Some readers will no doubt remember the ‘old’ rules for capital allowances on expensive cars (i.e. costing over £12,000), which were in place for many a year. Those rules ceased to apply for cars bought after 5 April 2009 (or after 31 March 2009 for companies), but the single asset pools for existing cars remained.
Out with the old…
We shall finally see the back of the old rules soon, because for year ends after 5 April 2014 (31 March 2014 for companies) any remaining expenditure is transferred to the main pool. However, this will not affect the capital allowances for that period because the balance of expenditure is deemed to be transferred at the start of the first ‘chargeable period’ to commence after those dates.
The old rules for restriction of tax relief for hire charges in respect of cars costing over £12,000 were changed at the same time and a simple 15% restriction is now applied where the carbon dioxide (C02) emissions do not exceed 130 grams per kilometre (previously 160 g/km) for expenditure incurred under hire contract entered into after 5 April 2013, or 31 March 2013 for companies. It is perhaps worth noting that the price of the car is now of no relevance, which some of us steeped in capital allowances history have taken some time to get used to! Nor is the size of the company, which used to be relevant for some capital allowances.
…in with the (not so) new!
The current capital allowances rules for cars are obviously not new now, so there is little point in revisiting them except to say that expenditure on cars with C02 emissions not exceeding 130 g/km goes into the ‘main rate’ pool, or into the ‘special rate’ pool, where emissions exceed that figure (for expenditure incurred after 5 April/31 March 2013). The exception would be where the car is used partly for non-business purposes by an unincorporated trader, where the car must be allocated to a single asset pool.
The difference between the main rate and special rate pools allowance-wise is of course writing-down allowances at 18% versus 8% respectively.
Main rate cars
A main rate car is defined (by CA 2001, s 104AA) as:
- A car which is first registered before 1 March 2001;
- A car which has low C02 emissions (see above); or
- A car which is electrically propelled.
We then have a third category effectively of cars which have ultra-low C02 emissions, which qualify for a first year allowance. However such cars are still main rate cars. This has implications as regards the allocation of any expenditure for which a first-year allowance is not claimed, and for bringing in a disposal value when the car is sold.
First year allowances
Since 2002, expenditure on electrically propelled and certain ultra-low-C02 emissions cars has qualified for 100% first-year allowance (‘FYA’). FYA is only available for new, unused cars; otherwise the expenditure would be allocated to the main rate pool.
The C02 emissions limit for FYA expenditure on cars incurred after 5 April 2013 is 95 g/km. The Government has stated, however, that it aims to reduce the limit to 75 g/km (along with progressive reductions in all emissions limits).
It is perhaps true to say that businesses have been somewhat slow on the uptake of FYAs for low-C02 and electrically-propelled cars. The models available which met the emissions limit hitherto have tended not to be the sort of cars to which executives or employees clocking up a high annual business mileage would have found sufficiently prestigious or serviceable.
But things have changed to some extent. No doubt prompted also by the London congestion charge, car manufacturers have taken up the challenge. It has to be said that the list of cars with C02 emissions as low as 75g/km may still not be seen as inspiring, but with some notable exceptions. For example, the Porsche Panamera SE-Hybrid Plug-in costs about £100,000, but (with C02 emissions of just 71g/km) will qualify for a 100% FYA. There a few other models which qualify, but the purpose of this article is not to sell cars! Readers interested in the idea will no doubt do their own research.
As things stand, the 100% FYA for electrically-propelled/low C02 cars is applicable to expenditure incurred before 1 April 2015, though the Government intends to extend this to expenditure incurred before 1/6 April 2018.
Allocation of FYA expenditure to a pool
The following are some ‘nuts and bolts’ rules on how FYA expenditure is allocated to a pool, etc. Whatever software is used to produce capital allowances computations should get the right result (most of the time!), but it may still be useful to have an understanding of the rules.
There is no requirement to allocate expenditure to a pool for the period in which it is incurred, though it will usually be in the taxpayer’s interests to do so. However, if for example the expenditure had not been allocated by mistake, it would be possible to allocate the expenditure for a later period provided the plant etc., is still owned. There may be other circumstances where deferral of allocation may be beneficial, but annual investment allowance (AIA) and FYA can only be claimed for the period in which the expenditure is incurred.
Where FYA is claimed in respect of ‘an amount’ of FYA expenditure, that amount cannot be allocated to a pool for the chargeable period in which it is incurred, which seems rather obvious given that if the rate of FYA is 100% and FYA is claimed for the whole of the expenditure incurred then there is nothing left to allocate. If the rate of FYA were only 50%, though, if it were permissible to allocate the remaining 50% of the expenditure to the pool in the same period, writing-down allowance could be claimed on that balance, so there is logic to this rule. However, if no FYA is claimed or only claimed for part of the expenditure incurred, the amount for which no claim is made may be allocated to the pool for the same period, which might be beneficial to avoid a balancing charge.
Example: Allocation of expenditure
A company has expenditure brought forward in its main pool of £10,000. It sells a piece of machinery for £15,000 and incurs FYA expenditure of £20,000. It will have a balancing charge of £5,000 and so claims net allowances of £15,000. It could alternatively claim FYA on only £15,000 and allocate £5,000 to the pool to avoid a balancing charge, but the net result is the same so there would be no point.
However, if the rate of FYA were only 50% then the choice is between a balancing charge of £5,000 and a FYA of £10,000, giving net allowances of £5,000; or, £5,000 could be allocated to the pool to avoid a balancing allowance leaving £15,000 on which FYA at 50% = £7,500, giving £2,500 extra allowances.
The only circumstance where FYA expenditure must be allocated to a pool is where the plant or machinery is disposed of (whether in the same period as the one in which the expenditure was incurred, or in a subsequent period). Any unallocated FYA expenditure must be allocated to the pool up to the amount of the proceeds or ‘disposal value’. Where a 100% FYA has been claimed, a nil balance is deemed to be allocated. These provisions enable a disposal value to be allocated to the pool because qualifying expenditure must be pooled in order to determine WDAs, balancing allowances and liability to balancing charges.
Practical Tip:
FYA and AIA are sometimes confused, possibly because they are both 100% (at the moment). However they are different allowances, so if FYA is available for a car as discussed above or for energy-efficient or environmentally beneficial plant and machinery etc., that expenditure does not count towards the limit on expenditure qualifying for AIA (which the Chancellor announced on 3 December 2014 would be increased to £500,000 per annum from 1/6 April 2014 to 31 December 2015).
