Capital Allowance is a deduction that can be taken from a company’s overall corporate or income tax on profits. You can claim Capital Allowance on cars you lease and buy in your business. Depending on the car’s emissions you can deduct the full or partial value of the car from your profits before you pay tax.
Changes in Capital Allowance first came into conversation in the 2013 Budget with a commitment being set to review FYA (First Year Allowance) within the 2016 Budget. The 2016 Budget duly announced changes to the CO2 emissions thresholds for the FYA and set the main rate of 18% for Capital Allowance effective from April 2018.
Lease Rental Allowance
You can currently claim tax relief as a Capital Allowance on leased cars. This allowance is assigned in two ways based on the CO2 output per kilometre driven. The 2013 Governmental Budget set out the current Capital Allowance CO2 bandings:
- Cars emitting CO2 emissions up to 130g/km face no lease rental restrictions and can deduct the full cost of the lease against taxable corporate profit.
- Cars emitting CO2 emissions over 131g/km face a 15% LRR (Lease Rental Restriction) which means that companies can only deduct 85% of any rental payments against their taxable profits.
The current allowance will change in April 2018 when cars will have to emit under 110g/km CO2 emissions to deduct the full cost of the lease against taxable corporate profit and any car over this will face a 15% disallowance.
Also, if a business hires a car, for its own use, with emissions exceeding 130g/km for more than 45 days consecutively the deduction allowable for tax purposes for the expense of hiring the car is restricted. The amount of the deduction allowable is reduced by 15%.
Business are also able to claim tax relief as a Capital Allowance on purchased cars based on their CO2 emissions per kilometre driven.
The current Capital Allowance for purchased cars are:
- Any car purchased with CO2 emissions of 75g/km or less can claim a 100% first-year allowance.
- New and used cars with CO2 emissions between 75g/km and 130g/km can claim main rate allowance of 18%.
- New and used cars with CO2 emissions above 130g/km can claim special rate allowance of 8%.
The threshold for purchased cars is changing from April 2018, cars will only qualify for the 100% first-year capital allowance if their CO2 output per kilometre driven is below 50g/km. The emissions threshold for the main rate allowance is also changing with CO2 emissions per kilometre driven falling from 130 g/km to 110 g/km.
Business are also able to claim a 100% FYA on low CO2 emission on fully electric cars. This was due to end on 31 March 2018, however, it has recently been announced that the scheme will be extended for a further three years until 2021. This means businesses investing in these zero and ultra-low emission vehicles will continue to benefit from the upfront tax relief.
Vans with zero CO2 emissions are also eligible for a 100% first-year allowance. Any other van should be treated as plant and machinery and allocated to the main pool, where it will be eligible for writing down allowances at 18%.
|Capital Allowance||Current Permitted Emissions per Kilometre Driven
Pre April 2018
|New Permitted Emissions per Kilometre Driven After April 2018|
|100% First-Year Allowance||CO2 Emissions of 75g/km or less||CO2 Emissions of 50g/km or less|
|CO2 Emissions between 75g/km and 130g/km||CO2 Emissions between 75g/km and 110g/km|
|Special Rate Allowance 8%||CO2 Emissions above 130g/km||CO2 Emissions above 110g/km|
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