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 130% of the cost against business profits. As your accountants we can show you how.
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% (from 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;
4. the First Year Allowance, providing relief for up to 100% of the cost in the year of purchase; and
5. the temporary First Year Allowance (commonly known as the "Super Deduction"), providing relief for up to 130% 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. The Super Deduction cannot be claimed by unincorporated businesses.
The Super Deduction is included in Finance Bill 2021, which is expected to receive Royal Assent before the Parlaimentary recess in July 2021.
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; neither can the new Super Deduction. 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 or the new Super Deduction, so relief will normally be given only at the Main Rate of 18% or Special Rate of 6%, unless the car qualifies for a First Year Allowance. The First Year Allowance is available in 2021/22 for expenditure on a new and unused car that has zero emissions g/km (including electric cars).
For cars bought from April 2018 onwards, the applicable rates (for 2021/22) are:
New and unused car, CO2 emissions are 0g/km (or car is electric) - First Year Allowance 100%
New and unused car, CO2 emissions do not exceed 50g/km - Main Rate Allowance 18%
Second hand car, CO2 emissions are 50 g/km or less (or car is electric) - Main Rate Allowance 18%
New or second hand car, CO2 emissions exceed 50 g/km - Special Rate Allowance 6%
Since 23 November 2016, a 100% First Year Allowance has also been available for expenditure on electric car charging points. This continues to be the case for qualifying expenditure in 2021/22.
What about the new "Super Deduction"?
The Super Deduction is expected to provide a 130% First Year Allowance on qualifying expenditure incurred by a company. Based on the draft legislation, the Super Deduction cannot be claim by unincorporated businesses, and cannot be claimed in respect of expenditure on cars (as defined above) or on any vehicles that are intended to be leased out. However, there is scope for companies to claim the Super Deduction in respect of qualifying expenditure on vans, provided the conditions are all met. Those conditions include:
- the expenditure must be incurred on or after 1 April 2021 and before 1 April 2023;
- the expenditure must be incurred by a company that is liable to pay corporation tax;
- the plant or machinery in question must be new and unused, and not second hand;
- expenditure on plant that qualifies for the Special Rate Allowance cannot attract the 130% Super Deduction - but may attract a lower, 50% "Special Rate" allowance;
- the expenditure must not be of a type caught by the general exclusions (for example expenditure on cars, or on assets that are to be leased out are excluded)
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.
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