E-Mission To Become Net Zero: Government Pushing Towards Zero Emissions Cars and Impact on First Year Allowances
Efforts are being made by the Government to motivate businesses to own lower CO2 emission cars in the push to become a greener society. From April 2021, new tax measures – particularly relating to capital allowances – are being introduced to encourage and incentivise businesses to opt for more climate-friendly vehicles.
First Year Allowances (FYAs)
The Government announced during its last budget in 2020 that FYAs would be restricted to expenditure for new zero emission and new electric cars from 01 April 2021 onwards, with these FYAs being extended until April 2025. These allowances allow the whole of the expenditure incurred by the business to be deducted against trading profits in the period. It is important to note that the FYAs are only available on the purchase of new cars, but the Writing Down Allowance is still available for second hand cars (discussed below).
Under the current rules, you can claim 100% FYAs on the purchase of new cars where the car’s CO2 emissions do not exceed 50 g/km or if the car is unused and electric. To calculate the amount of CO2 that is emitted by a car, it is measured in grams per kilometre (i.e. g/km). The incoming changes in April 2021 will therefore restrict FYAs to those cars which are new electric cars or new zero emission cars where the CO2 emissions are below 0 g/km.
The HMRC’s Policy paper (which can be found here) details the objective behind these measures:
“The measure is designed to incentivise the uptake of zero CO2 emission vehicles, following the Government’s announcement that it will consult on bringing forward the phase out date for the sale of new petrol, diesel and hybrid cars from 2040 to 2035, or earlier. This would also support the wider policy on climate change to reduce all greenhouse gas emissions from the UK to net zero by 2050”.
Writing Down Allowances (WDAs)
These changes will also impact on WDAs. Where FYAs are not available, the expenditure is instead added to the relevant ‘pool’ and the appropriate WDA % is applied and deducted from the business’s taxable profits.
Currently, new cars with CO2 emissions between 50 g/km to 110 g/km and second hand cars with emissions up to 110 g/km are eligible for WDA of 18% in the ‘main rate pool’. New or second hands cars with CO2 emissions exceeding 110 g/km are eligible for WDA at a lower rate of 6% in the ‘special rate pool’.
From April 2021 onwards, the main pool threshold for cars for the WDA will be reduced from 110g/km to 50 g/km. Therefore, new cars which emit between 1 g/km and 50 g/km will be able to claim the main rate of 18% WDA. Similarly, second hand cars which emit 50 g/km or less will be also be able to claim the 18% WDA. However, cars (new or second hand) which emit more than 50 g/km will be allocated to the ‘special rate pool’, attracting WDA of 6%.
Lease Rental Restriction
Tax relief for car finance leasing is subject to a lease rental restriction depending on the amount of g/km the car is emitting. Presently, where the car emits less than 110 g/km there is no lease rental restriction, meaning that the whole cost of the lease is tax deductible. However, where the car is emitting above 110 g/km and is hired for more than 45 consecutive days, there is a 15% disallowance meaning that only 85% of the rental cost is deductible from taxable profits.
With the changes in April 2021, the threshold for the lease rental restriction will reduce from 110 g/km to 50 g/km for car finance leasing costs for cars hired for more than 45 consecutive days. HMRC’s policy paper has detailed the likely impact of these changes:
“The reduction in the CO2 thresholds will also impact some businesses where cars are hired and may require them to calculate the lease rental restriction on more of their car fleet…” and “… In addition, it may also increase the number of business cars for which the lease rental restriction will apply…”.
With the date for change fast approaching, we will wait to see whether these changes will impact businesses. If you require advice or assistance with applying for capital allowances, please contact a member of our team.