Businesses are able to claim relief on many purchases, including capital allowances on cars and vans. However, it can be difficult to pinpoint exactly how much that allowance can be, leading to millions of pounds of allowances going unclaimed each year.
This means that if your business needs to invest in a new vehicle, it’s well worth brushing up on capital allowance rules. You could find that some, or all, of the cost could be used to make savings when tax is due.
What is plant and machinery?
Technically, cars class as plant and machinery. This is usually the main type of capital allowance for businesses. To claim allowances for plant and machinery purchases, your business must incur this expense for a qualifying activity’.
All this really means is that the vehicle purchased must be used for usual business activities.
Depending on the type of vehicle purchased, a percentage of its cost can then be written off against profits that year, providing savings on tax. This relief can be up to one hundred percent of the vehicle’s value.
When one hundred per cent write off is not available, the business can use writing-down allowances to deduct a certain percentage of the cost. So, how can you achieve the maximum allowances tax relief possible on your vehicle purchase?
What are the rules?
There are three types of capital allowance on plant and machinery purchases for limited companies to claim allowances on:
- The annual investment allowance (AIA)
- First year allowances (FYA)
- Writing-down allowances (WDA)
These purchases are then added to one of three asset pools:
- The main pool
- The special rate pool
- The single asset pool
Aside from high-emission cars, most plant and machinery purchases will go to the main pool.
How much can I claim?
For higher emission cars, it may be possible to claim writing-down allowance of up to eighteen per cent of the expenditure. Whether or not a car falls into the higher-emission bracket depends on its carbon dioxide (CO2) emission levels. If the vehicle’s levels are above fifty grams per kilometre, then written-down allowances are six per cent.
For example, if Denise purchased a higher-emission car for her business for £8,000, then six per cent, £480, of the cost could be written-down as allowances.
Is it possible to claim higher allowances?
There is more exciting news if you’re looking to go green with your next vehicle purchase. For companies that purchase electric cars with zero emissions, you’ll be able to claim an allowance of one hundred per cent value. This is claimed under first year allowances.
What this means in reality is that you can claim the entire cost of the electric vehicle in its year of purchase, meaning an extremely attractive tax saving.
For example, if Denise were to choose an electric zero-emission vehicle instead at £30,000, then one hundred per cent of that cost could be deducted that year.
To incentivise zero-emission vehicle purchases, businesses may also claim one hundred per cent first year allowances on the costs of installing electric charging points.
Employees also receive an incentive to use electric company cars through very low electric car BIK (benefit in kind) tax. This is currently just one per cent per year of the value of the car in tax, providing huge savings to the employee.
Do company vans also apply?
Capital allowance on vans works a little differently; vans are subject to the annual investment allowance, meaning a much simpler situation. One hundred percent of AIA costs can be claimed against taxes.
I’m a sole trader. Can I claim these allowances?
Sole traders and partnerships are not separate from their business in the same way as a limited company. Therefore, the rules are different. Sole traders may own the car themselves and charge their company mileage. They may also allow the business to own the vehicle, then use a portion of their mileage for personal purposes.
Which situation is best for me?
Capital allowances on cars can seem daunting. However, the tax incentives on offer are too good to ignore. Contact UWM today to see how you can use allowances to lower your next tax bill.
