From 1st April 2009, important changes are being made to the tax treatment of cars which will impact all organisations that buy, own or lease cars. These changes are the most significant changes to the tax treatment of vehicles since the company car tax was linked to emissions in 2002.
The new rules will make it more tax efficient to buy or lease a company vehicle that emits 160g per kilometre of CO2 or less, and more expensive to buy or lease one that emits 161g/km or more.
Current rules
Under the current rules, corporation tax for business cars is divided into three main parts:
For expensive cars, a proportion of the finance cost is disallowed in the corporation tax calculation. The proportion disallowed is on a sliding scale dependent on the cost of the car, rising from zero at £12,000 to over 30% for cars costing over £30,000.
Lease rental restriction – new rules
The proportion of the finance cost disallowable for corporation tax will also move to being emissions based.
There will be no restriction for cars up to and including 160 g/km CO2 but for vehicles emitting 161 g/km CO2 or more there will be a flat rate restriction of 15% on the finance part of the rental. This will reduce the after tax cost of vehicles emitting over 161 g/km CO2 and costing in excess of £20,000 when compared to the current rules.
New rules
Under the new tax regime, the cost of the car will not determine the taxation treatment; instead it will move to an emissions based system. The corporation tax rules are again divided into three main parts:
CO2 emission output of vehicle110g/km CO2 or less 111 to 160g/km CO2 161g/km CO2 or greater.
Why are things changing?
The changes are due to the government's targets to lower CO2 emissions and to encourage consumers and businesses into more environmentally-friendly and fuel efficient vehicles. The Chancellor of the Exchequer, Alistair Darling, has set the agenda to encourage businesses to own and use cars emitting the least amount of CO2 by linking the writing down allowance to the CO2 rating of the vehicle.
Car manufacturers have also been set a target of reducing average emissions of new cars to 130g/km by 2012.
The changes aim to simplify the administration process for fleets and reduce fuel and tax bills by encouraging switching to lower emission vehicles.
Cars registered before 1st April 2009
The new corporation tax rules will be applied to all new business delivered from 1st April 2009. The government has yet to confirm how it will affect vehicles acquired before this date, though it is hoped these will be dealt with under the existing regime.
What about vans?
The changes announced are for cars only. Vans and commercial vehicles delivered after 1st April 2009 will continue to attract a 20% writing down allowance on a reducing balance basis.
Advice
Regardless of how many cars you run, now is the time to review your business car strategy to ensure that you can take full advantage of the new tax regime when it arrives on 1st April 2009.
Currently, as cars become more expensive the relative benefits of leasing are reduced by the impact of the lease rental restriction. Under the new system, cars emitting 160g/km CO2 or less are likely to be cheaper to lease for many businesses. Cars emitting 161g/km CO2 or more will become more expensive to own, regardless of the method of funding. With this in mind, drivers are advised to review their car policies with immediate effect, examining the pre and post tax cost of their vehicles.
Clearly, two identically priced cars may cost the same to lease or purchase, but, depending on emissions they could have a dramatically different after-tax cost, particularly as the corporation tax regime is now dependent on CO2 outputs. Vehicle Excise Duty (VED) and the scale charge used for Benefit in Kind (BIK) tax and computing National Insurance contribution calculations have been CO2 based for some years. Fleet managers are encouraged to review their existing fleet to see which cars costing more than £12K (expensive cars) would fair more favourably under the new regime.
The new rules will make it more tax efficient to buy or lease a company vehicle that emits 160g per kilometre of CO2 or less, and more expensive to buy or lease one that emits 161g/km or more.
Current rules
Under the current rules, corporation tax for business cars is divided into three main parts:
- Cars with emissions of 110 g/km CO2 or less attract a 100% first-year writing down allowance (regardless of vehicle cost).
- Cars which cost less than £12,000 are put in a pool and attract a writing down allowance of 20% on a reducing balance basis subject to a maximum of £3,000 per annum.
- Cars costing more than £12,000 are deemed to be "expensive cars". A separate calculation is performed for expensive cars on a vehicle by vehicle basis and the writing down allowance is subject to the maximum of £3,000 per annum.
- Lease rental restriction - current rules
For expensive cars, a proportion of the finance cost is disallowed in the corporation tax calculation. The proportion disallowed is on a sliding scale dependent on the cost of the car, rising from zero at £12,000 to over 30% for cars costing over £30,000.
Lease rental restriction – new rules
The proportion of the finance cost disallowable for corporation tax will also move to being emissions based.
There will be no restriction for cars up to and including 160 g/km CO2 but for vehicles emitting 161 g/km CO2 or more there will be a flat rate restriction of 15% on the finance part of the rental. This will reduce the after tax cost of vehicles emitting over 161 g/km CO2 and costing in excess of £20,000 when compared to the current rules.
New rules
Under the new tax regime, the cost of the car will not determine the taxation treatment; instead it will move to an emissions based system. The corporation tax rules are again divided into three main parts:
- Cars emitting 110 g/km CO2 or less will continue to receive a 100% first year allowance. This will remain in place until 2013.
- Cars emitting more than 110 g/km CO2 and below 161g/km CO2 will receive a 20% writing down allowance on a reducing balance basis.
- Cars emitting 161g/km CO2 or more will receive a 10% writing down allowance on a reducing balance basis.
CO2 emission output of vehicle110g/km CO2 or less 111 to 160g/km CO2 161g/km CO2 or greater.
Why are things changing?
The changes are due to the government's targets to lower CO2 emissions and to encourage consumers and businesses into more environmentally-friendly and fuel efficient vehicles. The Chancellor of the Exchequer, Alistair Darling, has set the agenda to encourage businesses to own and use cars emitting the least amount of CO2 by linking the writing down allowance to the CO2 rating of the vehicle.
Car manufacturers have also been set a target of reducing average emissions of new cars to 130g/km by 2012.
The changes aim to simplify the administration process for fleets and reduce fuel and tax bills by encouraging switching to lower emission vehicles.
Cars registered before 1st April 2009
The new corporation tax rules will be applied to all new business delivered from 1st April 2009. The government has yet to confirm how it will affect vehicles acquired before this date, though it is hoped these will be dealt with under the existing regime.
What about vans?
The changes announced are for cars only. Vans and commercial vehicles delivered after 1st April 2009 will continue to attract a 20% writing down allowance on a reducing balance basis.
Advice
Regardless of how many cars you run, now is the time to review your business car strategy to ensure that you can take full advantage of the new tax regime when it arrives on 1st April 2009.
Currently, as cars become more expensive the relative benefits of leasing are reduced by the impact of the lease rental restriction. Under the new system, cars emitting 160g/km CO2 or less are likely to be cheaper to lease for many businesses. Cars emitting 161g/km CO2 or more will become more expensive to own, regardless of the method of funding. With this in mind, drivers are advised to review their car policies with immediate effect, examining the pre and post tax cost of their vehicles.
Clearly, two identically priced cars may cost the same to lease or purchase, but, depending on emissions they could have a dramatically different after-tax cost, particularly as the corporation tax regime is now dependent on CO2 outputs. Vehicle Excise Duty (VED) and the scale charge used for Benefit in Kind (BIK) tax and computing National Insurance contribution calculations have been CO2 based for some years. Fleet managers are encouraged to review their existing fleet to see which cars costing more than £12K (expensive cars) would fair more favourably under the new regime.
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