HM Revenue and Customs has announced proposed changes to vehicle corporation tax, which moves the regime to a CO2 based system. These changes, which are likely to become legislation in April 2009, apply to write-down and balance allowances as well as the expensive car allowance applied to lease vehicles.

They dictate the amount a company can claim against annual profit, in turn reducing the level of corporation tax paid.

From April 2009, the ownership cost of vehicle classed as non-expensive (those vehicles with a capital cost of less than £12,000) will increase. As a result, many businesses can benefit by reviewing how they fund their vehicles. Taxation changes will affect the owner of the vehicle irrespective of whether it is owned or leased.

Write-Down Allowance
Previously a company was able to claim depreciation, for corporation tax purposes, to a level of 25 per cent of the opening value up to £3,000.  

The 2009 rules will allow a business to claim 20 per cent of the opening value, for vehicles below the 160g/km emissions bracket, and just 10 per cent for vehicles above the 160g/km tax bracket. Like many leasing providers, we are awaiting the final details from the government. It is now understood that these changes won’t affect vehicles registered before the April change.

This means that a vehicle costing £14,000 with a CO2 output of 170g/km would have an allowed depreciation of £1,400 rather than the £3,000 previously allowed. Using these figures, and applying a corporate tax rate of 30 per cent, the new rules result in an increase in tax for that year of £480.

Balancing Allowance
The change in the balancing allowance treatment has the greatest impact. Previously a business could claim the entire depreciation – from the “tax allowed” written-down value to the actual sale value in the year of disposal. In future, a business can only claim the amount under the allowances of the altered write-down allowance.

Write-down allowances will now cover much longer time periods, lasting well past the date when the vehicle is sold and passed into new ownership. If the vehicle in the previous example was sold for £800, the business could have claimed the additional appreciation of £3,000. The new proposals will result in an additional business tax burden of £900.

Expensive Car Disallowance
This was once the key reason for businesses to change from leasing to purchase arrangements for executive cars. This restriction reduces the proportion of the rental, which can be offset against profit for tax purposes. The new amendments move the variable disallowance to a fixed rate based on CO2 emissions, therefore allowing expensive cars to be efficiently funded via contract hire.

What do these three changes mean when considered together? In summary, the cost of running an average vehicle will increase but, and here’s the key point, while the ownership cost will spread across an extended period, leasing the vehicle will now allow a user to optimise the corporation tax relief by realising the depreciation element of the rental earlier than before.  Businesses should not only review the funding of their vehicles, it is also vital to consider the CO2 output, and the revised timeframe when considering vehicle selection.

*Paul Harrop is sales and marketing director for Daimler Fleet Management UK

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