Policy paper

Capital Allowances: CO2 emission thresholds for business cars and first year allowances for business cars, zero-emission goods vehicles and equipment for gas refuelling stations

Published 11 March 2020

Who is likely to be affected

Businesses incurring expenditure from April 2021 on the acquisition of cars, zero-emission goods vehicles or equipment for gas refuelling stations for use in their business.

General description of the measure

The measure extends the period for which the 100% first year (capital) allowances (FYAs) are available for this expenditure from April 2021 to April 2025. In conjunction with this, the measure also reduces the CO2 emission thresholds which are used to determine the rate of capital allowances available for business cars. This will also reduce the threshold for the lease rental restriction. These changes will also come into effect from April 2021.

Policy objective

The measure is designed to incentivise the uptake of zero CO2 emission vehicles, following the Government’s announcement that it will consult on bringing forward the phase out date for the sale of new petrol, diesel and hybrid cars from 2040 to 2035, or earlier. This would also support the wider policy on climate change to reduce all greenhouse gas emissions from the UK to net zero by 2050.

Background to the measure

The last changes to the FYA for business cars were introduced at Budget 2016, which extended it to 2021 and reduced its CO2 emissions threshold. The Government has announced that it is consulting on bringing forward to 2035 the ending of sales of new petrol, diesel and hybrid cars and vans and has invited the public’s views through an open consultation published on 20 February 2020.

At Budget 2017, the FYAs for zero-emission goods vehicles and equipment for gas refuelling stations were extended to 2021.

Detailed proposal

Operative date

For the FYA for zero-emission goods vehicles, the legislation will have effect from 1 April 2021 for businesses chargeable to corporation tax. For businesses chargeable to income tax, it will have effect from 6 April 2021.

For the reduction to the CO2 emission thresholds together with the FYAs for low CO2 emission cars and equipment for gas refuelling stations, the legislation will have effect from 1 April 2021.

Current law

Capital allowances allow businesses to write down their qualifying capital expenditure on plant or machinery against their taxable income. Where 100% FYAs are available, the entire expenditure can be written down against taxable income in the tax period in which the expenditure is incurred. Otherwise the expenditure is allocated to a pool, which would be eligible for a writing down allowance (WDA) for the tax period in which the expenditure is incurred and succeeding tax periods on a reducing balance basis against taxable income at either the main rate or the (lower) special rate.

The capital allowances legislation for the 100% FYAs for cars with low CO2 emissions, zero-emission goods vehicles and equipment for gas refuelling stations is respectively at Sections 45D, 45DA and 45E Capital Allowances Act 2001 (CAA).

The capital allowances legislation which sets out the CO2 emission thresholds for business cars is at Sections 45D and 104AA CAA.

Where a business hires a car with emissions exceeding 110 grams per kilometre (g/km) and it is hired for more than 45 consecutive days, the deduction allowable for tax purposes for the expense of hiring the car is restricted.

The amount of the deduction allowable is reduced by 15%. This emission threshold for the purposes of the lease restriction is determined from the emissions threshold for the main rate of capital allowances.

Proposed revisions

Legislation will be introduced to extend the 100% FYAs for low CO2 emission cars, zero-emission goods vehicles and equipment for gas refuelling stations by 4 years from April 2021.

Legislation will be introduced to reduce the CO2 emission thresholds from April 2021, which determine the rate of capital allowances available through which the capital expenditure for business cars can be written down. The thresholds will be reduced from 50g/km to 0g/km for the purpose of the FYA for low CO2 emission cars and from 110g/km to 50g/km for the purpose of WDAs for business cars.

This will mean that business cars acquired from April 2021 with CO2 emissions of 0g/km will be eligible for the FYA (100%) while those business cars with CO2 emissions not exceeding 50g/km will be eligible for WDAs at the main rate (18%) while such cars with CO2 emissions exceeding 50g/km will be eligible for WDAs at the special rate (6%). The new 50g/km threshold will also apply for determining the lease rental restriction for costs of hiring business cars for more than 45 consecutive days.

Summary of impacts

Exchequer impact (£ million)

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025
-	negligible	-5	+10	+70	+110

These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020.

Economic impact

This measure is not expected to have any significant macroeconomic impacts. It will increase the incentive for businesses to invest in lower emission vehicles. A behavioural adjustment is applied to account for companies changing the type of car they purchase in order to fall into the tighter emission brackets and qualify for FYA and Main rate.

Impact on individuals, households and families

There is expected to be no impact on individuals as capital allowances can only be claimed on qualifying expenditure for businesses. There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

This is not expected to have any impact on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to impact on an average of 880,000 vehicles per year by extending the period for which these FYAs are available and the reduction of the CO2 thresholds in respect of the FYA and WDAs for cars.

However as this is a rate change and businesses will already be claiming capital allowances, the anticipated burden of the emission band changes on businesses is expected to be negligible. The extension for the FYA is expected to have a negligible impact on administrative burdens for business as the measure extends an existing FYA scheme.

The reduction in the CO2 thresholds will also impact some businesses where cars are hired and may require them to calculate the lease rental restriction on more of their car fleet. One-off costs will include familiarisation with the change and could also include updating software or purchasing new software as a result of the change and training or up-skilling staff as a result of the change. On-going costs could include providing HMRC with more data/information compared to what they do now.

Customer experience could be negatively impacted as some customers could face additional complexity as a result of this change. In addition, it may also increase the number of business cars for which the lease rental restriction will apply.

This measure is not expected to impact on civil society organisations.

Operational impact (£ million) (HMRC or other)

There will be HMRC operational costs, mainly IT, to develop this change which are estimated to be approximately £3.2 million.

Other impacts

This measure has a behavioural impact in encouraging businesses to purchase vehicles with zero CO2 emissions to support the Government’s wider objective on climate policy to reduce greenhouse gas emissions to net zero by 2050.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact John Rodgers on telephone: 03000 514188 or email: john.p.rodgers@hmrc.gov.uk