Business car taxation reform overview

Acquisition of business cars

Members can access a comprehensive fact sheet on the new regime from the quick links box on the right

What has happened since 1 April 2009?

The expenditure on all business cars is now treated in three ways, depending on the CO2 emissions of each vehicle. Diesel and petrol engine vehicles will be treated the same way.

• Companies purchasing cars with emissions of 110g/km or below are able to write down the full cost of these vehicles against their taxable profits in the first year of ownership
• Companies purchasing cars with emissions between 111g/km and 160g/km must allocate the expenditure to the general plant and machinery pool – where they will be able to write down 20 % of the cost of these vehicles against their taxable profits each year, on a reducing balance basis
• Companies purchasing cars with emissions of 161g/km and above must allocate the expenditure to a ‘special rate’ plant and machinery pool - where they will be able to write down only 10 % of the cost of these vehicles against their taxable profits each year, on a reducing balance basis

What does expenditure mean?

Expenditure is incurred as soon as there is an ‘unconditional obligation’ to pay for an asset, providing the expenditure is due to be paid within four months. For example, if a contract to purchase cars was entered into on 31 March 2009 and requires payment to be made on 31 July 2009, the payment obligation is treated as arising on 31 March 2009. These rules cater for situations where expenditure is incurred even though the cars are not delivered for some time after the new regime has started.

What if the car is delivered after 1 August 2009?

If the contract became unconditional after 8 December 2008 and the car is made available on or after 1 August 2009, the new rules apply even if the expenditure has been incurred before 1 April 2009.

If the contract became unconditional before 8 December 2008 for a car being made available on or after 1 August 2009, the current rules apply.

What happens to cars treated under the old regime?

The old 'expensive cars' regime for vehicles costing over £12,000 (with an annual writing down cap of £3,000 and a balancing adjustment on disposal) remains in place for five years. Any balance of unrelieved expenditure left after the five years will be added to the general pool of unrelieved expenditure. This transitional period will finish at the close of the businesses’ first chargeable period to end on or after 31 March 2014.

Leasing of business cars

What has changed?

Cars being leased after 1 April 2009 are treated in one of two ways:

• Cars with CO2 emissions of 160g/km or less face no lease rental restriction, meaning that the cost of the lease is fully deductable against taxable corporate profits.
• Cars with CO2 emissions of 161g/km or more face a 15% lease rental restriction, meaning that they can only deduct 85% of any rental payments against their taxable profits. If there is a chain of leases, this disallowance will apply only to rental payments made by one lessee in a chain of leases.

What about leases that commenced before 1 April 2009?

All lease rental payments for cars costing more than £12,000 will be subject to the old rules until termination of the lease.

What if the lease started before 1 April 2009 but the car is delivered afterwards?

The new rules apply, the lease will be regarded as commencing from the date when the lessee is entitled to use the car under the lease.

Short term hire (Daily Rental Cars)

As previously announced, daily rental cars have been brought into the new regime. The rules on acquisition outlined above are therefore applicable.

A daily rental company using leasing to fund cars emitting more than 160g/km will be liable to pay a lease rental restriction unless:

• A customer has hired a car for less than 45 consecutive days. This would include leasing companies that are buying and reselling rentals.
• A rental company has inward leased its cars for a period, but hires these cars to a business customer for more than 45 consecutive days. In this situation the business customer would incur the 15% lease rental restriction and the rental company would claim exemption. Leasing companies buying and re-selling cars for more than 45 days would not incur the LRR.

For further information on the above HMRC has published a guide, please click on the following link for more details http://www.hmrc.gov.uk/briefs/company-tax/brief2009.htm

Anti Avoidance Measures

The government has outlined its plans to take the following anti-avoidance measures:

• To prevent a business from re-leasing existing cars in order to bring the lease into the new rules
• To prevent artificial winding up of business to generate a balancing adjustment on the cessation of the main and or plant and machinery pools