HMRC regards company vehicles as tools of the business. As such, the costs incurred are not taxable and can be offset against profits – reducing the company’s tax liability.
However, HMRC doesn’t treat them the same way they treat day-to-day expenses such as running costs and general office expenses, they can’t just be subtracted from income. To get the tax deduction, Capital Allowances must be applied.
Capital Allowances vary depending on the type of vehicle and whether it is purchased or leased. Here’s a summary of what the capital allowances are and how they work in the UK.
Customers can claim capital allowances on cars they buy and use in their business. Part of the value of the car can be deducted from any profits before tax is paid. ‘Writing Down Allowances’ are used to work out what can be claimed.
Cars do not qualify for Annual Investment Allowance (AIA).
The rate of allowance that can be claimed depends on the C02 emissions of the car and the date the car was purchased.
|Tax Allowances: Capital Allowances for Cars (Purchased) 2021 – 2025|
|Description of car||Annual Allowance|
|New and unused car with C02 emissions of 0g/km (or electric car)||FYA – 100%|
|Second hand electric car||Main Rate – 18% pa|
|New or second hand car with C02 emissions of 50g/km or less||Main Rate – 18% pa|
|New or second hand car with C02 emissions of 50g/km or more||Special Rate – 6% pa|
The main and special rates apply from April each year. The first-year allowances (FYA) rate applies from April 1 for all businesses.
Finance Interest (Revenue Allowances/Business Expenses)
If the business enters into a finance agreement to purchase the vehicle, the interest paid is also allowable against profits as a business expense, also known as a revenue allowance.
These allowances are deemed to have been paid for out of day-to-day business expenses and must be offset against taxable profits in the year in which they are raised.
HMRC treats all lease rentals as an allowable business expense. In the same way that interest is allowable as a revenue allowance for a purchase plan, the rentals paid must be claimed in the year they are incurred. If they are not claimed in the year they are incurred, the amount is unrecoverable.
The actual amount of the lease that is tax allowable is determined by the CO2 emissions of the car.
|Revenue Allowances for Cars (leased) 2021 – 2025|
|CO2 g/km||Annual Allowance|
|Up to 50g/km||100% of lease rental|
|Over 50g/km||85% of lease rental|
The day-to-day business running costs of a company vehicle are allowable business expenses and are accounted for `as paid` in each tax year. These include: