For the car finance sector, the main news coming out of the
Budget statement on March 12 concerns capital allowances (CAs) and
related aspects of business expenditure on cars, affecting contract
hire and leasing deals.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
As has long been trailed in successive rounds of
consultations, CAs will become yet another aspect of the tax system
to be tilted against cars with high CO2 emissions. The good news is
that these structural changes will not come into effect until April
2009. There had been fears in the motor finance industry about the
systems implications if these far reaching changes had had to be
implemented this year, very soon after their
finalisation.
As from next year the annual rates of writing down
allowance (WDA) will be 20 per cent for most cars up to a high
emission break point which has now been set at 165g/km of CO2 – a
slight easing compared with the earlier proposed break point of
160g/km. A 10 per cent WDA rate, obviously far below the true
annual depreciation pattern for car values, will apply to those
cars on the wrong side of the emission limit. Cars leased to
consumers in receipt of disability benefits under Motability type
schemes will, however, qualify for 20 per cent WDAs regardless of
emission levels.
The new system will replace existing rules where a line is
drawn in terms of car prices rather than emission levels. At
present cars costing up to £12,000 when new qualify for 25 per cent
WDAs (in line with the rate for most other vehicles, plant and
machinery), but with restricted rates for those above the price
break point. The 25 per cent rate will in any case fall to 20 per
cent from April 2008, as a result of wider changes in the CA system
for all plant and machinery.
Leasing discrimination
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataThe bad news is that the new system, like the old one, will
retain a real element of discrimination against leasing to
commercial customers. For leased cars above the 165g/km limit, the
lessee will suffer a 15 per cent disallowance of the lease rentals
as an expense under corporation tax (or income tax), in addition to
the lessor being subject to the unfavourable WDA rate. BVRLA
director-general John Lewis commented: “This iniquitous and
discriminatory weapon against leasing will lead to a treble
emission tax on some leased cars.”
The deferral of the structural CA changes on cars, though
welcome in itself, will result in a two-stage process of change.
For the wider changes in CAs will also affect cars from this year.
George Tonks, partner at consultancy Invigors explained: “During
the 2008/09 fiscal year we shall still have the £12,000 break
point, but with the main WDA rate falling from 25 to 20 per cent.
It would seem that the maximum WDA amount per car will nevertheless
still be set at £3,000, rather than falling to £2,400 (i.e. 20 per
cent of £12,000).”
Punitive VEDs
For the car market generally, the major Budget announcement is
the higher vehicle excise duty (VED) rate for the first year of
registration of cars in the top emission band, rising to £950 in
2010. There is no direct effect on finance agreements, though there
will clearly be some consequential implications for the potential
car finance market. There is some relief that this new imposition
will not apply to cars already on the road, so residual values
(RVs) should not suffer and might even benefit.
New VAT reclaim deadlines
As a consequence of the government’s defeat in the courts in
recent VAT litigation (see MF Feb 08), new time limits were
announced on Budget day for the filing of old VAT reclaims where
the UK authorities’ interpretation of the law has been found to be
wrong under European judicial rulings.
In the motor sector there will be potentially huge claims by
dealers (in respect of demonstrator cars), and to a lesser extent
by finance companies, related to manufacturers’ volume bonuses.
These claimants will now have until the end of March 2009 to submit
claims which in some cases could go back as far as the inception of
the VAT system in 1973.
Motor Finance Issue: 41 – March 08
Published for the web: March 27 08 15:41
Last Updated: March 27 08 15:44
