Date posted: 13th Nov 2018
You may think of a high emission cars as being a ‘gas guzzling’, luxury or exclusive sports car such as a Ferrari, Lamborghini or a Range Rover.
The tax laws however, deem a high emission car to be a car that emits carbon dioxide of over 110 g/km (this was cut from 130 g/km in April 2018).
If your business is looking to buy a new car, then it will be important to consider the carbon dioxide emissions from a taxation viewpoint. The cost of the car is given tax relief via the capital allowances legislation. That legislation dictates that the cost of the car is given tax relief at an appropriate rate which is determined based upon the level of the carbon dioxide emissions.
Essentially, cars with CO2 emissions of less than 110 g/km will fall into the ‘general pool’ for capital allowances and therefore the cost is relieved at a rate of 18% per annum on a reducing balance basis. At the moment, cars that emit more than 110 g/km, fall into the ‘special pool’ and are given tax relief at a rate of 8% per annum on a reducing balance basis. However, it was announced in the recent Budget that the latter rate will reduce to 6% from April 2019 for all high emission cars bought either before or after that date.
To highlight this as an example, say a partnership wished to purchase a car for £30,000 for use by an employee.
If the car was a low emissions car, then the tax deductible cost in year one would be £5,400 (being 18% of the £30,000), in year two it would be £4,428 (being 18% of the unrelieved cost £24,600 (£30,000 – £5,400 already claimed)), in year three it would be £3,631 (being 18% of the unrelieved cost of £20,172 (£30,000 – £5,400 – £4,428) and so forth. After year five, the business would have received tax relief upon nearly £19,000 of the cost, which could be a tax/nic saving of nearly £9,000.
If the car was a high emissions car, then after year five, the business would have received tax relief upon nearly £8,000 of the cost, which would transpire into a maximum tax/nic saving of almost £3,800.
The difference in the tax saving after year five is over £5,000.
Whilst ultimately the cost will be fully relieved for tax purposes, under either scenario, it will take 10 years to get tax relief on £25,000 of the cost of a low emission car, compared with over 30 years to get tax relief on a high emissions car.
Given that different variants of each model of car that exists in today’s marketplace, it could be significant to pay close attention to the carbon dioxide emissions, before deciding upon the exact variant of the car to be provided to the employee.
Other impacts of carbon dioxide emissions
The CO2 emissions are also important as they will dictate the income tax that an individual pays, if the car is to be provided as a company car. Although you need to watch for the changes to ‘salary sacrifice’ arrangements too,
In addition, if the car is leased, the carbon dioxide emissions can determine whether the full lease costs can be deducted or whether there is a flat 15% add back.
The purchase of a car within any business is becoming increasingly complicated for tax purposes due to the numerous changes that the Government has introduced over the last fifteen years and taxes are only likely to rise in the future.
Call our specialists today for further advice on an aspects of this.