Changes in Tax Relief on Cars – what does it mean for my organisation?
From 1st April 2021 for companies and on 6th April 2021 for sole traders & partnerships, the tax relief available on cars used by businesses have been reduced yet further.
But what exactly has changed? In our blog, we will explore the key points you need to know regarding the latest changes and how they impact your organisation.
What changes were introduced?
The main changes centered around capital allowances. For businesses purchasing cars, capital allowances are available as follows:
- Brand new cars with 0g/km emissions (or electric cars) will receive a 100% first year allowance in the year of purchase.
- Cars with CO2 emissions between 1g/km and 50g/km will be entitled to an annual writing down allowance of 18%.
- Cars with CO2 emissions of more than 50g/km will be entitled to an annual writing down allowance of just 6%.
These limits have been gradually reducing over several years, historically set at 160g/km, falling to 110g/km rather than the 50g/km we are now working to.
Why have these changes been introduced?
The Government is keen to increase the uptake of low emission/electric cars and are therefore incentivising businesses to do so by reducing the tax relief available on higher emission cars.
It is important to keep in mind that if a purchased vehicle is used also for private purposes, VAT cannot be reclaimed on the purchase.
For businesses leasing cars, the annual costs are considered. Should the emissions of the car be over 50g/km, 15% of the annual costs are disallowed for tax purposes. It is possible to reclaim 50% of the VAT on these costs too.
Commercial vehicles will largely not fall into the above rules.