The Finance Bill will include changes to the capital allowances regime for cars which will apply to expenditure on cars from 1 April 2009 (from 6 April 2009 for non corporate businesses). It will also introduce changes to the restriction on the tax deduction available for leased cars.

Baker Tilly analysis

The changes are in line with the Chancellor’s green agenda to discourage higher emission vehicles and restrict significantly the allowances available on expenditure from 1 April 2009 on cars with emissions in excess of 160g/km.

Ultra-economical cars, those emitting less than 120g/km will qualify for 100% first year allowances.

These changes were anticipated and have already been discounted by leasing companies in setting their pricing structure under the new regime. There will be some winners as well as many losers but one certainty is that the tax cost of buying and running a gas guzzler can be expected to increase significantly.

In detail

Under the existing regime capital allowances on expenditure on expensive cars, i.e. those costing more than £12,000 were restricted to the lower of 20% of the tax carrying value or £2,400 (25% of the tax carrying value or £3,000 prior to 1 April 2008). A further tax deduction or charge arises on the disposal of the car where respectively the proceeds are less than the tax carrying value or the tax carrying value is less than the proceeds. Expenditure on non expensive cars was added to the 20% pool of expenditure and allowances given in the normal way with disposal proceeds being deducted from the pool balance.

The concept of an “expensive car” for capital allowances purposes has disappeared: now the determining criterion is carbon emission. From 1 April 2009:

• cars with emissions of more than 160g/kg will be included in the 10% pool 
• cars with emissions between 121 and 160g/km are to be added to the 20% pool of expenditure and allowances given in the normal way with disposal proceeds being deducted from the 20% pool balance; and
• cars with emissions of less than 120g/km will qualify for 100% first year allowances.

For expensive cars owned at 1 April 2009, grandfathering provisions will mean that allowances under the ‘old’ rules will continue to be available for a five year period.

Motorcycles are not included in the definition of “cars” for capital allowances purposes as from April 2009.