Unprepared and overstressed every year come tax time? Scrambling to find ways to reduce those weighty fees?
We have you covered with this comprehensive guide to capital allowances on cars.
What are capital allowances?
Capital allowances are a type of tax relief for businesses. They let you deduct some or all of the value of an item from your profits before you pay tax.
They are solely available for business assets.
The three types of assets you can claim from are:
- Equipment
- Machinery
- Business vehicles
These are collectively termed, ‘plant and machinery’.
Types of capital allowances
The types of capital allowances a business can claim are:
- Annual investment allowance (AIA)
- Writing down allowances
- 100% First year allowances
- The super-deduction or 50% special rate first year allowance
The amount of relief a business can claim depends on which capital allowance they use. Cars do not qualify for annual investment allowance (AIA).
Capital allowances on cars
If you own a vehicle in the UK and utilise it for business, you may claim capital allowances.
The government encourages the use of environmentally sustainable cars by only affording capital allowances to new/unused vehicles, with zero CO2 emissions.
Statistics have proved this tactic successful, as transport emissions were 3% lower in 2019 than in 2009.
If a vehicle’s CO2 emission is less than 50g/km, it is eligible for 18% of ‘writing down allowance’, while cars with anything higher fall into the ‘special rate pool’, with a 6% capital allowances rate.
Requirements
The predominant type of capital allowance for cars is ‘writing down allowances’, which permits a business tax relief by reducing its taxable profit.
Vehicles for private use are placed in a distinct category, as allowances are restricted by the amount of private use.
The deductible percentage depends on CO2 emissions. If the vehicle is electric or has zero CO2 emissions, it may be eligible for the ‘100% first year allowance’.
Examples:
- Nicole buys a new vehicle, costing £15,000. The car has zero CO2 emissions and meets the requirements for ‘first year allowances’. Nicole can claim the full cost of the car as a capital allowance on her 2022/23 tax return
- Anthony buys a car to the value of £8,000, with CO2 emissions above 110g/km. Although the car does not meet ‘first year allowances’, it does qualify for the ‘special rate pool’ and will receive capital allowances at a rate of 6%. Anthony would receive capital allowances of £480 on his 2022/23 tax return
Rules and restrictions
The amount of tax relief available is subject to the type of car and business involved.
For example:
- If the car is used for personal and business purposes, capital allowances only apply to the degree in which it is used in a business capacity
- If the car is leased out, capital allowances will be eliminated
- Sole traders or partnerships qualify for ‘simplified mileage expenses’, while employees do not
- Employees may be compensated for ‘business mileage and fuel costs’
How to claim capital allowances on cars
To claim capital allowances, a record must be kept of:
- The car’s original purchase price
- Any repair/maintenance expenses
- The business role played by the car
Once these details are taken into account, the capital allowances for the vehicle may be calculated and deducted, so save your money while saving the planet.
Get help with capital allowances
Should you need any support, get in touch with Accountants East London today – we’re here to help.
