Changing lanes

The UK government is set to end the sale of petrol and diesel cars and vans by 2030. Hybrid cars will have a further five years, with the sale of plug-ins and full hybrids ending in 2035. In addition to pledging to reduce emissions, the UK has committed to a ‘net zero’ target for greenhouse gases by 2050. In order to deliver this, the government needs to tackle emissions from across the transport industry, which is now the highest emitting sector in the UK. With these targets in mind, the government has implemented a number of tax incentives to support individuals and businesses as they transition towards zero emissions.

Purchasing a car or a van through a limited company Tax relief is obtained through capital allowances, which have specific rules as to how much can be claimed. With most cars, this deduction will be applied gradually over time, however, for new and unused electric cars where CO2 emissions are 0g/km, they have a first-year capital allowance of 100%. This means the company can off-set the full cost against its taxable profi s in the year of purchase, creating a corporation tax saving. If they were to buy a car personally (rather than through their business) they will have to use cash that has already been subject to corporation tax and income tax. Something to consider however, is that when the vehicle is sold, the company will pay corporation tax on any sale proceeds. Light commercial vehicles (LCVs) already qualify for 100% allowance under the Annual Investment Allowance. They can claim 100% write down in year one, subject to an overall limit per financial year (£1m).

The increased limit of £1m is in place until 31/03/2023. If the vehicle is obtained under hire purchase (HP) agreement, not only will the company benefit from the 100% fi rst year allowances, but will also make corporation tax savings on the interest on the monthly payments. More broadly, the government has also made capital allowance more generous to stimulate business investment. The super-deduction (capital allowances) has given companies a strong incentive to make additional investments, and to bring planned investments forward.

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets are able to claim 130% in-year tax relief for main rate expenditure, and this applies to LCVs. This allows businesses to claim back up to 25p for every pound spent on new LCVs. With the super-deduction, if your clients spend £10,000 on an LCV, they will be able to deduct 130% of that figure when calculating profits. This equates to a direct actual saving of £2,470 on their corporation tax bill for every £10,000 spent on qualifying LCVs and equipment. Equipment and machinery that qualifies for this scheme is usually given an 18% main rate write-down allowance. This shows just how much of a saving the super-deduction is offering. Qualifying vehicles will also get a first-year allowance of 50%. Qualifying LCVs and machinery would usually only receive a 6% special rate write-down.

Leasing a car or van through a limited company If a car is leased by a company, the monthly rentals will be included in the profit and loss account as an expense, which reduces the company’s profit and corporation tax for the year. The level of rental tax relief is determined by the CO2 output of the vehicle. For cars with CO2 emissions of 0 to 50g/km, 100% of rentals are allowable.

For cars with emissions over 51+ g/km, 85% of rentals are allowable (lease rental restriction or rental disallowance). This includes any unrelieved VAT (50%) (VAT not reclaimed in your quarterly VAT return). If the car’s CO2 is greater than 50g/km, un-reclaimed VAT is also restricted to 85%. For cars, there may also be an opportunity to claim 50% of the VAT for the ‘basic rental’ element of the lease, and 100% of the VAT for the service element.

For LCVs when leasing, businesses may be able to claim 100% of the rental (before VAT) against corporation tax and 100% of the service and maintenance element of the lease, providing there is no private use, or they are a limited company. Businesses can claim 100% of the VAT, provided they are VAT registered, there is no private use, they are not on the Flat Rate VAT scheme, and there is no ‘exempt turnover’.

Benefit in kind (BIK) As with any company car, if there is personal usage, then a BIK will arise. The BIK rate for a fully electric car is just 2% of the vehicle list price until 2025. This is a signifi cant saving on the BIK for petrol and diesel cars which can be up to 37% depending on emissions. Tax and national insurance on the BIK are payable by the company and/ or the employee. The company will pay the list price of the car x 2% x 13.8% (employers National Insurance). The employee will pay the list price of the car x 2% x employees income tax rate.

Such low BIK rates for zero and low emission vehicles has led to a resurgence of car salary sacrifice schemes and particularly electric car schemes. These schemes have been well publicised – they’re a ‘colleague benefi t scheme’, which enables colleagues to acquire a brand-new company car through salary sacrifice. Employees save money by exchanging part of their annual salary for the car and the added services before it is taxed. This reduces the amount of tax and National Insurance they pay on the remainder of their salary.

Colleagues who receive a cash allowance for a company car will see a benefit as all of the allowance can go towards paying for the vehicle. If a cash allowance is spent on a private fi nance arrangement, it will be subject to income tax and National Insurance deductions, which means there is much less to spend. For businesses, it’s even more attractive given current cost pressures. Employers make National Insurance savings that they can either retain or pass these back to employees through the scheme. Hannah-Louise Kirkpatrick is the founder of Harmoto Vehicle Leasing