Alastair Kendrick looks at the impact of the proposed capital
allowance changes for motor cars
The 2008 Budget contained some proposed changes to the way in
which capital allowances on cars are calculated. These proposals
are due to be introduced in April 2009 and so at present their
detail is still awaited. It is, however, fairly clear from the
Budget announcements what the general basis of calculation will be
going forward.
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Since the Budget we have seen a considerable number of articles
about these proposed changes and it is clear that there are some
major misunderstandings over the impact. The suggestion that it
will be significantly cheaper from April 2009 to lease a car with
sub-160g CO2 emissions seems incorrect. There may be a small drop
in the price but this reduction is hardly going to be sufficient to
influence people back into company cars. The position for a vehicle
in excess of 160g CO2 emissions is fairly clear and the cost of
this vehicle will increase.
The changes in the rules are really in two areas:
1. The level of capital allowance relief is reduced with
the writing down allowance reduced to 20 per cent for vehicles with
a CO2 emission below 160g and 10 per cent for vehicles in excess.
(There are special rules for cars with a CO2 emission below 110g
which I do not cover within this article.) From April 2009 the
vehicles which are below 160g are to be pooled and a separate pool
is to be created for cars with CO2 emissions above 160g.
2. The expensive car leasing disallowance rules are being
revised. This is the relief claimed by the lessee and the
complexity is to be removed with a simple rule that for cars below
160g CO2 there is full relief of the leasing costs whilst for cars
above 160g the relief is restricted by 15 per cent.
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By GlobalDataThe impact of the first of these changes is to delay the time in
which the owner of the vehicle can recover tax relief.
Case study
We took the details of one of our clients with 1,400 vehicles on
contract hire and found that from April 2009 it would take 43 years
for the owner of the vehicles to recover the capital allowances
which today are recovered within a four year period (the vehicles
are leased on a 36 month term). In cost terms this would mean the
lessor that recovered nearly £11.5m of relief within the four year
period would under the proposals only recover £8.3m in the same
timeframe with the balance of £3.2m claimed in the following 39
years.
The tax on the £3.2m is £890,000 (assuming rates do not get
adjusted in the 39 years) and the cost of funding that delay in
recovery of relief is £480,000 (assuming an interest rate of 6 per
cent). It is likely the lessor will have to increase the cost of
leasing the vehicles by the £480,000 over the 36 month term to
simply keep itself in a financially neutral position.
Against this, though, there is an increase in the amount of
expensive car leasing disallowance which can be claimed by the
lessee, which in this example gives a saving of £110,000 per annum.
The net result for this fleet is that for cars below 160g the cost
over 36 months reduces on average by £90 in total whilst for cars
in excess of 160g there is an added average cost of £706.
It is clear that, if our understanding is correct, these changes
coupled with the other proposals announced will seriously impact on
the company car. It is essential that employers review their car
policy to determine whether they are using the best method to
procure cars, and that they decide whether there needs to be
changes to the types of cars permitted within the fleet to curtail
additional costs.
The author is a partner at Bourne Business Consulting
LLP
Motor Finance Issue: 43 – May 08
Published for the web: May 27 08 14:18
Last Updated: May 27 08 14:20
