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Capital Allowances - changes ahead for cars

The cost of acquiring capital equipment in a business is not a tax deductible expense. Instead, tax relief is available on certain capital expenditure in the form of capital allowances.

The allowances available depend on the type of equipment acquired and are not generally affected by the way in which the business pays for the purchase.

Plant and machinery

This includes items such as machines, equipment, furniture, computers, cars, vans and similar equipment that are used in a business.

• Expenditure on all items of plant and machinery are pooled, rather than each item being dealt with separately, with most items being allocated to a main rate pool. However, assets which are used partly for private purposes by a sole trader or an individual partner in a partnership are allocated to a single asset pool to enable a private use adjustment to be made.
• A writing down allowance (WDA) on the general pool of 18% (previously 20%) is available on any expenditure incurred in the current period either not covered by the Annual Investment Allowance (AIA) of £25,000 or not eligible for AIA. WDA also applies to the balance of expenditure remaining from earlier periods.
• Certain expenditure on fixtures in buildings, known as integral features, is only eligible for an 8% WDA (previously 10%) so is allocated to a separate special rate pool. Certain cars are also allocated to this pool.

Special rules for cars

Vehicles generally are treated as main rate pool plant and machinery and so qualify for AIA but cars are not eligible for the AIA. The treatment of car expenditure acquired from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses is based on the CO₂ emissions of the car and is summarised in the table below. Pre April 2009 acquisitions (not dealt with here) were generally dependent on cost.

Although a car cannot qualify for AIA, a special 100% first year allowance (FYA) is available on new low emission cars purchased (not leased) before 31 March 2013 by a business. This is generally available where a car’s emissions do not exceed 110 grams per kilometre (gm/km).

Changes ahead

Legislation will be introduced next year to reduce the CO₂ threshold for a main rate pool car attracting the 18% rate. This will reduce to 130gm/km to match EU emissions targets for 2020 and looks set to apply to cars acquired from 1 April 2013 for companies and 6 April 2013 for unincorporated businesses.

The availability of the 100% FYA on new low emission cars will be extended for a further two years for purchases from April 2013 but only where emissions do not exceed 95gm/km.

The reduced tax relief on car acquisitions is clearly not good news but the effect can be deferred by making purchases before April 2013 or consider leasing alternatives for higher emission cars, as 85% of the cost can be deducted for tax.

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