emitting more than this threshold but will be fixed at a standard rate of 15%, meaning organisations will only be able to claim 85% of the financial element of their rental.

The big picture

It is clear that the tax changes coming into effect from next April will have a major impact on nearly every corporate fleet. The partial abolition and simplification of the lease rental restriction, which the BVRLA has long argued for, makes leasing a car below 160 g/km cheaper in all cases. Meanwhile, the new 15% restriction for all vehicles over 160 g/km could actually make some top-end executive cars cheaper to lease as well.

However, tax is just part of the whole life costs of a car fleet (others include depreciation, running costs and financing) and any organisation should always endeavour to get some professional advice or use modelling software to determine whether they should buy or lease company cars and which models they should offer.

This last point has become critical now that emissions play such a key role in the tax equation. Two cars that look alike and have a similar list price could have a significantly different total cost of ownership due to what comes out of the tailpipe. A difference of just 1g/km could mean many hundreds of pounds difference - for each car.