Capital Allowances

HMRC regards company vehicles as tools of the business. This means, 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.

Purchased LCVS

The value of a commercial vehicle will reduce during its useful working life and HMRC allows a business to claim this cost against taxable profits within their Annual Investment Allowance or as a Capital Allowance. The actual allowance is based on the capital cost of the vehicle and is not linked to CO2 emissions.  

cAPITAL ALLOWANCES – GENERAL

To ensure the UK has one of the most competitive business tax regimes of major economies the Government has refined the Capital Allowance regime for investment in plant and equipment, recognising that the reliefs and allowances within the tax system are an important factor in business investment decisions. 

The decision to permanently set the Annual Investment Allowance at £1 million, means 99% of businesses receive 100% tax relief on their qualifying plant and machinery investments in the year of investment.  

The “Full Expensing” (100% First Year Allowance) will apply to qualifying businesses and plant & equipment, on a permanent basis (was due to end in March 2026) 

This means that companies (Corporation Taxpayers) across the UK will be able to write off the full cost of all qualifying main rate plant and machinery in the year of investment.  

Annual investment allowance (aia)

Annual Investment Allowance
Business EligibilityAll businesses
Limit£1,000,000 (First Year Allowance)
General Eligibility  New and used Plant and machinery
Vehicle Eligibility  New and used LCVs and HGVs (not cars)
PeriodPermanent

Note: Any allowable capital expenditure more than the AIA during a financial year, is dealt with in the main pool and written down at 18% on a reducing balance basis. This is often referred to as `Writing Down Allowances` (WDA). 

Capital Allowances

Capital Allowance
Business EligibilityAll Businesses
Main Rate18% per annum (after AIA)
General Eligibility  New and used Plant and Machinery 
Vehicle Eligibility  New and used LCVs and HGVs (not cars)
PeriodPermanent

Full EXPENSing

Full Expensing (100% First Year Allowance)
Business EligibilityLimited Companies (Corporation Taxpayers)
LimitUnlimited
General Eligibility  New Plant and Machinery 
Vehicle Eligibility  New LCVs and HGVs (not cars)
PeriodPermanent
Capital allowances: Technical consultation on extending full expensing to assets for leasing – Draft legislation on an extension of full expensing to assets for leasing will be published shortly.

Full expensing will be extended to assets for leasing when fiscal conditions allow.

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. 

LEASED LCVs

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. 

vehicle expenses

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: 

  • Fuel 
  • Servicing & Maintenance 
  • Tyres 
  • RFL etc