Font Size

HM Revenue and Customs Brief 20/09

 By

HM Revenue and Customs -Tax Authorities

Tax Articles
Submit Articles   Back to Articles

Issued 1st April 2009

Modernising tax relief for business expenditure on cars: Amendments to draft legislation and anti avoidance measures

Readership

This Revenue & Customs brief is of interest to all businesses that buy or lease cars or that sell or lease cars to other businesses.

Background

At PBR the Government announced that the current capital allowance rules for 'expensive cars' and the associated rules that restrict deductions for expenditure on hire of 'expensive cars' are to be abolished; and replaced with new rules whereby the writing down allowances (WDA) and the restriction on deductions for expenditure on car hire are based on a car's carbon dioxide (CO2) emissions.

Draft legislation was published in a technical note (http://www.hm-treasury.gov.uk/taxrelief_cars_technote.htm) on 8 December 2008.

The legislation has been amended in the light of comments received and the current draft (http://www.hmrc.gov.uk/briefs/company-tax/brief2009_draft-legis.pdf    PDF 170K) also includes anti avoidance measures that were mentioned but not exposed in the technical note.

Restrictions on deductions for expenditure incurred on the hiring of a car

The new rules are intended to provide that the restriction will

  • be a flat rate disallowance of 15 per cent of the amount of the deduction that would otherwise be allowed
  • apply to only one lessee in a chain of leases (in most cases to the last business user)
  • apply to all cars including 'qualifying hire cars'

The rules are also intended to provide for the restriction to apply to a business that hires cars on short term to other persons.

Respondents to the technical note commented that the rules in the draft legislation that was published in December could result in the restriction applying to more than one lessee in a chain of leases.

They also gave rise to inconsistent treatment of lessees depending on whether or not the lessor was a 'short term hire business'.

The latest draft of the legislation  adopts a different approach to deliver the policy objectives outlined above. In brief the legislation will provide that s48 ITTOIA 2005, s56 CTA 2009 or s 578A ICTA 1988 will not apply (that is the restriction will not apply) to expenses incurred by a person on the hiring of a car if either one of two conditions is met;

The first condition is if the expenditure is incurred by a person ('the taxpayer') on the hire of a car from another person for a period (the hire period) of 45 consecutive days or less; and
the car is made available to the taxpayer (whether by the same person or different persons) for one or more periods linked to the hire period, the hire period and the linked period(s) taken together are less than 45 days.

The second condition is if the expenditure is incurred on the hire of a car which is leased for a period (the sub hire period) to another person (the customer) for more than 45 consecutive days, or
the taxpayer makes the car available to the customer throughout one or more periods linked to the sub hire period, the sub hire period and the linked period(s) taken together are more than 45 days.

The second condition will not be met if the 'customer' is an employee of the taxpayer or of a person connected with the taxpayer, or if the customer makes the car available to an employee of the taxpayer under arrangements with the taxpayer or with a person connected with the taxpayer.

A period of consecutive days ('the main period') is linked with

  • a period of consecutive days that ends not more than 14 days before the main period begins
  • a period of consecutive days that begins not more than 14 days after the main period ends, and
  • a period of consecutive days linked with either period above

The legislation will also include rules that prevent either condition being met by the taxpayer entering into arrangements to meet them.

S208A CAA 2001: Disposal value of cars which are in single asset pools under section 206 CAA 2001

Under the new rules expenditure on a car that is used for both business and non business purposes continues to be dealt with in a single asset pool under s206 CAA 2001.

The draft legislation now includes rules to prevent a person creating a balancing allowance by selling the car to a connected person for a nominal amount.

The rules will apply if;

  • a disposal value is required to be brought into account under s61 CAA 2001 and
  • the disposal event is that the person ceases to own a car to which s206 applies because of a sale or the performance of a contract, and
  • allowances are to be restricted under s217 or s218 (anti avoidance)

In those circumstances, the disposal value is the lower of the market value of the car and its cost to the person selling it. The person who acquires the car is treated as incurring capital expenditure on the car equal to the seller's disposal value.

This rule is similar to the rule in S79 CAA 2001 which applied to expenditure on cars which cost more than 12,000 and which are dealt with in single asset pools. The draft legislation now retains s79 for those cars throughout the transitional period.

S104F CAA2001: Winding up of businesses to create balancing adjustments

Under the current rules expenditure on cars costing over 12,000 is allocated to a single asset pool (one pool for each car), and the WDAs are restricted. When the car is disposed of the pool ceases and there is a balancing adjustment, in most cases a balancing allowance.

Under the new rules expenditure on cars is to be pooled in either the main (20%) pool or the special rate (10%) pool, depending on the cars' CO2 emissions. When cars are disposed of the disposal proceeds will be deducted from the appropriate pool and there will be no balancing adjustment unless it is the final chargeable period. The final chargeable period for the main pool or the special rate pool is the chargeable period in which the qualifying activity is permanently discontinued.

The new S104F applies if a company

  • incurs expenditure on cars which is allocated to the special rate pool, and
  • the qualifying activity carried on by the company is permanently discontinued; and
  • three further conditions are met.

The three conditions are

  • the qualifying activity consisted of or included (other than incidentally) making cars available to other persons
  • at any time in the 6 months after the qualifying activity is permanently discontinued the qualifying activity of a company in the same group consists of or includes (other than incidentally) making cars available to other persons
  • the balancing allowance to which the taxpayer would be entitled (but for s104F) in respect of the special rate pool is greater than the total of the balancing charges (if any) to which the taxpayer is liable for the final chargeable period in respect of any pool less the total of the balancing allowances to which they are entitled to for that period in respect of any pool other than the special rate pool.

The new s104F restricts the balancing allowance due to the company that permanently discontinues the activity to an amount equal to any balancing charges it might have. Any surplus balancing allowance is treated as notional expenditure incurred by the other company with a qualifying activity which consists of or includes (other than incidentally) making cars available to other persons regardless of whether or not they own any cars previously owned by the company that ceased the qualifying activity.

The taxpayer can nominate (not more than 6 months after the end of their final chargeable period) which company is to be treated as having incurred the notional expenditure. In the absence of such a nomination by the taxpayer HMRC can nominate the relevant company.

The other company is treated as having incurred the expenditure on the day after the end of the taxpayer's final chargeable period.

Where there are overlapping accounting periods the rules will prevent WDAs being claimed twice on the same expenditure.

Lessee under a long funding lease

Long funding leases (LFL) are defined at s70G CAA 2001. The lessee, not the lessor, is entitled to claim capital allowances on plant or machinery subject to a LFL. Because the lessee under a LFL is entitled to claim capital allowances, the LFL rules restrict the amount of rentals for which they may receive a deduction.

The lessee's capital allowances claim is currently subject to the 'expensive car rules' and will in future be within the new emissions based rules. This means that a lessee of a car with emissions above 160 g/km could potentially suffer a partial disallowance of its deduction for lease rental payments under both the LFL rules and the lease rental restriction rules.

The draft legislation addresses this potential double disallowance by amending s49 ITTOIA, s57 CAA2009 and s578B ICTA1988 to the effect that the restriction on the deductions for expenditure incurred on the hire of cars does not apply where a lease is a long funding lease as defined in s70G CAA2001.

Motorcycles

Under the new rules, motorcycles will be excluded from the capital allowances definition of a car. On this basis the draft legislation provides that expenditure on motorcycles will qualify as standard plant and machinery expenditure and so will qualify for the Annual Investment Allowance (AIA), with any balance of expenditure falling to be allocated to the main plant and machinery pool, attracting WDAs at 20 per cent a year. Expenditure on motorcycles will also qualify (where appropriate) for first year allowances and to be treated as short life asset expenditure.

Commencement

The drafting of the commencement provisions has been amended to make it clearer to what expenditure the new and old rules apply by defining 'new' and 'old' expenditure.

Consequential amendments

The draft legislation includes consequential amendments to various sections to reflect the amendments described above which were not reflected in the draft that was previously published.


About the Author

Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



Follow us @Scopulus_News

Article Published/Sorted/Amended on Scopulus 2009-04-04 12:05:44 in Tax Articles

All Articles

Copyright © 2004-2019 Scopulus Limited. All rights reserved.