2008 Budget proposals extended to leased cars

The 2008 Budget included proposals for changing the system of capital allowances on 'expensive' cars (that is, cars costing over £12,000) to reflect environmental concerns. These proposals are extended to include leased cars, and will form part of the Finance Act 2009, taking effect from April 2009.

Low-carbon cars (with emissions up to 100 gm/km) already attract 100% allowances.

Baker Tilly analysis

The main features of the new regime are:

• Expenditure on cars with emissions exceeding 160 gm/km will attract writing-down allowances (WDAs) at 10% Other cars above 100 gm/km will attract a 20% WDA
• Cars with private use will receive the same emission-based rates of allowance
• Lease payments on cars emitting over 160 gm/km will be subject to a 15% disallowance for tax purposes Cars used for hire will be subject to all the above rules.

Described as 'a modernisation', these measures will not make the system much simpler, but they do address some environmental concerns.

In detail

The changes may best be understood by comparing them with the existing rules. At present:

• Expenditure on each 'expensive' car forms a separate pool, attracting 20% WDAs, restricted for the excess cost over £12,000. This rule is abolished, and all cars will now attract WDAs at rates based only on their emissions.
• Each car with private use similarly forms a separate pool, with WDAs restricted by the amount of private use. This rule is retained, but the rate of WDAs (before restriction) will be based on the car's emissions.
• The tax deduction for lease payments on an 'expensive' car are restricted by the excess cost over £12,000. This rule is replaced by a flat 15% disallowance for high-emission cars.
• Cars used for hiring-out are not subject to the 'expensive car' rules, but they will be subject to the new emission-based rules. The position on cars leased to certain disabled people remains to be decided.

However, the new capital allowance rules apply only to expenditure incurred on or after 1 April 2009 for companies, or 6 April 2009 for individuals. Earlier expenditure will continue to follow the old rules for a five-year transitional period. Leases commencing before those dates will continue under the old rules indefinitely. Businesses will therefore be obliged to operate two different sets of tax rules for cars, for at least the next five years.