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 temporary ‘Super-Deduction’ has now ended, however, a new ‘Full Expensing’ (100% First Year Allowance) will apply to qualifying businesses and plant & equipment, from April 1, 2023 until March 31, 2026.
This means that limited companies (paying Corporation Tax) 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 Eligibility | All 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) |
| Period | Permanent |
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 Eligibility | All Businesses |
| Main Rate | 18% per annum (after AIA) |
| General Eligibility | New and used Plant and Machinery |
| Vehicle Eligibility | New and used LCVs and HGVs (not cars) |
| Period | Permanent |
Full EXPENSing
| Full Expensing (100% First Year Allowance) | |
|---|---|
| Business Eligibility | Limited Companies (Corporation Taxpayers) |
| Limit | Unlimited |
| General Eligibility | New Plant and Machinery |
| Vehicle Eligibility | New LCVs and HGVs (not cars) |
| Period | April 1, 2023 – March 31, 2026 |
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.