You may have heard the Chancellor’s announcement in November that he intends to change the capital allowances system for business expenditure on cars. As these proposals are to take effect from April 2009, we thought you would be interested in hearing what the changes will involve.

The existing rules

Under the existing capital allowances system, expenditure on cars is generally treated in one of four ways:

1. If a car costs more than £12,000, it is subject to a separate tax computation. This restricts the annual tax allowance (known as a Writing Down Allowance or WDA) to a maximum of £3,000 – known as the ‘expensive car’ rule.

2. If a car costs £12,000 or less, then the expenditure is placed in the main capital allowances pool which obtains a WDA of 20%.

3. If a car has CO2 emissions of 110 grams per kilometre (g/km) or less, a low emission car, then a 100% First Year Allowance (FYA) may be due on the total cost of the car.

4. If the proprietor of a self employed business uses a car for private as well as business purposes, then the car is treated as a separate single asset so that the private element of any FYA (low emission cars only) or WDA can be adjusted in respect of that private use.

The new rules

The new rules for cars apply to expenditure incurred on or after 6 April 2009 (1 April 2009 for companies). There will be no difference in the treatment of petrol and diesel cars.

The 100% FYA for expenditure on cars with CO2 emissions of 110g/km or less remains up to 2013 but the old ‘expensive car’ rules are abolished.

The rate of WDA for expenditure on other cars will also be determined by the car’s CO2 emissions. The new rules provide that expenditure on cars with CO2 emissions:

  • not exceeding 160g/km will be pooled in the main capital allowance 20% pool: and
  • over 160g/km will be pooled in the 10% pool.

The 10% pool was introduced for capital allowances from 1 April 2008 to accommodate various special categories of plant expenditure including relevant cars from April 2009.

Electric cars will be placed in the 20% pool.

Cars with private use

Expenditure incurred on a car that is provided or used partly for non-business purposes will continue to be treated as a single asset calculation. The WDA of this single asset will be determined by the CO2 emissions of the car as above and the allowances will continue to be adjusted so that only the proportion of the allowances relating to business use is allowed.

Other cars

Cars that were first registered before 1 March 2001 do not have CO2 emissions data on their registration documents. It is proposed that expenditure on such cars will be allocated to the main 20% pool.

Where cars are registered on or after 1 March 2001 but do not have an approved CO2 emissions figure, the proposal is that they will either be allocated to the 10% pool or, if used partly for private use, treated as a single asset with a rate of 10% WDA.

Cars acquired before 1 or 6 April 2009

Expenditure on cars costing less than or equal to £12,000, incurred before either the 1 or 6 April 2009, will continue to be pooled in the general 20% pool, regardless of the car’s CO2 emissions.

Expenditure on cars costing more than £12,000 and incurred before either the 1 or 6 April 2009 will continue to be subject to a separate calculation for each asset and subject to a 20% WDA. This treatment will continue for a transitional period.

For these cars, WDAs will continue to be capped at £3,000 per annum for that period. If the car is disposed of before the end of the transitional period, a balancing adjustment will be available. However, any balance of unrelieved expenditure on the asset after the transitional period will be taken to the main 20% pool.

The transitional period will end on the last day of the business’s first chargeable period ending on or after 5 April 2014 (31 March 2014 for companies). It is being referred to as a five year transitional period but depending on the accounting period of the business may be longer.


A company bought a car for £25,000 in its accounting period ending 31 December 2008. This expensive car is subject to a separate calculation outside the main 20% pool as it is pre-April 2009 expenditure.

The allowances will be calculated under the old rules with an annual WDA of 20% not exceeding £3,000 for the 7 periods to 31 December 2014.

The transitional period will then end on 31 December 2014 (the last day of the first accounting period to end after 1 April 2014). At 31 December 2014 any unrelieved expenditure will be transferred into the 20% pool.

Expenditure on cars by the self employed, purchased prior to April 2009, with private use, will continue to have separate calculations for each car. The WDA of 20% will continue after the transitional period has ended until the car is disposed of.

What is the effect of these changes?

Assume John’s company purchases a new BMW 520 car for £25,000 and uses it for 4 years before it is sold for £12,000. The table below shows the differences that may arise during the ownership period.

Current rules More than 160g/km CO2 – relief at 10% Up to 160g/km CO2 – relief at 20%
£ £ £
Year 1 – cost 25,000 25,000 25,000
Allowance 3,000 (max) 2,500 5,000
Amount to carry forward 22,000 22,500 20,000
Year 2 – allowance 3,000 (max) 2,250 4,000
Amount to carry forward 19,000 20,250 16,000
Year 3 – allowance 3,000 (max) 2,025 3,200
Amount to carry forward 16,000 18,225 12,800
Year 4 – sale (12,000) (12,000) (12,000)
Balancing allowance 4,000 None None
Year 4 – allowance 623 (6,225 x 10%)* 160 (800 x 20%)*

*Further WDA @10%/20% will continue in subsequent years following the period of disposal on the same reducing balance principle.

Of course, if John ran a self employed business and used the car privately, the situation would be rather different. Although there would be a reduction in the WDA each year to reflect any private usage, there would be a balancing allowance when the car is sold.

And finally – car hire

Currently businesses generally face a reduction in the amount of rental payments allowable as a deduction for expenditure incurred on the hiring of a car if the retail price of the vehicle, when new, exceeds £12,000. The disallowance is by reference to a rather convoluted calculation.

Where a lease commences on or after the 6 April 2009 (1 April 2009 for companies), the reduction in the amount of car lease rental payments will be applied only to expenditure on cars with CO2 emissions over 160g/km. The new rules will disallow a flat rate of 15% of the amount of the deduction that would otherwise be allowed.