Capital allowances on cars – it’s important to get the rules right
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
9 May 2023
With greater moves towards going electric, Chris Campbell provides a reminder of the capital allowances rules on cars.
How are cars treated differently for capital allowances?
Whilst the annual investment allowance (both companies and unincorporated businesses) and full expensing (companies only) offer 100% up front relief on qualifying expenditure, this does not apply in respect of expenditure on cars. Thus, there is a difference between the Capital Allowances treatment of cars compared with other commercial vehicles.
The capital allowances available on expenditure for cars depends on the CO2 emissions of the vehicle and whether the car is new or used. Details of a car’s CO2 emissions can be found at gov.uk. It is important to bear in mind that the CO2 emissions of a vehicle are only relevant in respect of a car – the capital allowances treatment of a van or a commercial vehicle is unaffected by the level of CO2 emissions.
Expenditure on a car bought before 31 March 2025 will qualify for a 100% first year allowance if it relates to a car which is new and unused, and either has CO2 emissions of 0g/km or is fully electric. Otherwise, expenditure on cars will qualify for writing down allowances at 18% per annum of the car’s value (where CO2 emissions are 50g/km or less) or writing down allowances at 6% per annum of the car’s value (where CO2 emissions are over 50g/km).
HMRC manual CA23153 considers the example of demonstrator vehicles and states that a car should be treated as unused even if it has been driven a limited number of miles for the purposes of testing, delivery, test driven by a potential purchaser, or used as a demonstration car. The definition of ‘limited’ is nevertheless open to interpretation – it seems less likely to be able to persuade HMRC that a car being used as a demonstrator for several months or longer could meet this criteria, compared with a car with a lower level of mileage. Where there is ambiguity, suggested best practice would be to ensure that the circumstances are sufficiently disclosed on the tax return of the business.
The spring Budget also extended the first year allowance available on electric vehicle charge point equipment to 31 March 2025 (companies) and 5 April 2025 (unincorporated businesses).
What is the definition of a car for capital allowances?
Whether a vehicle is considered a car or a van/commercial vehicle can make a significant difference to the capital allowances available.
Section 268A CAA 2001 defines a car as a mechanically propelled road vehicle other than a motorcycle, a vehicle of a construction primarily suited for the conveyance of goods or burden of any description, or a vehicle of a type not commonly used as a private vehicle and unsuitable for such use. So it is important to view each vehicle on a case by case basis.
Motorcycles (except those bought before April 2009) and lorries, trucks and vans will therefore not be classed as cars for aapital allowances purposes, and should therefore qualify for annual investment allowance (both companies and unincorporated businesses) and full expensing (companies) subject to the normal rules.
The vehicle tax categorisation can be indicative of the likely capital allowances treatment of a vehicle (for instance, if this categorises a vehicle as a car, it is difficult to argue otherwise for capital allowances), but it is not necessarily conclusive. Where there is ambiguity on the treatment of a vehicle, it is once again important that the circumstances are sufficiently disclosed to HMRC on the tax return of a business. It may also be advisable to ask the client to take pictures of the vehicle, so that they can demonstrate the filing position taken in respect of that vehicle in the tax return of the business.
How should cars be treated when sold?
Where a car is disposed of, it is necessary to consider the original capital allowances treatment of the vehicle. For example, if the car qualified for 100% first year allowance, then any proceeds on disposal may give rise to a balancing charge on disposal.
In terms of allocating the disposal proceeds to the main pool or special rate pool, tax practitioners should consider the thresholds that applied when the vehicle was purchased. The HMRC website gives details of how the rates and thresholds have changed in recent years.
This means, for instance, that a car bought between April 2013 and April 2015 with CO2 emissions of 130g/km should be treated as a disposal from the capital allowances mail pool, even though the addition of a vehicle with the same emissions bought today would be treated as a special rate pool addition. The vehicle should be treated as a disposal from the same pool as it was added to.
What other tax issues need to be considered re cars?
Aside from the capital allowances issues on cars, it is important to bear in mind the benefit-in-kind treatment where a vehicle is available for private use. The criteria for private use is different for company car benefit, compared with company van benefit.
A recent article on our website by Pike + Bambridge gives more details on the benefit-in-kind implications of electric cars.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
