Business Finance: Peter Harrup on why it might be time to buy a greener car

THE idea of spending money on new business cars may not be particularly attractive at the moment but there may be significant tax advantages in replacing them before April 2013.

It is Government policy that the greener the car (that is, the less CO2 emitted per kilometre), the less tax you pay. But to keep up the pressure for ever greener cars, the limits are regularly reduced, with significant changes from April next year.

Businesses buying cars can claim 100% capital allowances in the year of purchase (that is, write off the whole cost) provided the car only emits up to 110g/km.

There are a few cars that meet this criterion but cars bought after April 1, 2013 will need to be even greener, as from that date this allowance will only be available for new cars with CO2 emissions of 95g/km or less.

The next break point is at 160g/km: cars emitting 160g/km or less currently qualify for a 20% writing down allowance but cars emitting more only get a 10% allowance, so it takes much longer to get full relief for the cost. This second limit will reduce to 130g/km for cars bought after April 1, 2013.

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Businesses that choose to lease cars rather than buy – a better option in cashflow terms – also need to consider the CO2 emissions of their vehicles as there is a similar cut off point for claiming the leasing costs.

Currently, for cars emitting up to 160g/km, the full leasing cost of the car can be claimed as a trading expense but for less efficient cars businesses are only entitled to claim 85% of the leasing costs as a deductible expense. This emissions limit also reduces to 130g/km from April 2013.

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Employees who have the use of a company car pay tax on this benefit in kind charge based on a percentage of the list price of the car when new – again, the greener the car the lower the percentage.

From April 2012, the scales increased so that, for example, an employee with an Audi A3 1.4 TFSI Sport 122PS emitting 120g/km will have a benefit of 15% of its list price for this tax year, rather than just 10% for the 2011/12 tax year – an income tax increase of over �400 for a 40% taxpayer.

A wide rebasing of benefit charges is scheduled to introduce a 13% minimum rate for all cars (even electric ones) from 2015/16, and by 2016/17 the benefit on such an Audi A3 will reach 21%.

Clearly, there will be advantages for both businesses and their employees in trading up to greener cars before April 2013, but take expert advice from an accountant (rather than a car dealer) before you do.

: : Peter Harrup is a partner at the Ipswich office of accountants and business advisers PKF

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