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.

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.

The changes will mean that all motoring taxes give businesses a real financial incentive incentive to switch to low emissions, and therefore more fuel efficient, vehicles.
Also, the changes aim to simplify the administration process for fleets and reduce fuel and tax bills.

Our advice for customers
Regardless of how many cars you run, you need to review your business car strategy to ensure that you can take full advantage of the new tax regime by examining the whole-life cost of vehicles. For example, two £30,000 cars may cost the same to lease or purchase, but, depending on emissions, could have a dramatically different after-tax cost.

Corporation tax for business cars - 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.

New rules
From April 2009, 160g/km becomes a key CO2 emissions figure, replacing the previous £12,000 ‘Expensive Car’ threshold. Using it as a breakpoint, two new accounting incentives have been introduced to encourage businesses to choose cleaner cars. The new tax regime will be applied to all new business cars registered from 1 April 2009. The Government has yet to confirm how it will affect vehicles acquired before this date.

Corporation tax for business cars – new rules
From 1 April 2009, cars with CO2 emissions above 160g/km will receive a 10% writing down allowance, while those at or below 160g/km will attract a 20% allowance. 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.

There is an even greater incentive for firms willing to buy vehicles that produce 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 change in the balancing allowance treatment will also have a substantial impact. Previously a business could claim the entire depreciation – from the “tax allowed” written-down value to the actual sale value in the year of disposal. In future, a business can only claim the amount under the allowances of the altered write-down allowance.

Write-down allowances will now cover much longer time periods, lasting well past the date when the vehicle is sold and passed into new ownership

Unlike the current system for writing-down the value of company vehicles, cars delivered after 1st April 2009 will remain in their CO2 pool after they are disposed-of. For a typical car in the sub-160g/km CO2 pool, around 20% of its original cost will remain in the
pool after disposal proceeds are removed, and it will take around 11 years to claim 90% of this balance – or “tail” – against tax.

For cars in the over-160g/km CO2 pool, which tend to realise proportionally less money on disposal, the tail will be larger and therefore take longer to claim against tax – typically more than 20 years to claim 90% of the balance. The difference in the level of writing-down allowance and the length of the respective tax relief tails will create an increase in car ownership costs at the 160g/km CO2threshold.

Lease rental restriction - new rules
Businesses will be allowed to set the full cost of contract hire rentals against tax in respect of cars under160g/km CO2, irrespective of the car’s price. At present, only rentals on cars costing less than £12,000 are fully deductible. For cars above 160g/km CO2, rentals will be deductible except for a flat portion of 15% of the rental, which will be disallowed and therefore remain taxed. Compared with the current sliding scale of leasing disallowances for cars over £12,000,  the new system will make it cheaper than at present to lease any car costing more than £17,430 regardless of its CO2 rating.

Example (From the BVRLA)

A popular executive car, the BMW 320d ES Touring has a list price of £26,775 and emissions well under 160g/km. A typical monthly cost to lease this vehicle is £380 per month over 36 months, equivalent to £4560 a year.

Currently, a company can deduct around 72% of the cost of this rental from its Corporation Tax calculation – £3,283.

Under the new regime, from April next year the company will be able to deduct the full cost of the rental, because the car is below the new 160g/km CO2 threshold. Thus it can deduct the full £4,560 from its taxable profits.

If you take corporation tax at 28% this means that the company would save £358 each year on the rental cost of that car.