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Tax Aspects of Business Motoring 2010/11
This briefing focuses on the current tax position of business motoring, a core consideration of many businesses. The overall aim is to provide a clear explanation of the tax deductions available on different types of vehicle expenditure in a variety of business scenarios and the tax liabilities which arise when vehicles are provided for employees/directors.
Methods of acquisition
Motoring costs, like other costs incurred which are wholly and exclusively for the purposes of the trade are tax deductible but the timing of any relief varies considerably according to the type of expenditure. In particular, there is a fundamental distinction between capital costs and ongoing running costs.
Purchase of vehicles
Where vehicles are purchased outright, the accounting treatment
is to capitalise the asset and to write off the cost over the useful
business life as a deduction against profits. This is known as
depreciation.
The same treatment applies to vehicles financed through hire purchase
with the equivalent of the cash price being treated as a capital
purchase at the start with the addition of a deduction for the
finance charge as it arises. However the tax relief position depends
primarily on the type of vehicle, and the date of expenditure.
A tax distinction is made for all businesses between a normal car
and other forms of commercial vehicles including vans, lorries
and some specialist forms of car such as a driving school car or
taxi.
Tax relief on purchases
Vehicles which are not classed as cars are now eligible for the
Annual Investment Allowance (AIA) for expenditure incurred on/after
1 April 2008 for companies or 6 April 2008 for the self employed.
This allowance allows a100% write off against profits on plant
and machinery purchases of £50,000 per year.
Where purchases exceed the AIA, a writing down allowance (WDA)
of 20% is due on any excess in the same period.
Cars are not eligible for the AIA so will only benefit from the
WDA.
Example
Barber Limited has a year to 31 March 2010 and purchases a commercial
van for £20,000 and a car for a member of the sales team costing
£11,500. £5,000 of other plant and machinery is acquired during
the period.
As the van and the plant expenditure do not exceed £50,000, the
£25,000 spent will attract 100% relief. The car will attract only
a 20% allowance of £2,300 for this period (11,500 x 20%) giving
£27,300 of allowances in total.
Comment
The effect of reducing the tax liability of the business with such allowances depends on the type and size of business. For a small company such as in the above example the tax rate is 21% so the company's tax liability is reduced by £5,733. For a sole trader who pays higher rate tax and whose trading profits are in excess of the upper limit for National Insurance the effective tax saving is 41% x £27,300 = £11,193.
Complex cars!
The green car
Cars generally only attract the WDA but there is one exception
to this and that is where a business purchases a new car with low
emissions - a so called ‘green' car. Such purchases attract a 100%
allowance to encourage businesses to purchase cars which are more
environmentally friendly.
The rules on this were updated for expenditure on/after 1 April
2008 so that the 100% write off is only available where the CO2
emissions of the car do not exceed 110 grams per kilometre (g/km).
The cost of the car is irrelevant and the allowance is available
to all types of business.
What about expensive cars?
The purchase of a car other than a green car in excess of £12,000 is treated as an expensive car for tax purposes and has to be recorded separately to other plant additions. Although in theory it currently attracts a normal WDA of 20-25%, this is capped at £3,000 per annum. However, due to the requirement that such cars have to be recorded separately for tax, when such cars are disposed of an extra allowance may be obtained, referred to as a balancing allowance.
The future
Budget 2008 announced that the government will promote the take up of cleaner cars through reforms to the taxation of business travel. It appears that from April 2009 the basis for calculating allowances will change from cost to CO2 emissions as follows:
- cars up to 110 g/km will attract a 100% allowance;
- cars from 111-160g/km will attract a 20% WDA; and
- cars with emissions of more than 160g/km will only attract a 10% WDA.
However, at present the full details of the changes have not been confirmed.
Comment
It is not expected that there will be any requirement to record cars separately for tax except where there is private use (see below). In other words they will be pooled in either a 20% or 10% pool. The significance of this is that no extra balancing allowance will be available on disposal.
Example
The following table compares the current position and the proposals where a car is purchased for a manager at a cost of £18,500 and sold at the end of three years for £5,500, where the car has CO2 emissions of 160g/km or less.
|
Current rules Car > £12,000 |
Up to 160g/km CO2 - relief at 20% |
Year 1 - cost |
18,500 |
18,500 |
Allowance |
3,000 (max) |
3,700 |
Amount to carry forward |
15,500 |
14,800 |
Year 2 - allowance |
3,000 (max) |
2,960 |
Amount to carry forward |
12,500 |
11,840 |
Year 3 - sale |
(5,500) |
(5,500) |
Balancing allowance |
7,000 |
None |
Year 3 - allowance |
- |
1,268 (6,340 x 20%) |
Total allowances over three year life in business |
13,000 |
7,928 |
Comment
The non availability of a final allowance when the car is sold is clearly not as beneficial as the current position and may affect decisions about providing cars for employees and directors.
Alternatives to purchase
What if vehicles are leased?
The first fact to establish with a leased vehicle is whether the lease is really a rental agreement or whether it is a type of purchase agreement, usually referred to as a finance lease. This is because there is a distinction between the accounting and tax treatment of different types of leases.
Tax treatment of rental type operating leases (contract hire)
The lease payments on operating leases are treated like rent and
are deductible against profits. However where the lease relates
to a car there may be a portion disallowed for tax. For 2008/09
this applies where the car has a retail price when new which exceeds
£12,000. An adjustment is made to disallow part of that excess.
For 2009/10 onwards it appears that a flat disallowance of 15%
will apply for cars with CO2 emissions which exceed 160 g/km, regardless
of cost. It is assumed that the old rule will apply for existing
contracts and that the new rule will apply for new contracts from
April 2009.
Example
Existing contracts
If a car has a retail list price of £20,000 and an annual lease charge of £6,000, there would be a disallowance of £1,200 so only £4,800 would be tax deductible.
New contract from 1 April 2009
For a car with 166 CO2 emissions and a £6,000 annual lease charge the disallowed portion would be £900 so £5,100 would be tax deductible.
Tax treatment of finance leased assets
These will generally be included in your accounts as fixed assets and depreciated over the useful business life but as these vehicles do not qualify as a purchase at the outset, the expenditure does not qualify for capital allowances unless classified as a long funded lease. Tax relief is generally obtained instead by allowing the accounting depreciation and any interest/finance charges in the profit and loss account - a little unusual but a simple solution! A disallowance still applies if the vehicle is an expensive car.
Private use of business vehicles
The private use of a business vehicle has tax implications for either the business or the individual depending on the type of business and vehicle.
Sole traders and partners
Where you are in business on your own account and use a vehicle owned by the business - irrespective of whether it is a car or van - the business will only be able to claim the business portion of any allowances. This applies to capital allowances, rental and lease costs, and other running costs.
Providing vehicles to employees
Where vehicles are provided to employees irrespective of the form of business structure - sole trader/partnership/ company - a taxable benefit generally arises for private use. A tax charge may also apply where private fuel is provided for use in an employer provided vehicle. For the employer such taxable benefits attract 12.8% Class 1A National Insurance.
Cars
When a car is provided for the exclusive use of a particular employee
a taxable benefit is calculated based on the list price of the
car and the level of its CO2 emissions.
This is intended to encourage company car drivers and their employers
to choose more fuel-efficient vehicles as the lower the emissions
the lower the taxable benefit.
An illustration of how this works is as follows
For a car with a list price including VAT of £21,600 and CO2 emissions
of 185 g/km the benefit would be 25% x £21,600 = £5,400.
The percentages range for 2008/09 from 15% to 35% for most cars.
A diesel car generally has lower CO2 emissions than a petrol equivalent
but generally attracts an additional 3% supplement each year, due
to other emissions.
Comment
There are a number of detailed rules which can reduce the charge such as unavailability and contributions made by the employee/director, so if you are concerned with the precise tax position please contact us for further information.
Environmentally friendly cars
A new 10% tax band for non-electric cars emitting no more than 120g/km applies for 2008/09. The 3% diesel supplement still applies.
Example
Jane has a petrol car with a list price of £9,107 and CO2 emissions
of 111 g/km. The benefit for 2008/09 calculated as follows:
£9,107 x 10% = £910.
Fuel and cars
If free fuel is provided with an employer provided car for private motoring then a fuel benefit tax charge also arises. This is based on a ‘fixed' list price multiplied by the car benefit percentage for that employee. The ‘list price' for calculating this has increased substantially for 2008/09 from £14,400 to £16,900 (increasing further to £18,000 from 1 April 2010). This means that if an employee has a 25% car benefit percentage and also receives fuel that the fuel benefit, for 2008/09 will be: £16,900 x 25% = £4,225.
Vans
No charge applies where employees have the use of a van and a
restricted private use condition is met. For details on what this
means please contact us. Where the condition is not met there is
a flat rate charge per annum of £3,000 for the unrestricted private
use. Where vans are shared a reduction is made to the benefit on
a just and reasonable basis.
Where an employer provides fuel for unrestricted private use an
additional fuel charge of £500 (£550 from 1 April 2010) will also
apply.
If you would like further details on any matter contained in this
briefing please do get in touch.