Company Cars and Capital Allowances

Introduction

Over the last few years the range for electric cars has increased significantly, with some electric cars able to drive around 300 miles on a single charge.   The continuing improvement in electric vehicle technology along with more charging points available throughout the UK means that it might  be time for businesses to consider adding electric vehicles to their fleet.

However, if businesses are not ready to take the plunge quite yet, but are considering replacing some vehicles shortly, there are some very important changes to the tax rules coming into force on 1 April 2021 for companies and 6 April 2021 for sole traders and partnerships.  The key change is a significant reduction in up front capital allowances available on non-electric cars.  The main tax changes are discussed throughout this blog, which could require fairly urgent action for some businesses.

Capital Allowances

The capital allowance rates which currently apply to cars allow 100% first year allowances on vehicles with a co2 emissions figure of 50g/km and under. The main pool allowances of 18% apply for cars with emissions up to 110g/km.  Any cars exceeding co2 emissions of 110g/km only qualify for the special rate pool allowance of 6% per annum.

From 1 April 2021 for companies and 6 April 2021 for sole traders and partnerships, the capital allowances available on cars will be amended to the following:

• New cars with no emissions (fully electric) – 100% first year allowance
• New cars with emissions 1-50g/km – 18% annual allowance
• Cars exceeding 50g/km – 6% annual allowance.

As capital allowances on non-electric vehicles are being tightened, it could  be tax efficient to purchase a new vehicle before the new changes come into force on 1 April/6 April 2021.  The changes are likely to impact most hybrid vehicles, which might currently qualify for 100% up front tax relief but will only be eligible for an annual claim of either 18% or 6% tax relief from April 2021.

To be clear, only new cars qualify for the enhanced capital allowances.  Second hand cars are not eligible.

Other First Year Allowances

If new zero emissions goods vans are purchased between now and April 2025, they will also be eligible for first year allowances.

Furthermore, if electric vehicles are purchased, the business can claim first year allowances for charging points installed at the place of business where their sole purpose is for charging of the electric vehicles.

First year allowances are beneficial as these are available in addition to the annual investment allowance on other qualifying plant, which is currently a maximum of £200,000.

Benefits in kind

Directors and employees with a company car are subject to tax on their vehicle based on the benefit in kind rules.  The tax on non-electric vehicles has been increasing steadily over the past few tax years.

However, the benefit in kind rates for electric vehicles have been reducing year on year to encourage businesses to replace petrol and diesel vehicles with environmentally friendly alternatives. The benefit in kind rates for electric cars are as follows:

• 2021/2022 – 1% of vehicle list price
• 2022/2023 – 2024/2025 – 2% of vehicle list price

Benefit in kind rates for hybrid vehicles are now based on the number of miles that can be driven on a single charge. Hybrid vehicles with a range of 130 miles or more qualify for the 2% rate.

Although electric cars generally have a higher manufacturer’s list price, the lower benefit in kind rates should make then significantly cheaper in tax terms than a petrol/diesel equivalent.

Non-electric cars

Finally, when looking at new company cars please note that currently there will be two emissions figures given for a vehicle registered after 1 September 2019.

The emissions will be provided for both the old NEDC scheme and the new WLTP scheme. The new scheme on average produces an emissions figure around 22% higher. For cars registered after 6 April 2020 only the new WLTP omissions figures are used for calculating benefits in kind.  However, the percentage applied will be 2% lower to account for the changeover from NEDC to WLTP, although in most cases this will result in an increased benefit in kind.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.

Photo by Waldemar Brandt on Unsplash