The proposed legislation for business expenditure on cars is likely to come into effect from April 2009

What are the advantages of accelerating the purchase of expensive cars in advance of the proposed new capital allowance regime from April 2009?

What are the current rules?

Each expensive car (ie those costing more than £12,000) is entered into its own capital allowance pool and is entitled to a 20% writing down allowance (WDA) (capped at £3,000 per annum). On disposal, the sale proceeds of the car, restricted to the original cost, are compared with the amount remaining in the pool. Owing to the normal depreciation rate of cars, the residue in the pool is likely to exceed the disposal proceeds and as such a balancing allowance is given. 

What are the proposed changes?

The Government announced changes to the above capital allowances regime in respect of expensive cars in the 2008 Budget. We will not actually have the final provisions in legislation until the 2009 Finance Bill is enacted, which is likely to be in July 2009. Nevertheless, these changes are due to come into effect from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses.

The proposed changes are detailed in the technical note issued by HM Revenue and Customs (HMRC). Under the draft legislation the capital allowances that can be claimed on cars will be based on the emissions of the vehicles. The legislation provides that WDA rates of 10% and 20% for expenditure incurred on cars with CO2 emission levels >160g/km and >110g/km respectively.

It is proposed that cars generating a CO2 output of less than 110g/km will continue to be entitled to a 100% allowance.

The 10% special rate pool will now incorporate all higher emission cars together with long life assets and the new integral features class of assets that was introduced in 2008. It is important to note that no balancing allowances are given against this pool therefore allowances will continue to be given long after the car (or other asset) has been sold or scrapped.

What about expenditure incurred before April 2009?

Under the draft legislation, expensive cars (ie cars costing more than £12,000) purchased before April 2009 will continue to generate 20% allowances (capped at £3,000 per annum) and once sold the disposal will give rise to a balancing adjustment. This is provided the car is sold within a five year transitional period. After five years have elapsed the Written Down Value (WDV) of the car will be transferred to the general pool. It is proposed that the five year period will run until the end of the first accounting period of the business ending after 31 March 2014 for companies or 5 April 2014 for unincorporated businesses.

The draft legislation also contains anti-avoidance rules to prevent planning to take advantage of the current rules. These provisions will impose the new emissions-based rules even if expenditure is incurred before April 2009, where the purchaser enters into an unconditional contract after 8 December and car is only made available after 1 August 2009 where the purchaser is a company or 6 of August 2009 where the purchaser is an unincorporated business.

For non-expensive cars contained within the general pool, expenditure incurred before 1/6 April 2009 will continue to be entitled to the 20% WDA under the old regime and will not be restricted if the emissions exceed 160g/km.

Is there anything businesses can do now?

Assuming that there are no substantial changes to the draft legislation prior to its enactment, there may be advantages for businesses considering purchasing cars, particularly, high-polluting (>160g/km) or expensive cars, to enter into binding purchase agreements and incur the expenditure before the commencement dates in April 2009.

The following table illustrates the difference in the tax relief that could be obtained under the old and the new rules.

If businesses will be incurring expenditure on cars after April 2009 then now more than ever lower emission cars should be given serious consideration particularly those with CO2 emissions less than 110g/km, giving businesses a 100% WDA on expenditure. This is compounded by the fact that the benefit in kind charge on cars provided by employers to employees is already calculated by reference to the car's emissions. Further information regarding low emission cars can be found on the 'Direct Gov' website.

Peter Stoddart, Senior Manager at Grant Thornton says: " The benefit of the balancing allowance on the disposal of an expensive car is often used to enable extra cash to be available to purchase new cars. Any businesses that are thinking of purchasing a car in the next few months may want to consider bringing that purchase forward so that any expenditure is incurred prior to 1 April 2009 for incorporated businesses, and prior to 6 April 2009 for unincorporated businesses enabling them to benefit from the potential balancing allowance on the disposal of the car. However, care will need to be taken to ensure that the anti-avoidance provisions do not apply and expenditure incurred before April 2009 is not subject to the new rules."

Please contact us if you would like further advice on any of the above.