Helping you understand the changes to vehicle corporation tax

From 1st April 2009, important changes are being made to the tax
treatment of cars which will impact all organisations that buy, own or
lease cars. These changes are the most significant changes to the tax
treatment of vehicles since the company car tax was linked to
emissions in 2002.

The new rules will make it more tax efficient to buy or lease a
company vehicle that emits 160g per kilometre of CO2 or less, and more
expensive to buy or lease one that emits 161g/km or more.

Current rules

Under the current rules, corporation tax for business cars is divided
into three main parts:

*
Cars with emissions of 110 g/km CO2 or less attract a 100%
first-year writing down allowance (regardless of vehicle cost).
*
Cars which cost less than £12,000 are put in a pool and attract
a writing down allowance of 20% on a reducing balance basis subject to
a maximum of £3,000 per annum.
*
Cars costing more than £12,000 are deemed to be "expensive
cars". A separate calculation is performed for expensive cars on a
vehicle by vehicle basis and the writing down allowance is subject to
the maximum of £3,000 per annum.

Lease rental restriction - current rules

For expensive cars, a proportion of the finance cost is disallowed in
the corporation tax calculation. The proportion disallowed is on a
sliding scale dependent on the cost of the car, rising from zero at
£12,000 to over 30% for cars costing over £30,000.

Lease rental restriction – new rules

The proportion of the finance cost disallowable for corporation tax
will also move to being emissions based.

There will be no restriction for cars up to and including 160 g/km CO2
but for vehicles emitting 161 g/km CO2 or more there will be a flat
rate restriction of 15% on the finance part of the rental. This will
reduce the after tax cost of vehicles emitting over 161 g/km CO2 and
costing in excess of £20,000 when compared to the current rules.

New rules

Under the new tax regime, the cost of the car will not determine the
taxation treatment; instead it will move to an emissions based system.
The corporation tax rules are again divided into three main parts:

*
Cars emitting 110 g/km CO2 or less will continue to receive a
100% first year allowance. This will remain in place until 2013.
*
Cars emitting more than 110 g/km CO2 and below 161g/km CO2 will
receive a 20% writing down allowance on a reducing balance basis.
*
Cars emitting 161g/km CO2 or more will receive a 10% writing
down allowance on a reducing balance basis.

The new regime will increase the amount of tax paid in the early years
and therefore will increase the operating cost of cars emitting 161
g/km CO2 or more, whether leased or purchased outright. The maximum
writing down allowance of £3,000 per annum has been removed.

CO2 emission output of vehicle110g/km CO2 or less 111 to 160g/km CO2
161g/km CO2 or greater.

Why are things changing?

The changes are due to the government's targets to lower CO2 emissions
and to encourage consumers and businesses into more
environmentally-friendly and fuel efficient vehicles. The Chancellor
of the Exchequer, Alistair Darling, has set the agenda to encourage
businesses to own and use cars emitting the least amount of CO2 by
linking the writing down allowance to the CO2 rating of the vehicle.

Car manufacturers have also been set a target of reducing average
emissions of new cars to 130g/km by 2012.

The changes aim to simplify the administration process for fleets and
reduce fuel and tax bills by encouraging switching to lower emission
vehicles.

Cars registered before 1st April 2009

The new corporation tax rules will be applied to all new business
delivered from 1st April 2009. The government has yet to confirm how
it will affect vehicles acquired before this date, though it is hoped
these will be dealt with under the existing regime.

What about vans?

The changes announced are for cars only. Vans and commercial vehicles
delivered after 1st April 2009 will continue to attract a 20% writing
down allowance on a reducing balance basis.

Advice

Regardless of how many cars you run, now is the time to review your
business car strategy to ensure that you can take full advantage of
the new tax regime when it arrives on 1st April 2009.

Currently, as cars become more expensive the relative benefits of
leasing are reduced by the impact of the lease rental restriction.
Under the new system, cars emitting 160g/km CO2 or less are likely to
be cheaper to lease for many businesses. Cars emitting 161g/km CO2 or
more will become more expensive to own, regardless of the method of
funding. With this in mind, drivers are advised to review their car
policies with immediate effect, examining the pre and post tax cost of
their vehicles.

Clearly, two identically priced cars may cost the same to lease or
purchase, but, depending on emissions they could have a dramatically
different after-tax cost, particularly as the corporation tax regime
is now dependent on CO2 outputs. Vehicle Excise Duty (VED) and the
scale charge used for Benefit in Kind (BIK) tax and computing National
Insurance contribution calculations have been CO2 based for some
years. Fleet managers are encouraged to review their existing fleet to
see which cars costing more than £12K (expensive cars) would fair more
favourably under the new regime.