Alastair Kendrick, director of employment tax services, Mazars: Capital allowance rules drive fleet changes

The changes to capital allowance rules on company cars enforced this month are likely have a significant impact on future fleet costs.

Previous rules considered any car costing more than £12,000 to be an expensive vehicle, and therefore subject to a separate taxation calculation for capital allowance relief. As part of the government’s efforts to simplify the rules, a limit was put on the relief, which can be claimed year on year for cars that have a CO2 emission level of above 160g per km. The rules for cars with CO2 emissions below 110g per km remain unchanged.

Employers that lease cars for their employees will find it more straightforward to determine the tax relief they are entitled to. For cars with a CO2 emission below 160g per km, employers will be able to claim 100% of the cost of leasing. Meanwhile, cars with CO2 emissions above 160g per km will attract a 15% disallowance, which, in reality, means the employer can claim back 85% of the cost of leasing.

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However, those who own the vehicle (the leasing company, if leased) will have to create two pools of cars for capital allowance purposes. For the pool of cars that have CO2 emissions below 160g per km, a writing-down allowance of 20% of the balance of cost can be claimed, but for vehicles in excess of 160g per km, the relief will be limited to 10%.

Meanwhile, the leasing company will not get the balance of any cost on a vehicle in the year of disposal, as they did previously, and the balance of any relief on the actual loss will continue to be claimed year on year. In my view, there will be a significant drag in time before this relief is obtained in full, which could be in excess of 40 years.

Given the length of time taken to obtain this relief, the cost of cars is likely to increase significantly. This will be worse for cars with CO2 emissions above 160g per km, but increases are also likely to be seen for lower-emission cars.

Rather than ceasing to offer cars with higher CO2 emissions to senior employees altogether, employers should either allow them to cash out to or move into an affinity/employee car ownership arrangement, which will be unaffected by these legislative changes.