HM Revenue and Customs Brief 20/09
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Issued 1st April 2009
Modernising tax relief for business expenditure on cars:
Amendments to draft legislation and anti avoidance measures
This Revenue & Customs brief is of interest to all
businesses that buy or lease cars or that sell or lease cars to other
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
The legislation has been amended in the light of comments
received and the current draft
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
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
The legislation will also include rules that prevent either
condition being met by the taxpayer entering into arrangements to meet
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
- allowances are to be restricted under s217 or s218 (anti
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
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
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
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
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.
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.
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.
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.
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Article Published/Sorted/Amended on Scopulus 2009-04-04 12:05:44 in Tax Articles