Company Car Tax Relief

Tax rule changes could see prompt company car squeeze

Companies which finance eco-unfriendly cars for employees could find their tax relief going up in smoke under new rules which come into force on April 5.

In the biggest shake up of the company car tax system for years, cars will no longer qualify for tax relief – called capital allowances – based on their value alone, but also on how green they are.

We believe that this will lead to businesses keeping a much closer eye on what cars its employees are driving and will lead to them approving smaller, more economical models instead of larger, luxury vehicles.

With company cars, there is a treatment for the company and then a tax consequence for the employee. As far as the employee is concerned, nothing specific has changed with the new rules. For some time, the amount they are taxed on has depended on a combination of the original cost of the car and its level of emissions.

As far as the employer that is buying the car is concerned, the calculation has relied upon the same criteria for years which are now going through a drastic change this year.

In the past, if a company bought a car, depreciation was allowed to be set against tax. So if you bought a car for £20,000, you were allowed to write off a certain amount of the initial value to depreciation in the first year. This was 25% of the value, to a limit of £3,000. The amounts were calculated years ago when an expensive car cost £12,000 – so £3,000 was 25%. The same would then happen for each year it was owned, with an amount written off as depreciation.

If a company buys a car after April 5 this year, the new rules look at the emissions of the car bought as well, to bring it into line with how employees’ taxable benefits are calculated on company cars.

Companies ought to be reviewing their company car procedures now so they know how it works and do not get caught out. If they do not look at this until the end of the tax year, the car will have been bought and it will be too late.

There will be three bands for cars purchased. On cars that are deemed very green against the criteria, the capital allowance will be 100% of the value of the car.

As far as capital allowances against other vehicles are concerned, for those which produce less than 160 grammes of carbon dioxide per kilometre, like a Toyota Avensis or WV Passat, 20% of the value of the vehicle can be written off. For vehicles which produce over 160 g/km, for instance an Audi A4 or Vauxhall Insignia, the figure will be 10 per cent.

New lists have been produced to show which cars are in which bands and companies need to be aware and check which cars are in which band.

If you would like us to check what band a specific car is in please email Paislei