Business cars and corporation tax

HM Treasury has published a technical note which provides a greater level of detail on how the new capital allowance regime being introduced for all business cars from 1 April 2009 will work.

Acquisition of business cars

What is happening?

The expenditure on all business cars will be treated in three ways, depending on the CO2 emissions of each vehicle. Diesel and petrol engine vehicles will be treated the same way.

* Companies purchasing cars with emissions of 110g/km or below will be able to write down the full cost of these vehicles against their taxable profits in the first year of ownership

* Companies purchasing cars with emissions between 111g/km and 160g/km must allocate the expenditure to the general plant and machinery pool – where they will be able to write down 20 % of the cost of these vehicles against their taxable profits each year, on a reducing balance basis

* Companies purchasing cars with emissions of 161g/km and above must allocate the expenditure to a ‘special rate’ plant and machinery pool – where they will be able to write down only 10 % of the cost of these vehicles against their taxable profits each year, on a reducing balance basis

When do the new rules apply?

The new rules will affect any ‘expenditure incurred’ on or after 1 April 2009.

What does expenditure mean?

Expenditure is incurred as soon as there is an ‘unconditional obligation’ to pay for an asset, providing the expenditure is due to be paid within four months. For example, if a contract to purchase cars is entered into on 31 March 2009 and requires payment to be made on 31 July 2009, the payment obligation is treated as arising on 31 March 2009. These rules cater for situations where expenditure is incurred even though the cars are not delivered for some time after the new regime has started.

What if the car is delivered after 1 August 2009?

If the contract becomes unconditional after 8 December 2008 and the car is made available on or after 1 August 2009, the new rules will apply even if the expenditure is incurred before 1 April 2009.

If the contract becomes unconditional before 8 December 2008 for a car being made available on or after 1 August 2009, the current rules will apply.

What happens to cars treated under the current regime?

The existing ‘expensive cars’ regime for vehicles costing over £12,000 (with an annual writing down cap of £3,000 and a balancing adjustment on disposal) will remain in place for five years. Any balance of unrelieved expenditure left after the five years will be added to the general pool of unrelieved expenditure. This transitional period will finish at the close of the businesses’ first chargeable period to end on or after 31 March 2014.

Leasing of business cars

What is happening?

Cars being leased on or after 1 April 2009 will be treated in one of two ways:

o Cars with CO2 emissions of 160g/km or less will face no lease rental restriction, meaning that the cost of the lease is fully deductable against taxable corporate profits.

o Companies leasing cars with CO2 emissions of 161g/km or more will face a 15% lease rental restriction, meaning that they can only deduct 85% of any rental payments against their taxable profits. If there is a chain of leases, this disallowance will apply only to rental payments made by one lessee in a chain of leases.

What about leases that commence before 1 April 2009?

All lease rental payments for cars costing more than £12,000 will be subject to the existing rules until termination of the lease.

What if the lease starts before 1 April 2009 but the car is delivered afterwards?

The new rules will apply. The lease will be regarded as commencing from the date when the lessee is entitled to use the car under the lease.