Capital allowances are a mechanism for providing tax relief for capital expenditure.
Relief is generally given in the form of a writing down allowance, although a first year allowance is available for expenditure on new and unused zero-emission cars. Expenditure on cars does not qualify for the annual investment allowance or for the time-limited super-deduction or 50% first-year allowance available to companies. Capital allowances cannot be claimed where the simplified expenses system is used to pay mileage allowances.
Capital allowances for cars can be claimed by both unincorporated businesses and companies. They can also be claimed where the cash basis is used as expenditure on cars cannot be deducted under the cash basis capital expenditure rules.
A 100% first-year allowance is available for expenditure on new and unused zero-emission cars. This means that the cost can be deducted in full in computing taxable profits in the period in which the expenditure is incurred.
The first-year allowance is only available for new cars; second-hand zero-emission cars only qualify for a writing down allowance.
A balancing charge, equal to the sale proceeds, will arise if the car is sold.
There are two rates of writing down allowance – the main rate and the special rate. The available rate depends on the car’s CO2 emissions and the date on which the expenditure was incurred.
New and used cars purchased on or after 6 April 2021 which have CO2 emissions of 50g/km or less (other than new electric cars qualifying for a 100% first-year allowance) are added to the main rate pool and receive main rate allowances at the rate of 18% on a reducing balance basis.
Cars purchased on or after 6 April 2021 with CO2 emissions in excess of 50g/km must be added to the special rate pool. They attract special rate writing down allowances of 6% on a reducing balance basis.
If the car is sold, the sale proceeds must be added to the relevant pool. This ensures that capital allowances are given for the difference between the cost and the proceeds over the life of the car.
If a sole trader or partner uses a car partly for business and partly for private use, capital allowances are proportionately reduced to reflect the private use. Cars used for business and private use have their own pool rather than being added to the main rate or special rate pool.
Employees are not able to claim capital allowances for cars, even if they use them for business. The approved mileage rates (which may be paid tax-free up to the approved amount) provide an element to cover depreciation.
Partner note: CAA 2001, ss. 45D, 52, 56, 74—82.