Applied Leasing, Tax Info

Tax Info

“In the 2008 Budget the Chancellor set out changes to the current Writing Down Allowance (WDA) and Expensive Car Leasing Disallowance regulations (ECLD). Taking effect from April 1st 2009

These latest taxation changes, announced in April 2008, according to the Government now focus on ‘replacing the existing capital allowance treatment for business cars with an emission based approach’. In line with VED, writing down allowances (WDA) and lease rental restriction (formerly known as Expensive Car Leasing Disallowance –

ECLD ) will now both be linked to CO2 emission levels.

The clear objective is to incentivise business to switch to low emission, more fuel efficient cars. The Energy Saving Trust estimates that British businesses could save £2.6bn* by switching to greener fleets.

Purchasers of cars will see the most significant change

From 1st April 2009, for companies purchasing vehicles that produce less than 110gkm of CO2 there is no change to the 100% WDA. The government has said that, until 2013, it will allow companies to write off the full cost of these cars in the first year.

From 1st April 2009, a redefined 20% WDA pool will apply to ALL vehicles above 110gkm and up to 160gkm; a NEW 10% pool will apply to ALL cars over 160gkm; There will be no maximum WDA of £ 3,000 nor will the expensive car (over £ 12,000 Retail Price) balancing concept operate.

This last element is the most significant in that it defers a purchaser’s opportunity to claim tax relief on any vehicle, irrespective of retail price, until many years after actually disposing of it. Currently a balancing allowance would be secured at disposal time. Consequently, this

now makes expensive vehicles OVER 160gkm much more costly to fund in cash flow terms.

The outgoing scheme

Capital Allowances

The Capital Allowances rules for motor cars have always differed in their treatment to those applied to other business expenses. There are three specific categories of motor cars that have their own distinct treatment. Any car with a CO2 value at or below 110gkm will secure 100% WDA in the first year.

Cars with a Retail Price of £12,000 or less will be placed in a 20% WDA pool operated on a reducing balance basis. Cars with a Retail Price in excess of £ 12,000 are treated on an individual

basis. WDA is restricted to 20% per annum – but with a maximum annual WDA allowance of £ 3,000. Once a vehicle is sold a balancing allowance (or charge) will be calculated thereby securing, within the life of the vehicle, all necessary tax relief. The car is removed from any ongoing corporation tax calculation.

Lease Rental Restriction

Expensive Car Leasing Disallowance (ECLD) is a permanent disallowance applied to the Finance portion of any car leasing agreement for any car whose Retail Price exceeds £ 12,000. This disallowance is applied as a percentage % of the Finance Rental and increases in scale as the Retail Price of the car increases.

Rules from April 09:

The new regime

Capital Allowances

As with the current rules three possible treatments will apply to motor cars. There

are however significant changes where the emphasis shifts towards a CO2 dynamic

rather than a Retail Price based approach. There is NO change in the first category: any

car with a CO2 value at or below 11 0gkm will secure 100% WDA in the first year.

Manufacturer	Toyota
Model	Prius 1.8VVTi T3 Hybrid CVT NEW
Body Style	Hatchbacks
Transmission	Automatic
Doors	5
Engine Size	1795cc
Fuel	Petrol
MPG (Combined)	72.4
CO₂ Emissions	89g/km

Toyota Prius 1.8VVTi T3 Hybrid CVT NEW Specs

Cars with a CO2 emission ranging from 111 gkm and up to 160gkm will be placed in a 20% WDA pool irrespective of Retail Price. No balancing allowance will be allowed and the pool will operate on a reducing balance method. Cars with a CO2 emission above 160gkm will be placed in a new 10% WDA pool again irrespective of Retail Price. Similarly no balancing allowance will be allowed and the pool will operate on a reducing balance method.

As a consequence many cars, particularly those falling into the new 10% WDA pool, will be written down over a much longer period than was previously the case.

Lease Rental Restriction

The concept of an Expensive Car (over £ 12,000 Retail Price) has gone. Instead of an increasing and permanent disallowance, as the price of the car increases, there will be a much simplified approach:

NO disallowance will be applied to any vehicle with a CO2 profile of 160gkm or below. A universal permanent disallowance of 15% (of the Finance Rental) will apply to any vehicle with a CO2 profile above 160gkm

What does this mean in practice?

In practice, under the new rules every vehicle will need to be considered on an individual basis to determine how the changes have affected overall cost of ownership. In principle, it will always be beneficial to choose a 160gkm or below vehicle – irrespective of the method of acquisition.

In most instances this simplification makes leasing a more attractive proposition: there is either NO disallowance or a much reduced liability of 15% compared to the outgoing, escalating method.

Currently any vehicle with a retail price greater than £12,000 suffers a PERMANENT disallowance (applied as a % of the Finance portion of the rental) which increases as the price of the vehicles increases. This is known as the Expensive Car Leasing Disallowance (ECLD).

From 1st April 2009, the concept of ‘expensive car’ has been removed and instead we see a Leasing Disallowance linked to the CO2 value of the car. Instead of an increasing disallowance as the cost of the car increased, we see a simple 15% disallowance being applied - irrespective of retail price. This is a

welcome change but does mean that any fleet policy must recognise the impact of crossing the 160gkm threshold on its costs.

The contrasting examples illustrate the impact of both the purchase and leasing positions under the current and new regimes.

Please note that these costs are purely illustrative.

CAPITAL ALLOWANCES EXAMPLES

1 – 100% First year allowance

Vehicle Cost

£13,785

Residual Value

£5,193

CO2 emissions

110g/km

Total Capital Allowances due

£8,592

Manufacturer	Citroen
Model	C1 5dr 1.4HDi VTR
Body Style	Hatchbacks
Transmission	Manual
Doors	5
Engine Size	1395cc
Fuel	Diesel
MPG (Combined)	68.9
CO₂ Emissions	109g/km

C1 5dr 1.4HDi VTR

Depreciation Rules @ 2008-2009

Depreciation – New Rules April 2009

Year

Current Asset Value

Writing Down Allowance

Year

Current Asset Value

Writing Down Allowance

13,785

(5,193)

(1,039)

(4,154)

(831)

(3,324)

(665)

(2,659)

(532)

(2,127)

(425)

(1,702)

(340)

(1,361)

(272)

All applicable capital allowances claimed dealt

with via balancing charge/allowance on disposal.

Balancing charge/ allowance entered into 20% pool – asset value drops below £100 after 22yrs

* Source: KPMG – December 2008

Capital Allowances Examples (Cont)*

CAPITAL ALLOWANCES EXAMPLES

2 – 20% First year allowance

Vehicle Cost

£14,685

Residual Value

£ 4,453

CO2 emissions

118g/km

Total Capital Allowances due

£10,232

Manufacturer	BMW 1 Series
Model	Coupe 118D 2.0 ES 2dr
Body Style	Coupés
Transmission	Manual
Doors	2
Engine Size	1995cc
Fuel	Diesel
MPG (Combined)	62.8
CO₂ Emissions	119g/km

BMW 1-Series Coupe 118D 2.0 ES 2dr

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