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Tax efficient green cars opportunity

The phrases ‘tax efficient’ and ‘cars’ do not normally sit comfortably together but this is changing due to new developments regarding ultra-low emission (ULE) cars, explains LSCA Taxation Committee member Pat Nown.

May 2020

From 6 April 2020, changes in how the provision of ULE cars to employees or directors are taxed, as well as the availability of First Year Allowances (FYA) on such vehicles, offer a unique opportunity to align the tax incentives from both the business and user perspective.

Car benefits 

In 2019/20 the lowest taxable benefit percentage (multiplied by list price = benefit) on an employer provided ULE car, even if zero emissions, was 16%. In 2020/21 this could be 0%.

From 6 April 2020, new low percentages apply on employer provided ULE cars with C02 emissions which range from 0-50. Two factors determine the percentage to be used. The first factor depends on when the car is registered. There is a distinction between cars registered before and on/after 6 April 2020. The second is that the applicable percentage depends on the electric mile range of the car before it has to be recharged. The higher the miles the lower the percentage. The percentages are set to range from 0% to 12% for cars registered on/after 6 April 2020 and 2% to 12% for cars registered before that date. 

The acquisition of a ULE company car for a director, for example, not only means a low personal tax benefit but also a low Class 1A Employer NIC charge. But what about the tax deduction position for the business?

FYA on ULV cars 

The good news is that a 100% FYA deduction remains available on ULE cars up to 75 CO2 emissions until 31 March 2021, so it is tax cost effective for the business too.  This is only available if the car is new and unused at acquisition. However, from April 2021, it is bad news for capital allowances on most cars.  The 100% FYA is only retained for cars with 0% emissions, meaning other car acquisitions will only qualify for writing down allowances at either 18 or 6%.

Pat Nown is a consultant at Mercia and a member of the LSCA Taxation Committee.

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