Deloitte’s Nigel Morris explains the key changes to Corporation Tax and business cars following the Budget.
THIS Budget sets out the Government’s agenda for using taxation to influence businesses into greener cars. It includes taxation on the whole life cost of the vehicle.
Most companies ignore their cars’ CO2 emissions. Because they assume CO2 only affects the driver, even though employer’s NIC is based on the driver’s benefit – which is based on the CO2 emissions of the car.
Companies will now need to bring tax into their calculations of whole life cost of the car, otherwise it won’t reflect the true cost over the period of use.
From 01 April 2009, Corporation Tax relief for company cars will depend on their CO2 emissions: 160g/km and 110g/km will become key benchmarks.
There will be a big difference to the cost to the company of a car with emissions of 161g/km compared to one with 160g/km. The changes will affect all users of company cars. If the car is leased, the leasing company will be affected by these changes and will pass any additional costs on to the person leasing the car.
Ignoring low emission cars up to 110g/km, there are two main changes. The 20% rate (for cars above 160g/km) and 10% rates (below 160g/km) are lower than the current rate of 25% – and the cars will be pooled with other cars and assets.
This means that there is no balancing allowance (or balancing charge) when the car is sold. Instead the proceeds of sale are deducted from the value of unclaimed allowances and the remainder is claimed years after the car is sold. When you model this, taking account the time of money, the effect is significant.
In summary, 161g/km+ cars will become more expensive than cars up to 160g/km for the company to buy (or lease) in tax terms. As a result expect a range of cars to no longer have a market within the mainstream business car arena, although it will take time for companies to realise the effect.
- Read Nigel Morris’ analysis of the budgetary changes to the Expensive Car Leasing Disallowance
- Deloitte business car advice can be found at www.cartax.co.uk.
- This advice correct at time of posting – March 2008.