Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one hour of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units.
This article was first published in the October 2011 issue of Accounting and Business magazine.
It's not unusual for the government to give with one hand and then take back with the other. To some extent this is what has happened with luxury company cars. Recent changes have generally improved the tax relief that a business receives when it buys or leases a luxury car. However, since 6 April 2011 the tax cost of being provided with a luxury company car has increased for directors and employees, in some cases quite drastically.
Purchasing a company car
Since 1 April 2009 for limited companies, and from 6 April 2009 for unincorporated businesses, there is no longer any restriction to the amount of writing down allowance that can be claimed when a car is purchased. Instead, the rate of writing down allowance now depends on a car's CO2 emissions.
Cars with CO2 emissions of between 111 and 160 grams per kilometre (g/km) qualify for writing down allowances at the rate of 20% on the full purchase price. If CO2 emissions are greater than 160 g/km (normally the case for luxury cars) writing down allowances are given at the rate of 10%. Previously, writing down allowances for cars were subject to a GBP3,000 restriction. From 1 April 2012/6 April 2012 the rates of 20% and 10% will be reduced to 18% and 8%.
Cars qualifying for writing down allowances at the rate of 20% are included in the main pool, while cars qualifying for writing down allowances at the rate of 10% are included in the special rate pool. This treatment reduces capital allowances compliance costs as there is no longer any need to keep separate records for each car.
For example, a company purchases a Ferrari 458 Italia for the use of a director for GBP172,000. This car has CO2 emissions of 320 g/km. The car is included as expenditure in the special rate pool (as CO2 emissions are greater than 160 g/km) and the company will receive writing down allowances at the rate of 10% per year on a reducing balance basis. The allowance in the year of purchase will therefore be GBP17,200 (GBP172,000 at 10%), reducing each year thereafter. However, under the old system a balancing allowance was given in the year of disposal.
For example, if the Ferrari was sold after three years for GBP80,000 a balancing allowance of GBP86,000 (GBP172,000 - GBP3,000 - GBP3,000 = GBP166,000 - GBP80,000) would have been given in that year. The company would therefore have benefited from deductions for the fall in value of the Ferrari over the three years that it was owned. Under the new system, the sale proceeds are simply deducted from the pool of expenditure, and writing down allowances will continue to given on the remaining expenditure in the pool.
The new system is therefore beneficial where luxury cars are kept for several years, but may be less beneficial when they are replaced on a regular basis.