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100% capital allowance for low-emission cars

Sian Kelly Last updated: April 12, 2016

Cars do not qualify for the annual investment allowance, but by choosing a low or zero emission car it is possible to secure a 100% deduction in the year of purchase in the form of a 100% first year allowance.

What is a low emission car?

For capital allowance purposes, since 1 April 2015 a car is a low emission car if its CO2 tailpipe emissions are 75g/km or less. Until 31 March 2018, expenditure on new cars that meets this emissions test will qualify for a 100% first year allowance. This provides immediate write off against profits. It should be noted that it is only new cars that qualify – the 100% first-year allowance is not available for second-hand cars, even if they have CO2 emissions of 75g/km or less.

Example

John runs a small business, J Ltd, and purchases a car for use in that business. He chooses a fuel-efficient model with CO2 emission of 65g/km. The car costs £12,000 and John buys it new in February 2016. J Ltd prepares accounts to 31 March each year,

In computing his profits for the year to 31 March 2016, he can claim a first year allowance of £12,000 in respect of the car.

Added benefit

Choosing a low emission car will also keep the benefit in kind charge low. Cars with CO2 emissions of 51—75g/km are taxed on 9% of the list price in 2015/16 and on 11% of the list price in 2016/17.

Non-business use

If the car is used by an unincorporated business for both business and private use, the first year allowance can still be claimed, but must be reduced to reflect non-business use.

Example

Jessica is a sole trader and buys a small car, which she uses for both business and private mileage. The car has CO2 emissions of 60g/km and costs £8,000. Jessica buys it new in January 2016. 80% of her mileage is for business use and 20% is private use.

She is able to claim a first-year allowance of £6,400 (being 80% of £8,000).

No requirement to claim

It will not always be beneficial to claim the 100% first year allowance (for example, if the business does not have sufficient profits to utilise the allowance or is only planning to keep the car a short time and would prefer not to trigger a balancing charge). Instead, a writing down allowance (at 18%) can be claimed.

Capital allowances for cars which are not low emission cars

Cars which have CO2 emissions in excess of 75g/km do not qualify for the 100% first-year allowance. Instead, writing down allowances are given. The rate of writing down allowances depends on the CO2 emissions level of the car. If it is below 130g/km, writing down allowances are given at the rate of 18%. However, cars which have CO2 emissions of 130g/km or more are only eligible for writing down allowances of 8%.

Need to know

By choosing a new low emission car it is possible to claim a deduction of the full cost in the year of purchase.

If you need further advice on capital allowance for low-emission cars or information on any other tax related matters pl ease get in touch with us at Inform.