The capital allowance regime provides traders with relief for the cost of buying cars and vans that are used within the business, enabling a deduction of up to 100% of the cost against business profits.
The actual amount of capital allowances may depend on a few things, including in particular the type of vehicle acquired and (for unincorporated businesses) whether the vehicle is provided for a proprietor or employee and, if for the proprietor, whether it is used wholly and exclusively for business purposes.
The principal rates of capital allowance we are concerned with here are:
1. the Annual Investment Allowance, providing relief for up to 100% of the cost in the year of purchase;
2. the Main Rate of Writing Down Allowance, providing relief at up to 18% of the cost in the year of purchase with the remaining expenditure normally 'pooled' and written down in subsequent years at the same rate;
3. the Special Rate of Writing Down Allowance, providing relief at up to 6% (for 2019/20) of the cost in the year of purchase with the remaining expenditure normally 'pooled' and written down in subsequent years at the same rate; and
4. the First Year Allowance, providing relief for up to 100% of the cost in the year of purchase.
Vehicles operated by the proprietors of sole trade/ partnership businesses and which have some private use are not pooled but tracked individually, and relief is restricted for any element of private use.
What is a car for capital allowance purposes?
The distinction between a "car" and other vehicles (e.g. vans, trucks, lorries, motorbikes) is very important for capital allowance planning purposes because the Annual Investment Allowance cannot be claimed in respect of the purchase of a car. For capital allowances purposes, a car is a mechanically propelled road vehicle that is not:
- a motor cycle;
- a vehicle of a construction primarily suited for the conveyance of goods or burden; and
- a vehicle of a type not commonly used as a private vehicle or unsuitable for use as such.
Double-cab pickups with a payload of over one tonne are not treated as cars as HMRC should accept that they are "of a construction primarily suited for the conveyance of goods". You can read more on HMRC's interpretation of the law here.
If the vehicle you want to buy meets the above definition of a car, then it will not attract the Annual Investment Allowance so relief will normally be given only at the Main Rate of 18% or Special Rate of 6% (previously 8%), unless the car qualifies for a First Year Allowance. The First Year Allowance is available in 2019/20 for expenditure on a new and unused car that emits no more than 75 g/km (including electric cars).
For cars bought from April 2015 onwards, the applicable rates (for 2019/20) are:
New and unused car, CO2 emissions are 75g/km or less (or car is electric) - First Year Allowance 100%
New and unused car, CO2 emissions are between 75g/km and 130 g/km - Main Rate Allowance 18%
Second hand car, CO2 emissions are 130 g/km or less (or car is electric) - Main Rate Allowance 18%
New or second hand car, CO2 emissions exceed 130 g/km - Special Rate Allowance 6%
What about vehicles that are financed?
If you want your business to acquire a vehicle on finance, the availability (or otherwise) of capital allowances may depend on what type of finance you use. Vehicles acquired on hire purchase terms are treated for capital allowances purposes as if purchased outright on the date of the contract. This is termed "notional ownership".
By contrast, vehicles hired under "contract hire" type arrangements do not attract capital allowances because ownership of the vehicle does not transfer to the lessee.
For more information about the tax aspects of business vehicles, contact us today.