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You have two weeks in which to act if you're not keen on the planned reform to capital allowances, which could impact on whether you put high-emission cars on your choice list, writes Rupert Saunders
Here's a wake-up call. You only have two weeks left in which to tell the Government what you think of its plans to reform capital allowances for business cars.
Alright, some of you might not have given the subject much thought - even the leasing industry trade associate, the BVRLA, accepts it is not the sexiest of subjects - but it is fundamental to the way every company in this country funds its business cars.
Let me fill you in. Capital allowances allow a business to claim tax relief for the depreciation of assets (such as plant and machinery) bought for the business. There is a very simple system for most business assets that assumes a 25% reduction in the total value of the assets each year. But, the system for cars is rather more complex.
It introduces the concept of an 'expensive' car, which, for the purposes of the tax, is defined as any car costing more than £12,000. Cars below that value are pooled as general assets; cars above that value have to be treated separately and the capital allowance on each car is restricted to £3000 a year.
This can have a significant effect on the cashflow of a company, particularly if you tend to buy more expensive cars which would depreciate by more than £3000 a year in their early days. However, when you dispose of the car, you can apply a balancing charge to make allowance for the difference.
The Government has accepted for some time that this system is overcomplicated and outdated. The £12,000 cap does not reflect the reality of today's market and is not inline with the Government's wider policy of using taxation to promote environmental objectives. The problem is what to do about it.
“Cars with emissions above 165g/km would be penalised with reduced allowances - and they would still get a leasing restriction. Broadly speaking, that means all upper-medium petrol-engines business cars (Vectra, Mondeo, Passat, 407 etc) would be further penalised against their diesel equivalents.” |
Rupert Saunders |
There is also a further complication that affects leasing companies in particular. Known as the 'rental restriction', it reduces the amount of car lease rental payments for 'expensive' cars that can be claimed against profits. Apart from being a unique tax on car leasing it has the side effect of making it more tax efficient to outright purchase cars above a certain value (roughly £18,000) rather than lease them.
Needless to say, the leasing industry has been lobbying for some time to get this anomaly removed. John Lewis, BVRLA director general, calls it an "iniquitous tax suffered only by contract hire and thus inequitable, unfair and distorting the market".
The Government has been thinking about this since 2005 and has already introduced an environmental element to the whole calculation (cars emitting up to 120g/km get 100% allowance in year one). On Budget Day it slipped out a further consultation paper that detailed its preferred option.
Environmental objectives have prevailed. The preferred option substitutes the concept of an 'expensive' car with one we could call the 'dirty' car. While cars with emissions between 121g/km and 165g/km would be treated as general plant and equipment, cars with emissions above 165g/km would be penalised with reduced allowances - and they would still get a leasing restriction.
Broadly speaking, that means all upper-medium petrol-engines business cars (Vectra, Mondeo, Passat, 407 etc) would be further penalised against their diesel equivalents.
As Alison Chapman, tax guru at Deloitte commented: "If (or when) these proposals are introduced, the downside effect on cash flow will force many companies to consider whether they should continue making high emission cars available to their employees."
The clock is ticking (you have until 16 May), so if you don't want that to happen, you should make your comments (constructive, please) to: janice.houghton@hm-treasury.x.gsi.gov.uk. A full copy of the consultation document is available to download on the right.
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