It’s possible to claim capital allowances on cars which are bought for business use. This means you can deduct part of the value of the car from your profits before tax. Unfortunately, cars do not qualify for the Annual Investment Allowance but you can use the Writing Down Allowance to work out what you are eligible to claim for.
What is considered a car for Capital Allowance purposes?
For capital allowances a car is:
- Used by most people privately
- Suitable for private use (including motorhomes)
- Not built to transport goods
What is not considered a car?
- Lorries, trucks and vans
- Motorcycles (unless they were bought before 6 April 2009)
You can claim Annual Investment Allowance (AIA) on the latter vehicles listed above because they are not considered cars.
Vans, trucks and lorries are generally considered main pool assets for capital allowance purposes and therefore a Writing Down Allowance (WDA) of 18% can be applied.
Until 31st March 2020, provided that the government’s Plug-In Van Grant has not been claimed, vans emitting 0g/km of CO2 qualify for 100% of the first-year allowance.
As of 1st January 2018, businesses can claim the full cost of eligible items up to a limit of £200,000 against profits for the AIA. As of 1st January 2019, this limit temporarily increased to £1 million (ending 31st December 2020) for qualifying plant and machinery items – including vans, lorries and trucks.
The WDA can be applied to expenditure that exceeds the AIA limit.
The rules regarding capital allowances and cars
Under section 38B of the Capital Allowances Act 2001, the cost of a car does not qualify for the AIA. However, if you are buying a car for use in your business you can use the WDA to deduct part of the value of the car from your company’s profits before you pay any tax.
As long as no other claim has been made (including the capital allowance), you can claim simplified mileage expenses on business vehicles if you are a partner or sole trader.
The date you bought the car and the car’s CO2 emissions will determine the capital allowance available and the rate of relief you can claim.
For limited companies, the main and special rates apply from 1st April, whereas for sole traders and partners it is the 6th of April.
For all businesses, the First-Year Allowance (FYA) rate is applied from the 1st of April.
The government uses the FYA to persuade companies to invest in green cars. A business can set the full cost of a car against profits in the year of the purchase of the car if it satisfies certain criteria.
100% FYAs are available on new and unused cars where C02 emissions are 75kg/km or less if the car is purchased on or after 1st April 2015 and before 1st April 2018. If the car was purchased after 1st April 2018 and before 1st April 2021, the emissions must be 50g/km or less.
A 100% FYA also applies to zero-emission vans if it has been purchased as new and unused before 1st April 2021.
Please note – FYAs are only available on new and unused cars and second-hand cars do not qualify. WDAs are available as an alternative option for second-hand cars.
Main rate allowances
Unlike the FYA, both new and second-hand cars can qualify for the main rate WDA, as long as the car is being bought for business purposes only.
Cars will be allocated to the main rate WDA pool if they were bought after the 1st of April 2015 and before the 1st of April 2018 with C02 emissions of 130g/km or less.
If the car was bought after 1st April 2018 but before 1st April 2021 and has C02 emissions of 110g/km or less, it will also be allocated to the main rate pool WDA.
Expenditure in the main rate pool has a WDA of 18% applied.
Special rate allowances
If a car’s C02 emissions are too high to be considered part of the main rate allowance pool, it will still be eligible for a smaller WDA.
The special WDA rate of 8% can be applied in the following circumstances:
- If the car was bought between 1st April 2015 and 31st March 2018 and the C02 emissions are above 130g/km, or;
- The C02 emissions are above 110g/km and the expenditure occurred between 1st April 2018 and 31st March 2021
Single asset pool
If your car is used for both personal and business purposes it must be allocated to a single asset pool. The amount that the car is used for personal journeys is taken into consideration and the allowance will be reduced to reflect this. Depending on the car’s C02 emissions the allowances are calculated at a rate of either 8% or 18%.
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