100% capital allowance for low-emission cars
Cars do not qualify for the annual investment allowance, but by choosing a low or zero emission car it is possible to secure a 100% deduction in the year of purchase in the form of a 100% first year allowance.
What is a low emission car?
For capital allowance purposes, since 1 April 2015 a car is a low emission car if its CO2 tailpipe emissions are 75g/km or less. Until 31 March 2018, expenditure on new cars that meets this emissions test will qualify for a 100% first year allowance. This provides immediate write off against profits. It should be noted that it is only new cars that qualify – the 100% first-year allowance is not available for second-hand cars, even if they have CO2 emissions of 75g/km or less.
John runs a small business, J Ltd, and purchases a car for use in that business. He chooses a fuel-efficient model with CO2 emission of 65g/km. The car costs £12,000 and John buys it new in February 2016. J Ltd prepares accounts to 31 March each year,
In computing his profits for the year to 31 March 2016, he can claim a first year allowance of £12,000 in respect of the car.
Choosing a low emission car will also keep the benefit in kind charge low. Cars with CO2 emissions of 51—75g/km are taxed on 9% of the list price in 2015/16 and on 11% of the list price in 2016/17.
If the car is used by an unincorporated business for both business and private use, the first year allowance can still be claimed, but must be reduced to reflect non-business use.
Jessica is a sole trader and buys a small car, which she uses for both business and private mileage. The car has CO2 emissions of 60g/km and costs £8,000. Jessica buys it new in January 2016. 80% of her mileage is for business use and 20% is private use.
She is able to claim a first-year allowance of £6,400 (being 80% of £8,000).
No requirement to claim
It will not always be beneficial to claim the 100% first year allowance (for example, if the business does not have sufficient profits to utilise the allowance or is only planning to keep the car a short time and would prefer not to trigger a balancing charge). Instead, a writing down allowance (at 18%) can be claimed.
Capital allowances for cars which are not low emission cars
Cars which have CO2 emissions in excess of 75g/km do not qualify for the 100% first-year allowance. Instead, writing down allowances are given. The rate of writing down allowances depends on the CO2 emissions level of the car. If it is below 130g/km, writing down allowances are given at the rate of 18%. However, cars which have CO2 emissions of 130g/km or more are only eligible for writing down allowances of 8%.
Need to know
By choosing a new low emission car it is possible to claim a deduction of the full cost in the year of purchase.