Tax relief for depreciation on company vans is given through a system called Capital
How Do Capital Allowances Work?
Capital Allowances work by applying a fixed percentage rate of depreciation each year,
irrespective of the actual depreciation of a vehicle.
The current percentage rate of depreciation allowed for plant and machinery as a deduction against business taxes is 18%.
- A van is purchased for £20,000
- The existing capital allowances pool is already at £100,000
- The value of the pool becomes £120,000
- Capital allowances are given at 18% on the total pool, i.e. £21,600
- The pool value carried forward to the next year is £120,000 - £21,600 = £98,400
When the van is sold the sale proceeds are deducted from the value of the pool.
If the sales proceeds are less than the purchase price less capital allowances
already given then the difference will continue to be written down in the pool.
As a result, capital allowances may continue to be given on the difference
between the purchase and sale prices for many years after the vehicle has been sold.
Zero Emissions Vans
Until 31 March 2021, vans emitting 0g/km of CO2 are eligible for 100% first year allowances, provided that the government's Plug-In Van Grant has not also been claimed.
What this means is that the full purchase price of Zero Emissions vans can be written off for tax purposes in the year of purchase, assuming that there are sufficient profits available to use up the purchase price.
If the Government's Plug-In Van Grant has been claimed then the 100% FYA only applies to the price of the van after deducting the amount of the grant.
Annual Investment Allowance (AIA)
Businesses are able to claim the full purchase cost of vans that qualify for the annual investment allowance against profits, currently up to a total expenditure limit of £1m p.a. (to 31 December 2022) or £200,000p.a. (from 1 January 2023).
Businesses can then claim capital allowances on the excess if the total spent on plant and machinery in a year exceeds the annual limit.
Effects of Capital Allowances
Because company vans typically depreciate at a rate faster than the 18% capital allowances rate, the practical effect of capital allowances is to defer busines tax relief on depreciation for company vans unless they qualify for the accellerated Zero Emissions allowance or AIA.
This means that, for vans bought outright, tax relief on the total cost of depreciation may not be given until years after the the vehicle has been sold.
For the self-employed where the vehicle is used partly for non-business purposes,
tax relief is apportioned according to the ratio of annual business miles to total