Should my business buy or lease?
New tax rules came into force in April 2009 and have had a major impact on the way companies finance their vehicles. Whether a company leases or buys its cars, it has been effected, although the impact on fleets is minimal, where all or the majority of vehicles are low-emitters.
The new capital allowance system is aimed at rewarding fleets running cars that produce CO₂ emissions at or under the 160g/km benchmark. It also penalises those that run vehicles with emissions over that benchmark.
From April 2009 expenditure on cars above 160g/km attracts a 10% writing down allowance (WDA) and are grouped into a ‘Special Rate Pool’.
Cars of 160g/km or below attract the normal 20% WDA and are included in the main ‘Plant & Machinery Pool’.
The 100% first year capital allowances remain for cars emitting 110g/km or less.
When the vehicles are sold, the sale proceeds are deducted from the pool but the balance of any remaining value stays in the pool and continues to be written down
What does this mean?
The impact depends on a number of factors, but for a typical fleet and for income tax purposes, assuming a vehicle emitting under 160g/km and over 110g/km, it will take on average 10 years to claim 95% of the available capital allowances. For a vehicle emitting over 160g/km this rises to more than 25 years.
This new taxation system means outright purchase fleets will suffer more.
What if I Contract Hire?
Businesses can now deduct the full cost of the finance rentals from taxable profits if the car emits 160g/km of CO₂ or less.
On cars with higher emissions, there is a flat rate disallowance (called the Lease Rental Restriction) of 15% of the finance rental.
This new taxation system has had the effect of improving the Corporation Tax position of higher-priced cars acquired on leases after April 2009.
Will things change?
It is the governments intention (as with Company Car Taxation), to reduce the 160g/km limit over time to reduce pollution in the atmosphere. If you really want to future-proof your policy, cap your CO₂ emissions to 140g/km or below.