Following a recent announcement that the Government will consult on bringing forward the phase out date for the sale of new petrol, diesel and hybrid cars from 2040 to 2035, changes to capital allowances have also been introduced to incentivise the uptake of zero CO2 emission vehicles, which will be effective from April 2021.
What are the new measures?
If your business incurs expenditure on the acquisition of cars, zero-emission goods vehicles or equipment for gas refuelling stations for use in your business, you will need to be aware of the changes to measures, which extend the period for which the 100% first year capital allowances (FYAs) are available for this expenditure - from April 2021 to April 2025.
In addition to the above, the measure also reduces the CO2 emission thresholds which are used to determine the rate of capital allowances available for business cars. This will also reduce the threshold for the lease rental restriction. These changes will also come into effect from April 2021.
Current legislation
Capital allowances allow businesses to write down their qualifying capital expenditure on motor vehicles or commercial vans at varying rates dependent upon the emissions. Where 100% FYAs are available, the entire expenditure can be written down against taxable income in the tax period in which the expenditure is incurred.
If a car is leased and has high emissions exceeding 110 grams per kilometre (g/km) and it is leased for more than 45 consecutive days, the allowable deduction of leasing payments against profits is restricted by 15%.
How will the changes affect my business?
For businesses chargeable to corporation tax, from 1 April 2021, the FYA for zero-emission goods vehicles legislation will be effective.
For businesses chargeable to income tax, it will have effect from 6 April 2021.
For the reduction to the business cars CO2 emission thresholds together with the FYAs for low CO2 emission cars and equipment for gas refuelling stations, the legislation will have effect from 1 April 2021.
Business cars
Below we’ve detailed the changes that affecting clients using business cars from April 2021:
- The 100% FYA will only be available for the purchase of new electric cars or cars which have zero CO2 emissions.
- Writing Down Allowance (WDA) at the main rate (18%) will only be available for cars with CO2 emissions not exceeding 50g/km.
- WDAs at the special rate (6%) will be available for cars with CO2 emissions exceeding 50g/km.
- The new 50g/km threshold will also apply for determining the lease rental restriction for costs of hiring business cars for more than 45 consecutive days.
If you would like to find out how the proposed changes to company vehicles tax rates will affect your business specifically, please get in touch with our Corporate & Personal Tax team in Warrington on 01925 830 830 or call our Manchester office on 0161 905 1801.