Capital allowances incentive for “green” cars extended

Despite the financial pressures caused by the pandemic the government has gone ahead with the planned extension to tax breaks for environmentally friendly vehicles. What might this mean for your business?

The end is not yet nigh

Businesses wanting to take advantage of the capital allowances (CAs) tax break for environmentally friendly cars and other vehicles have been given an extra four years to make qualifying purchases.

The tax break was due to end on 31 March 2021 for companies and 5 April 2021 for unincorporated businesses. It now runs until 2025. In recent years there has been a stream of revised deadlines relating to this type of tax break but with the latest extension they’ve been aligned.

Qualifying purchases

Expenditure on environmentally friendly vehicles and related equipment shown in the list below qualifies for first year allowances (FYAs). This means a CAs tax deduction for 100% of the expenditure for the accounting period in which it’s incurred, rather than it being spread over many years.

The following qualify if incurred by the 31 March/5 April 2025 deadline.

  • new and unused zero-emission cars
  • new and unused cars with CO2 emissions not exceeding 50g/km
  • new and unused zero-emission goods vehicles, e.g. vans and lorries
  • electric vehicle charging points
  • gas refuelling equipment.

Interaction with the AIA

The annual investment allowance (AIA) provides similar tax relief, i.e. CAs for 100% of expenditure except for cars. However, the AIA is limited to expenditure of £1 million per year whereas there’s no limit for FYAs. For most small and even medium -sized businesses, the AIA is enough to cover any expenditure and so the FYAs appear academic for purchases (other than cars). But that won’t be the position for much longer – the AIA limit will reduce to £200,000 from 1 January 2022.

Trap. If your accounting year will span 31 December 2021 and you don’t claim the FYAs you’re entitled to, there’s a risk that you could inadvertently eat in to your AIA entitlement because of the tricky rules which apply when the AIA reverts to £200,000 . The same is true for accounting periods which begin on or after 1 January 2022, but without the complication of the transitional rules.

Record keeping

In view of the Trap mentioned above it’s important that whoever prepares your firm’s accounts can identify purchases that qualify for FYAs.

What to do next

For further information on this and other topics contact Tony on 07974-418819 or email at or through the contact page of the website

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