Magee Gammon Partnership LLP (M112)

New rules on capital

allowances and cars

The tax treatment of cars under the

capital allowances system changed with

effect from 1 April 2018. The new rules are

likely to have a significant impact on many

businesses. Here we consider the changes

in more detail.

‘Capital allowances’ is the term used to describe

the deduction we are able to claim on your behalf

for expenditure on business equipment, in lieu of

depreciation. The allowances available depend on

what you are purchasing, and there are special

rules for cars. Unlike expenditure on most plant

and machinery, expenditure on cars does not

qualify for the £200,000 Annual Investment

Allowance (AIA) and instead only benefits from the

writing down allowance (WDA). Any expenditure

not covered by the AIA (or enhanced capital

allowances) enters either the main rate pool

or the special rate pool, attracting WDA at the

appropriate rate.

What’s changed?

Whether the expenditure enters the main rate pool

or the special rate pool depends on the vehicle’s

emissions. Prior to 1 April 2018, expenditure

on cars with CO

emissions not exceeding

130 g/km was allocated to the main pool,

which attracts a WDA rate of 18%. Meanwhile,

expenditure on cars with emissions over 130 g/km

entered the special rate pool, which attracts an 8%

WDA.

However, the government has now lowered the

emissions thresholds for capital allowances,

thus restricting the available tax relief. The changes

apply to business expenditure on cars which

is incurred on or after 1 April 2018. From this

date, expenditure on cars with CO

emissions not

exceeding 110 g/km enters the main pool, while

those with emissions over 110 g/km now enter the

special rate pool.

It should be noted that the reduction in the

emissions threshold from 130 g/km to 110 g/km

will not apply to expenditure incurred under car

hire contracts entered into before 1 April 2018

(corporation tax) or 6 April 2018 (income tax)

for the purposes of the lease rental restriction.

In addition, from 1 April 2018 the 100% first

year allowance for expenditure on cars has been

reduced for cars with CO

emissions of 75 g/km or

less, to just 50 g/km.

Reviewing your expenditure

There are only a few vehicles which meet the

50 g/km test, so not identifying the change

could be costly. Businesses may want to take

the opportunity to review their expenditure on

business cars and consider some of the more

tax-efficient options that may be available. There

may be savings to be made from using goods

vehicles, which are subject to different tax rules.

We can help you to make the most of the

tax reliefs available to your business.

Running your business as a company

The question of whether to run a business as a limited company is a

major decision. Here we look at some of the key areas to consider.

Tax implications

Income tax vs corporation tax

For limited companies, it is

the company and not the

director-shareholder that pays tax.

The current rate for corporation tax

is 19%, meaning that the tax due

on profits made within a company

will be less than the income tax paid

by a sole trader or partner with the

same profit figure. However, the

profits of a company may be subject

to income tax and national insurance

contributions (NICs) when they are

extracted by the director-shareholder.

Extracting profits

Many director-shareholders take a

basic salary from the company, and

extract profits by way of dividends.

If they receive any form of cash

remuneration, these are taxed

as employment income.

Such income is liable

to income tax in the

normal way.

Director-shareholder

salary is tax

deductible for

corporation tax

purposes. Uneven

patterns of earnings,

which could mean a

spike in a tax bill for a sole trader,

can be evened out by adjusting

director remuneration.

National insurance contributions

Employment income attracts

Class 1 NICs, for which both the

director-shareholder and the company

may be liable. Though employees are

not liable to NICs on most benefits,

Class 1A is generally due from the

employer at 13.8%.

Director-shareholders have

considerable flexibility when it comes

to NICs. It may be possible to take

a small salary of up to the threshold

at which NICs are payable (£8,424

in 2018/19), and take the balance

of post-tax profits as dividends.

Earnings above the Lower Earnings

Limit (£6,032 in 2018/19) are

deemed subject to NICs at 0%, so

paying a salary above this level will

accrue entitlement to certain state

benefits, even though no NICs are

actually paid.

Dividends

Dividends have their own distinct

tax treatment and are not liable

to NICs. When combined with the

Dividend Allowance, which taxes the

first £2,000 of dividends at 0% (for

2018/19), dividends can produce a

favourable outcome for the taxpayer.

But remember that dividends are

paid out of taxed profits, meaning

that corporation tax also needs to be

factored in.

Pension provision

A company may be able to make

contributions into a registered

pension scheme, subject to certain

limits. Appropriate care is needed,

and pension contributions must be

paid ‘wholly and exclusively’ for the

purposes of the trade in order to

be deductible. For sole traders and

partners, pension contributions would

be considered a private expense.

Leaving profits in the company

Where director-shareholders do not

need to extract all the profits

from the company to meet

current expenditure,

profits can be left in

the company, opening

up further future

planning possibilities.

Additional

benefits of

incorporation

Some other benefits of incorporation

might include obtaining limited

liability, as well as additional

credibility. A company is a separate

legal entity from its shareholders.

It can own property, sue and be

sued. In terms of borrowing, limited

company status can allow a bank to

take additional security by means of

a ‘floating charge’ over the assets of

the company.

Additional

responsibilities

Incorporation brings additional

administrative responsibilities, which

can lead to higher annual compliance

costs. Company directors also have

certain statutory responsibilities,

and as such, they may be at risk of

criminal or civil penalty proceedings

for non-compliance. Business

owners should consider the legal and

administrative implications, together

with their associated costs, before

making any decisions.

We can advise on all aspects of

running a limited company –

contact us for assistance.