Capital allowances on business cars, used to write down the value of company-purchased vehicles, are changing. And changing significantly.
The main 100% first year allowance continues for cars with zero emissions until 2024/25 tax year. However, cars qualifying for the main rate of 18% will now only qualify if they have CO2 emissions of 1-50g/km; while cars with CO2 emissions above 50g/km will be subject to a writing down allowance of just 6%.
When you consider that the most recent average CO2 emissions of the cars in the UK was 124.5g/km (source: SMMT), that places a significant number of cars in the least favourable writing down allowance pool.
The changes to writing down allowances have moved quickly, very much in line with the Government’s Road to Zero plan that includes the banning from sale of all petrol and diesel engines from 2030. It’s also worth remembering that it was only in April 2018 that a vehicle emitting 75g/km – classed then as an ultra low emission vehicle – would be eligible for a 100% first year allowance. It demonstrates how far and how swiftly the goalposts have moved. From April 2021 such vehicles are classed as high emission with allowances slashed to 6%.
Capital allowances on business cars 2021/22
First year 100% allowance
- Qualifying cars must be zero emission
Main writing down allowance 18%
- Qualifying cars with CO2 emissions 1-50g/km
Special rate 6%
- Qualifying cars with CO2 emissions 51g/km and above
It should also be noted that this is only on a reducing balance basis, so it takes years and years to actually write down a vehicle’s costs. The result is plenty of on-balance sheet assets being continuously written down.
Fleet acquisition – time for a change with the new tax rules?
But as we enter the potential end of the coronavirus crisis, now that vaccines are being rolled out, is it time to reconsider the way your fleet acquires its vehicles, as well as ensuring the most tax efficient methods are used?
Business car leasing of company cars provides the use of an asset for a predetermined period and mileage, and makes better use of capital at a time it could be used to expand a business in post-COVID Britain’s stretched finances.
The way company cars are taxed on their benefit in kind has changed significantly, too. Electric vehicles (EVs) with zero emissions were subject to a 16% drop in the company car tax bandings to 0% in 2020/21, and rates will rise to just 1% and then 2% until the 2024/25 tax year.
The savings for company car drivers are equivalent to a salary rise. For example, the driver of a diesel BMW 520d (P11D £43,540) would expect to pay company car tax amounting to £420 each month in the 2021/22 tax year at the 40% higher rate; the driver of a zero emission Tesla Model 3 (P11D £43,490), meanwhile, would expect to pay company car tax of just £14.50 per month.
Having established there are some significant driver savings to be realised by moving to a zero emission vehicle, what are the savings for the business, especially if there is a swap to leasing?
We’ve used an online calculator called Gensen from BCF Wessex, a specialist tax consultancy and software solutions provider, to demonstrate example savings possible. All are based on a 3+33 lease profile with an annual mileage of 20,000 miles, of which 10,000 miles are for business. The costings are presented as whole life cost figures – in other words, all tax and VAT relief along with items such as maintenance expenditure are considered over the three year period.
Let’s start with that Tesla Model 3 (above), which has first year capital allowances of 100% if you purchase rather than lease. Here’s the example:
Tesla Model 3 Standard Plus 4dr Auto Saloon – purchasing costs
Depreciation £20,862.71
Maintenance £2,085.12
Business fuel £716.83
Insurance £1,283.01
Class 1A NIC £108.41
Other costs £174.46
True whole life cost £25,231
Tesla Model 3 Standard Plus 4dr Auto Saloon – leasing costs
Rental £15,736.21
Maintenance £2,117.16
Business fuel £716.83
Insurance £1,283.01
Class 1A NIC £108.41
True whole life cost £19,962
When you take all the relevant costs into consideration, including discounted cash flow, leasing works out more favourably, saving the business £5,269 over the term. Multiply that by 10 vehicles and that’s a tidy addition to the bottom line
What, though, if we were to consider vehicles in the sub 50g/km bracket where the main capital allowance is available? One very good example is the BMW X5 PHEV – it has very low CO2 emissions overall (29g/km) and has the ability to travel up to 52 miles in zero emission mode on its battery. The result is not only an economical vehicle for its size, but favourable benefit in kind for the driver at £163 per month (at the 40% higher rate for 2021/22 tax year).
So how do the sums work for the business – is it a case of buying the X5 (above) and making use of the 18% capital allowances, or leasing the vehicle? The workings are shown below:
BMW X5 xDrive45e M Sport 5dr Auto – purchasing costs
Depreciation £33,663.75
Maintenance £3,140.32
Business fuel £434.90
Insurance £1,283.01
Class 1A NIC £1,291.45
Other costs £832.70
True whole life cost £40,646
BMW X5 xDrive45e M Sport 5dr Auto – leasing costs
Rental £26,624.12
Maintenance £3,188.58
Business fuel £434.90
Insurance £1,283.01
Class 1A NIC £1,291.45
True whole life cost £32,822
Rather like the Tesla, when you consider all the costs, leasing works out the better option, saving the business £7,824 over the term. Again, multiplied over a 10 vehicle fleet and that’s nearly an £80,000 saving over the three years.
Think about the future differently
“The changes to legislation concerning business car allowances, which are primarily designed to encourage fleets and businesses to move to zero emission vehicles, plus the benefit in kind taxation and consequently Class 1A National Insurance changes, are significant for both fleets and drivers,” says Mike Manners, Managing Director of CBVC Vehicle Management (pictured above).
“To fully appreciate the savings fleets need to also look at vehicles on a ‘Whole Life Cost’ or ‘Total Cost of Ownership basis’ to fully work through all the tax effects and potential fuel cost savings.
“It represents a key moment to reconsider the construct of fleets, vehicle allocation policy and acquisition method. There are significant savings to be made for businesses if they move to business car leasing through multi-bid vehicle funding, while switching drivers into electric vehicles where practical ensures substantial driver savings on company car tax – not to mention the attendant NIC savings for businesses.
“I would strongly encourage business fleets to reconsider their policies in light of these changes and take advantage of the bottom line savings.”
“The changes to legislation concerning business car allowances, which are primarily designed to encourage fleets and businesses to move to zero emission vehicles, plus the benefit in kind taxation and consequently Class 1A National Insurance changes, are significant for both fleets and drivers,” says Mike Manners, Managing Director of CBVC Vehicle Management (pictured above). 