Speedy tax relief for company cars
Speedy tax relief for company cars
If your sole trader or partnership business provides cars to one or more of its employees, it can take decades to obtain full tax relief for the cost of the vehicles. How can one simple step reduce this to only a few years?
Time is money
As you might have found to your cost, the timing of tax reliefs can have a significant impact on your business' cash flow, perhaps no more so than for company cars. Apart from zero or very low emissions (no more than 50g/km) cars, tax relief in the form of capital allowances (CAs) is allowed as a percentage of the cost. For fossil fuel powered cars this is nearly always 6% per year on the reducing balance. The table shows how this works:
Cost of car (or other equipment) £30,000
Year 1 CAs at 6% (writing down allowance) £1,800
Reduced (written down) balance £28,200
Year 2 CAs at 6% (writing down allowance) £1,692
Reduced (written down) balance £26,508
At this rate after 20 years tax relief has only been allowed for 70% of the £30,000 cost of the car.
CAs on pooled expenses
Pooling of expenditure that qualifies for CAs involves aggregating all expenditure on plant and machinery, including that on cars, and CAs are worked out on the value of the pool. If an item of plant and machinery is sold the proceeds are deducted from the value of the pool and CAs are based on what's left. The effect of this, as we've already indicated, is that it can take decades for full tax relief to be achieved.
Ways to accelerate tax relief
The government offers tax incentives for businesses to buy "greener" company cars by linking the rate of CAs to \text{CO}_2 emission rates. Currently, incentives only apply to brand new cars.
Cars with zero emissions.
The normal CAs rate is overridden by so-called 100% first-year allowances. This allows your business CAs for the full cost of the car for the financial year in which you buy it.
Cars with CO 2 emissions between 1 and 50g/km.
The incentive here is that instead of the cost being included in the 6% rate pool of expenditure it's instead included in the 18% pool.
Tip. Sole traders and business partnerships can significantly shorten the period over which tax relief for 100\% of the cost of a car is allowed simply by using it for private purposes.
The private use factor
The rules require that the cost of a car used for a private purpose by the business owner (private use by an employee has no effect) must be excluded from the CA pools and instead placed in a pool of its own (known as a single asset pool). CAs are still worked out at either 6\% or 18\% per annum but the deductible amount is reduced by the proportion of private use. When the car ceases to be used in the business tax relief is given for the full cost less any money received if it's sold.
Tip. The most tax-efficient way to take advantage of the private use factor is for a business owner to use the car for a short period of time before it's used by employees as a company car. This can shorten the period over which CAs are given from decades to just several years.
Accelerate capital allowances by making cars owned by your business available for private use by yourself or one of your business partners before they are provided to employees as company cars. As a result, full tax relief for them is achieved over the period of ownership rather than having to wait decades.