Changes to capital allowances rules for April 2009 will particularly hit the running costs of cars with CO2 outputs of more than 160g/km, says Deloitte’s Nigel Morris.The capital allowance rules change in April 2009. It will affect all business car expenditure after that date.

Business owners need to consider the effects in detail: how the capital allowance changes could impact on the business cars they choose and how they acquire those business cars.

It will particularly hit the running costs of those cars with CO2 emissions of more than 160g/km.

In the example I’ve worked out below, the capital allowance changes show quite a difference. And potentially make 160g/km cars much less attractive to businesses.

Small business owners and directors need to evaluate the possible impact very carefully. They possibly need to revise their business car purchase policies taking into account whole life costs elements: in particular CO2 emissions and residual values.

Business owners should also consider alternative acquisition methods, such as leasing, in light of the changes.

The following figures show the post-April 2009 effect on the capital allowance taxation treatment of a new L20,000 car that has been purchased outright:

L20,000 business car: emissions 111g/km to 160g/km

• 3 years of allowances within pool – L9,760 (48.8%)
• Year 4 proceeds of L8,000
• Tax value remaining in pool L10,240 (51.2%)
• No balancing allowance
• 10 further years for 90% of residual tax allowances (L10,240-L8,000 = L2,240) to unwind

L20,000 business car: emissions more than 160g/km

• 3 years of allowances within pool – L5,420 (27.1%)
• Year 4 proceeds of L8,000
• Tax value remaining in pool L14,580 (72.9%)
• No balancing allowance
• 21 further years for 90% of residual tax allowances (L14,580-L8,000 = L6,580) to unwind

This an area of taxation that is changing quite quickly. Business car managers need to ensure that they are well-briefed on new developments and understand the effects of the changed capital allowance tax structure.

Further information

• More detail on the capital allowance changes can be found in this Special Report: CO2-based vehicle Corporation Tax ahead
• This Nigel Morris Special Report is taken from a presentation Nigel Morris made to delegates at GE Capital Solutions Fleet Services’ Future of Fleet event held in September 2008