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Tax Treatment on Cars in Business

Posted by: edwinsmith on February 17th, 2011

Capital Allowances on Cars Acquired by the Business*

*this includes cars acquired on hire purchase

Capital allowances are available on cars purchased by the business on or after 1 April 2009 for Corporation Tax and on or after 6 April 2009 for Income Tax at the following rates which are dependent on the cars CO2 emissions. 

  • 110g/km or less – 100% first year allowance

 

  • 111g/km – 160 g/km -20% writing down allowance per annum on expenditure incurred which is allocated to the main pool

 

  • 161g/km or more – 10% writing down allowance per annum on expenditure incurred which is allocated to a special rate pool

Where expenditure on a car is allocated to either the main pool or special rate pool (where there is no non-business use of the car), there will be no balancing adjustment when the car is sold, or otherwise disposed of, unless the business is ceasing e.g. any allowances still available after deducting the disposal proceeds will continue to be written down each year at the applicable rate. There will only be a balancing adjustment on the disposal of a car when the car is in a single asset pool.

Cars purchased before 1/6 April 2009 continue to be treated under the old rule for a transitional period of 5 Years. This means that cars costing: 

  • less than £12,000 continue to be handled on the main rate pool (20% capital allowance) regardless of their emission

 

  • £12,000 or more continue to be pooled in a single asset pool with a 20% capital allowance capped at £3,000 per annum.

 

The transitional period will end on the last day of the business first chargeable period to end on or after 31 March 2014 for corporation tax and after 5 April 2014 for income tax.

Car Leasing Disallowance

For contract leased (contract hire) cars there is no restriction on the tax deductibility of the car leasing costs if CO2 emissions are 160g/km or less.

For cars with CO2 emissions over 160g/km there is a flat rate disallowance of 15% of the car leasing costs for tax purposes.

Cars Acquired by Finance Lease

The difference between hire purchase and finance lease is determined by certain tests that include whether the lessee or lessor has control of the risks and rewards of the car, how the payments are structured and by the amount of the lease payments compared to the value of the car.

We can provide advice if you should require any help to determine what type agreement you have.

Finance lease cars are depreciated over the term of the lease. Then the finance lease interest element of the payments and the depreciation are treated as allowable for tax purposes.

Please contact us if you require any assistance.

Filed under: Tax