Capital allowances for business cars
Published 2 November 2016
© Crown copyright 2016
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/capital-allowances-for-business-cars/capital-allowances-for-business-cars
Who is likely to be affected
Businesses incurring expenditure from April 2018 on the acquisition or leasing of cars for use in their business.
General description of the measure
The measure extends the 100% First Year Allowance (FYA) for businesses purchasing low emission cars for a further 3 years to 31 March 2021.
The government will reduce the main rate threshold for capital allowances for business cars to 110 grams/kilometre (g/km) of CO2 and the FYA threshold to 50g/km of CO2 from April 2018, to reflect falling vehicle emissions.
In addition, the measure also lowers the lease rental restriction (LRR) in line with the main rate threshold. Leases that started before April 2018 will remain subject to the current threshold. This will be legislated in Finance Bill 2017.
Policy objective
This measure is designed to support transition in the UK to cleaner zero and ultra-low emission vehicles which will help improve air quality in the UK’s towns and cities and protect the environment for the next generation.
Background to the measure
At Budget 2013, the government committed to reviewing the FYA at Budget 2016. At Budget 2016, the government announced that changes to the CO2 emissions thresholds for the FYA and main rate (18%) of capital allowances will take effect from April 2018 and the FYA will be extended to 31 March 2021.
Detailed proposal
Operative date
The changes to the main rate and FYA thresholds will have effect in relation to qualifying expenditure incurred from 1 April 2018.
Current law
Business expenditure on plant and machinery normally qualifies for tax relief as capital allowances, which are normally given at the rate of 18% a year on a reducing balance basis.
Under current law, section 45D Capital Allowances Act 2001, 100% FYAs are available to businesses that purchase cars with low CO2 emissions or electrically propelled cars. The allowance was due to end on 31 March 2018.
The capital allowances rules for cars are based on their CO2 emissions per kilometre driven. Currently cars bought from April 2015 which are:
- new and unused with CO2 emissions of 75g/km or less (or car is electric) can claim first year allowances
- new and unused with CO2 emissions between 75g/km and 130g/km can claim main rate allowances
- second hand with CO2 emissions of 130g/km or less (or car is electric) can claim main rate allowances
- new or second hand with CO2 emissions above 130g/km can claim special rate allowances
Where a business hires a car with emissions exceeding 130g/km for more than 45 days consecutively for its own use, 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%.
Proposed revisions
Businesses will be able to claim 100% FYA when purchasing low emission cars for a further 3 years, ending on 31 March 2021.
In addition, businesses will only be able to claim the main rate threshold for capital allowances for business cars which have 110 g/km of CO2 and the FYA threshold (100%) for business cars which have 50 g/km of CO2 from April 2018.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| - | - | +5 | +35 | +80 |
These figures were set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
Economic impact
For car manufacturers this measure should increase the demand for lower carbon car models but demand for models that emit higher levels of CO2 may decrease.
This measure is not expected to have any significant macroeconomic impacts. The costing includes a behavioural effect to account for businesses choosing to purchase lower emission band cars to qualify for the FYA or the main rate.
Impact on individuals, households and families
The measure is not expected to impact on individuals or households as capital allowances can only be claimed in the course of a business. The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure does not impact on the equality of groups with protected characteristics.
Impact on business including civil society organisations
For those businesses purchasing cars, the extension of the FYA is expected to have a negligible impact on administrative burdens for business as the measure extends an existing FYA scheme.
There is expected to be an impact for business resulting from the lease rental restriction due to the revalorisation of the CO2 emission thresholds. Businesses may be required to calculate the restriction on more of their car fleet, with the average number of cars affected expected to be around 320,000 each year.
The changes proposed will not affect the writing down treatment of cars that were purchased before the changes takes effect. There may be some transitional costs to business in respect of understanding the new rules however these are expected to be negligible.
The measures are expected to have a negligible impact on civil society organisations. Civil society organisations cannot make claims for capital allowances, although if they lease cars their rentals may be more expensive if they chose to lease more polluting cars.
The Budget announcement was timed to allow manufacturers and businesses 2 years to adjust to the new thresholds.
The expected impact is detailed below:
Estimated one-off impact on administrative burden (£m)
| One-off impact | (£m) |
|---|---|
| Costs | negligible |
| Savings | - |
Estimated ongoing impact on administrative burden (£m)
| Ongoing average annual impact | (£m) |
|---|---|
| Costs | 0.6 |
| Savings | - |
| Net impact on annual administrative burden | +0.6 |
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
It is anticipated that there will be no significant operational impacts on HMRC arising from this measure with no IT changes required.
Environmental impact
This measure has a behavioural effect to encourage businesses to purchase lower emission band cars which qualify for the FYA or the main rate. This will support the objective of reducing the CO2 emissions from cars.
Other impacts
Cars with emissions above 130g/km face a 15% LRR, meaning businesses can only deduct 85% of any rental payments against their taxable profits.
The threshold above which the LRR applies will reduce in line with the main rate threshold, from 130g/km to 110g/km from April 2018. HMRC will take forward necessary legislation in Finance Bill 2017 to ensure that leases that start before April 2018 will remain subject to the current threshold.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Tunde Ojetola on Telephone: 03000 585 916 or email: tunde.ojetola@hmrc.gsi.gov.uk.