Budget Notes

BN11 100 PER CENT FIRST-YEAR ALLOWANCES FOR EXPENDITURE ON CARS WITH LOW CARBON DIOXIDE EMISSIONS.

Who is likely to be affected?

1. Businesses that purchase new, unused (not second hand) low carbon dioxide (CO2) emission cars or lease low CO2 emission cars.

General description of the measure

2. The 100 per cent first-year allowance (FYA) for expenditure on cars with CO2 emissions not exceeding 120g/km is due to end on 31 March 2008. Legislation will be introduced in Finance Bill 2008 to:

•    extend the scheme for an additional five years until 31 March 2013;

•    reduce the qualifying emissions threshold so that only expenditure on cars with CO2 emissions not exceeding110g/km driven will attract the 100 per cent FYA; and

•    introduce a transitional rule to ensure that any leasing contracts entered into before 1 April 2008 involving cars which qualified as low emissions cars under the old rules are unaffected by the reduction of the qualifying CO 2 emissions limit to 110g/km and below.

Operative date

3. This measure will have effect for expenditure incurred on or after 1 April 2008.

Current law and proposed revisions

4. Capital allowances allow business to write off the costs of capital assets, such as plant and machinery, against their taxable income. They take the place of commercial depreciation, which is not an allowable deduction in computing profits for tax purposes. On and after 1 April 2008 the general rate of plant and machinery writing down allowance (WDA) will be 20 per cent per annum on a reducing balance basis.

5. 100 per cent first-year allowances (FYAs) bring forward the time tax relief is available by enabling a business to claim relief on the full cost of an asset against its profits for the year in which the investment is made.

6. A scheme exists that gives 100 per cent FYAs to all businesses that purchase new cars with CO2 emissions not exceeding 120g/km driven. The scheme is due to end on 31 March 2008. This measure will extend the scheme for an additional five years to 31 March 2013.

7. The definition of a qualifying low CO2 car will also be amended. For expenditure incurred on or after 1 April 2008 the applicable CO2 emissions threshold will be reduced from not exceeding 120g/km driven to not exceeding 110g/km driven.

8. Low emission cars are not subject to the special rules for cars costing over £12,000. So it has been necessary to introduce a transitional rule to ensure that lessees who have entered into contracts to lease cars that currently qualify as low CO2 emission cars do not find mid lease, that as a result of the change to the definition of a low CO2 emissions car, their cars no longer qualify as such.

9. This rule will ensure that payments on leases in existence on 31 March 2008 for cars costing over £12,000 with CO2 emissions above the new threshold but below the current threshold (i.e. between 110g/km and 120g/km) are not subject to the LRR for the period on and after 1 April 2008 until the expiry of the lease.

Further advice

10. If you have any questions about this change, please contact Annie Carney on 020 7147 2603 (email: annie.carney@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk