Capital allowances on cars – understanding the rules
Chris Campbell, ICAS Head of Tax explains the capital allowances rules on cars in light of the growing shift towards electric vehicles.
How are cars treated differently for capital allowances?
While the annual investment allowance (both companies and unincorporated businesses) and full expensing (companies only) offer 100% up front relief on qualifying expenditure, this doesn’t apply to cars. There is a difference between the capital allowances treatment of cars compared with vans and commercial vehicles.
The capital allowances available on expenditure for cars depends on factors such as the CO2 emissions of the vehicle and whether the car is new or used. You can refer to gov.uk to find a car’s CO2 emissions details. It’s important to remember that the CO2 emissions of a vehicle only affect the capital allowances treatment of cars, while the treatment of vans and commercial vehicles is unaffected by the emissions level of the vehicle.
Expenditure on cars bought before 31 March 2025 will qualify for a 100% first year allowance if they are new and unused, and have a 0g/km CO2 emissions or are fully electric. However, if the car does not meet these criteria, the expenditure on it will qualify for Writing Down Allowances. Cars with emissions of 50g/km or less will have a Writing Down Allowance of 18% per annum of the car’s purchase cost, while cars with emissions over 50g/km will have a Writing Down Allowance of 6% per annum.
HMRC manual CA23153 considers the example of demonstrator vehicles and states that a car should be treated as unused even if it has been driven a limited number of miles for the purposes of testing, delivery, test driven by a potential purchaser, or used as a demonstration car. However, the definition of ‘limited’ is open to interpretation. Where there is ambiguity, the suggested best practice would be to make sure that the circumstances are sufficiently disclosed on the business’ tax return.
The spring Budget also extended the first year allowance available on electric vehicle charge point equipment to 31 March 2025 (companies) and 5 April 2025 (unincorporated businesses).
What is the definition of a car for capital allowances?
Whether a vehicle is considered a car or a van/commercial vehicle can make a significant difference to the capital allowances available.
Section 268A CAA 2001 defines a car as a mechanically propelled road vehicle other than a motorcycle, a vehicle of a construction primarily suited for the conveyance of goods or burden of any description, or a vehicle of a type not commonly used as a private vehicle and unsuitable for such use. So it’s important to view each vehicle on a case-by-case basis.
Motorcycles (except those bought before April 2009) and lorries, trucks and vans are not classed as cars for capital allowances purposes. As a result, they should qualify for annual investment allowance (both companies and unincorporated businesses) and full expensing (companies), subject to the normal rules.
While vehicle tax categorisation can be indicative of the likely capital allowances treatment of a vehicle (for instance, if this categorises a vehicle as a car, it is difficult to argue otherwise for capital allowances), it’s not necessarily conclusive. Where there is ambiguity on the treatment of a vehicle, it’s important that the circumstances are sufficiently disclosed to HMRC on the business’ tax return. It may also be helpful to ask the client to take pictures of the vehicle so that they can demonstrate the filing position taken in respect of that vehicle in the tax return of the business.
How should cars be treated when sold?
When disposing of a car, it’s necessary to consider the original capital allowances treatment of the vehicle. For example, if the car qualified for 100% first year allowance, any proceeds on disposal may result in a balancing charge.
In any case, allocating the disposal proceeds to the main pool or special rate pool, you should consider the thresholds that applied when the vehicle was purchased. The HMRC website gives details of how the rates and thresholds have changed in recent years.
This means, for instance, that a car bought between April 2013 and April 2015 with CO2 emissions of 130g/km should be treated as a disposal from the capital allowances main pool, even though the addition of a vehicle with the same emissions bought today would be treated as a special rate pool addition. The vehicle should be treated as a disposal from the same pool as it was added to.
What other tax issues need to be considered regarding cars?
For unincorporated businesses, the capital allowances available on (as well as any balancing charge on) a vehicle used by an owner of the business need to be restricted for private use. The private use element of any expenses in the profit and loss account that relates to the vehicle would also be disallowed in the tax computation of the business. No private use restrictions apply for limited companies, but there can be benefit-in-kind implications (see below).
Aside from the capital allowances issues on cars, it’s important to keep in mind the benefit-in-kind treatment for private use of vehicles, which could apply where the vehicle is available for use by an employee or director. The value of the taxable benefit and the criteria for private use is different for company car benefit, compared with company van benefit.
If you have any questions regarding this article, please speak to your tutor.