Background Note
76.Depreciation of fixed assets charged in the commercial accounts of a business is not allowed as a deduction in computing the taxable profits. Instead capital allowances may be given at prescribed rates on certain assets, including plant and machinery. The annual investment allowance provides an annual 100 per cent allowance for the first £50,000 of investment in plant and machinery to all businesses. There are also certain 100 per cent first-year allowances available for certain types of expenditure (such as expenditure on qualifying energy-saving plant or machinery). Otherwise expenditure on plant and machinery assets attracts a writing down allowance (WDA) calculated on a reducing balance basis. Qualifying expenditure has to be pooled for the purpose of determining entitlement to writing down allowances. WDA for assets in the main pool is 20 per cent (of unrelieved expenditure in the pool) per annum. The special rate pool was introduced from April 2008 with a WDA rate of 10 per cent.
77.Cars are plant and machinery, but there are special capital allowances rules that apply only to cars. The existing rules are based on the cost of the car:
expenditure on cars with very low carbon dioxide emissions (up to110g/km) can qualify for 100 per cent first-year allowances, so that the full cost of the car is written off against profits in the period that it is incurred;
expenditure on cars costing £12,000 or less is allocated to the main pool and WDAs are given at 20 per cent per annum on the reducing balance of expenditure; and
expenditure on cars costing over £12,000 must be dealt with separately from expenditure on other assets with expenditure on each car being allocated to a single asset pool. The WDAs are calculated in the normal way (at 20 per cent) and then restricted to an annual amount of £3,000. However, when the car is sold any unrelieved depreciation is allowed through a balancing allowance, while any excess allowances over economic depreciation are recovered through a balancing charge.
78.Expenditure on cars that are partly used for non-business purposes is also allocated to a single asset pool to enable an adjustment to be made to restrict the WDA for the proportion of business use of the car (the “private use” adjustment).
79.Certain cars (qualifying hire cars- including cars used as taxis, daily hire cars and cars leased to the disabled) are exempt from the current rules for cars costing over £12,000. Expenditure on such cars is dealt with in accordance with the capital allowances rules for other plant and machinery. Motor cycles are within the capital allowances definition of a car and are therefore subject to the rules for cars.
80.Not all businesses buy their cars but instead hire (lease) them. There are rules that restrict the tax deduction for hire expenses where the car cost more than £12,000. The amount of the lease rental payments that would otherwise be allowed is reduced using a formula or fraction which is based on the retail price of the car when new. This is commonly known as the lease rental restriction (LRR). Every business lessee in a chain of leases is potentially subject to the LRR.
81.The capital allowances rules for cars were originally introduced as a surrogate benefits charge on luxury cars, but the rules are now seen by business as outdated (in today’s market more than half of business cars cost more than £12,000) and onerous to comply with. Maintaining separate capital allowance pools for each expensive car is considered to impose a disproportionate compliance burden. This Schedule provides for the reform of these rules that business has pressed for, as announced at Budget 2008. The new rules are designed to fit with the Government’s environmental objectives in that they aim to encourage businesses to use cars with lower carbon dioxide emissions. The allowances to which a business is entitled will now be governed by the car’s carbon dioxide emissions rather than its cost.
82.The new capital allowances rules for cars generally apply to qualifying expenditure incurred on or after 1 April 2009 for businesses within the charge to corporation tax or 6 April 2009 for businesses within the charge to income tax. 100 per cent first-year allowances continue to be available on cars with very low carbon dioxide emissions (until 31 March 2013) but expenditure on other cars will be allocated to one of the two plant and machinery pools.
83.The appropriate pool is determined by the car’s carbon dioxide emissions. Expenditure on cars with carbon dioxide emissions exceeding 160g/km will be allocated to the special rate pool while expenditure on cars with emissions of 160g/km or less will be allocated to the main rate pool. Cars that are partly used for non-business purposes will continue to be allocated to a single asset pool to enable a private use adjustment to be made, but the rate of WDA will depend on the car’s carbon dioxide emissions.
84.Expenditure incurred before April 2009 will continue to be subject to the old rules for a transitional period of around five years. Any expenditure remaining in a single asset pool (unless there is any non-business use of the car) will be transferred to the main capital allowances pool at the beginning of the first chargeable period to commence on or after 1 or 6 April 2014.
85.For leases that commenced on or after 1 or 6 April 2009, the special rules that restrict the amount of lease rental payments that can be deducted for tax purposes for a car costing over £12,000 will be similarly reformed. The restriction will be changed to a flat rate disallowance of 15 per cent of relevant payments and will apply only in respect of cars with CO2 emissions above 160g/km.
86.From April 2009 the LRR will apply to only one lessee in any chain of leases. Broadly, businesses will not be subject to a restriction of their allowable lease rental payments where the car is made available to them for a period of no more than 45 consecutive days. Also a business will not be subject to LRR in respect of expenses it incurs in hiring a car where it makes the car available to a customer for a sub-hire period of more than 45 consecutive days (this exclusion does not apply, however, where a business makes cars available to its employees or the employees of a connected person).
87.Leases that commenced before 1 or 6 April 2009 will continue to be subject to the old rules for the duration of the lease.
88.Hire cars (cars used as taxis, daily hire cars and cars leased to the disabled) that are exempt from the current rules will be fully included in the new rules. However, motor cycles will be excluded from the definition of cars and will not, therefore, be subject to these rules. Expenditure incurred on motor cycles on or after 1 or 6 April 2009 will qualify, where appropriate, for Annual Investment Allowance, first year allowances and to be treated as short life asset expenditure.
89.The changes made by this Schedule represent a simplification of the rules for most businesses (by a reduction in both the numbers of cars in single asset pools and the number of leases that are subject to LRR) and will therefore reduce compliance costs. The changes are part of a package of measures to encourage businesses to choose cars that emit lower levels of carbon dioxide.
