Robert Kingdom of Masterlease of fleet management specialists Masterlease explains the labyrinth that is Capital Allowances Tax and how this impacts on fleets.
The UK Government is committed to linking all motoring taxes to the environmental impact of the vehicle. Its latest move — affecting capital allowances and the lease rental restriction for company cars — is designed not only to influence new vehicle choice, but also to help ‘shape’ the future flow of used cars to the market. The rapid adoption of the diesel company car (following the change to CO2 based personal benefit taxation) is evidence that appropriately targeted taxation can alter the behaviours and choices of companies and their employees alike.
For company cars acquired from 1st April 2009 there are two changes. Existing company cars, whether purchased or leased, will remain under previous rules for a period of up to five years — longer than the vast majority of replacement fleet cycles.
The significant change sees the removal of the ‘balancing allowance/charge’ when cars are sold. Under the previous regime this meant — effectively — that capital allowances for the depreciation of company cars could be claimed in full over the period of ownership. Under the new rules any balance of unclaimed allowances remains in a ‘pool’ which continues to be written down over time. For cars emitting more than 110 g/km CO2 and up to 160 g/km capital allowances can be claimed at 20% per annum. For cars emitting over 160 g/km this falls to 10% per annum. The impact depends on a number of factors, but for a typical fleet vehicle emitting under 160 g/km (and over 110 g/km) this means it will take 10 years to claim 95% of the available capital allowances, but for a vehicle emitting over 160 g/km this rises to more than 25 years.
So for businesses buying their company cars the delayed tax allowances effectively mean additional costs. These changes will affect leasing companies too, so those customers may see rental increases, particularly for higher emitting vehicles.
100% first year capital allowances remain available for cars emitting 110 g/km CO2 or less.
Lease rental restriction:
In addition, the lease rental expensive car disallowance — which varies on a complex formula currently according to the vehicle’s price — has been replaced by a 15% rental disallowance for cars emitting over 160 g/km CO2, below which there will be no restriction.
Should I lease or buy?
To some extent this equation should still consider your individual business circumstances, but these changes do swing the balance more towards leasing. The impact of the capital allowances changes (for vehicles emitting over 110 g/km CO2) will be felt regardless of acquisition method, either through the timing of capital allowances you are able to claim, or increased lease rates. However leasing companies continue to be able to recover the VAT on car purchases and, despite the 50% VAT disallowance on the rental, this typically offers the lowest cost of acquisition.
What does this mean for my fleet?
These changes mean that all fleets should probably take the opportunity to review fleet policies. Despite the apparent complexity what is clear is that choosing lower emitting vehicles will result in lower fleet costs, not just as a result of these changes, but also through reduced fuel and employers’ National Insurance costs. There are benefits for your driver too, with lower emitting vehicles attracting lower benefit in kind costs, and reducing their own private fuel bills.