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Tax Allowances

Tax Allowances for Company Cars

Acquisition of business cars

Purchase

  • From April 2021 until April 2025 Companies purchasing zero emission cars are able to write down the full cost of these vehicles against their taxable profits in the first year of ownership
  • Companies purchasing cars with CO2’s of 50g/km or less should allocate the expenditure to the main rate pool – where they will be able to write down 18% of the cost of these vehicles against their taxable profits each year, on a reducing balance basis.
  • Companies purchasing cars with emissions of 51g/km and above must allocate the expenditure to a ‘special rate’ plant and machinery pool – where they will be able to write down only 6% of the cost of these vehicles against their taxable profits each year, on a reducing balance basis.

Leasing

  • The percentage of leasing and contract hire payments that are allowable against a companies profits have improved considerably since the changes introduced in April 2009.
  • Quite simply for cars with CO2 emissions of less than 51g/km 100% of the rentals are allowable.
  • For cars with CO2 emissions of 51g/km or above, 85% of the rentals can be deducted from a company’s taxable profit.
  • From a purely financial standpoint it looks as if leasing could become the dominant method of funding for most cars” Dan Rees, Business Car Consultant, Deloitte & Touche

Tax Allowances – Commercial Vehicles

Purchase

  • The allowances when purchasing commercial vehicles (CV) are much more straightforward than those for cars.
  • For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments, this includes commercial vehicles.
  • Irrespective of the price or CO2’s of the CV they are placed in the general plant and machinery pool and written down at 18% per annum on a reducing balance basis. In other words in the first year 18% of the price paid for the CV is allowable against profits
  • It is worth noting that there is an Annual Investment Allowance (AIA) providing 100% relief for the first £1 million of a company’s expenditure on plant and machinery, including commercial vehicles. This is available until 31st March 2023.

Leasing

  • 100% of the leasing/contract hire rentals of a CV are allowable against profits regardless of price or CO2’s of the vehicle

Benefits of Business Car Leasing

Minimum capital expenditure

Accurate monthly budgeting

Improved cash flow

Fixed interest rates

Rentals can be offset against the businesses profits.

Reduced administration

On-going advice and support

Road Fund Licence provided (vehicle excise duty paid) for duration of contract

Optional maintenance package

Optional breakdown rescue cover

Optional replacement vehicle cover in event of breakdown

Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company

Disadvantages

Early termination can be expensive

If you do more miles than stated in your contract you will be charged excess mileage for each mile over that stated in your contract

You must look after the vehicle and return it in a well maintained condition otherwise you will be charged for any damage over and above that stated in the ‘Fair Wear and Tear Guide’

You must have fully comprehensive vehicle insurance

What is Business Contract Hire?

Contract Hire, sometimes referred to as an Operating Lease, is a long term rental agreement. Contracts range from 12 to 60 months and are tailored to the businesses requirements.

The Contract Hire Company reclaims the VAT on the original purchase, which reduces your monthly rentals (which are + VAT). Contract Hire is a very popular choice for VAT registered companies as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT Scheme).

On contracts with maintenance the VAT on the service element is 100% recoverable. One of the major benefits is that there are no disposal worries as the future value is underwritten by the leasing company. Another benefit of Contract Hire is that it is generally ‘off balance sheet funding’ (subject to legislation change) which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.