Claiming capital allowances on business cars can provide valuable tax relief, but the rules change depending on the vehicle, its emissions, and how you use it. Capital allowances let you deduct part of the cost from profits before tax. However, cars follow different rules than other assets, and VAT adds more complexity.
Capital Allowances on Business Cars
Most cars qualify for writing down allowances, which spread the cost over several years. If you buy a new electric or zero-emission car that qualifies for the 100 percent first year allowance, you can deduct the full cost immediately.
Cars do not qualify for the Annual Investment Allowance.
VAT on Company Cars
VAT creates one of the biggest tax considerations:
- You can only recover VAT in full if the car is used solely for business, a strict test few companies meet.
- If you allow private use, you usually cannot reclaim VAT on the purchase.
- You can often reclaim VAT on servicing, repairs, or leases. For leased cars with private use, you can usually reclaim 50 percent of the VAT on lease payments.
Plan carefully when deciding whether to buy or lease.
Rates You Can Claim
Allowance rates depend on emissions and purchase date:
- 100 percent deduction applies to new, unused, zero-emission cars.
- 18 percent main rate each year applies to low-emission cars up to 50g per km CO2, and to second-hand electric cars.
- 6 percent special rate each year applies to cars over 50g per km CO2.
Always check the car’s band before making a claim because rules change.
Business vs Private Use
Companies can usually claim allowances on the full cost of cars provided to employees or directors. However, if employees use the car privately, you face a Benefit in Kind charge. You must also account for VAT on fuel used privately.
Other Options for Sole Traders and Partnerships
Sole traders and partnerships without corporate partners may choose simplified mileage rates instead of capital allowances, but not both.
Employees cannot claim capital allowances on cars. They may, however, claim mileage and fuel costs.
What Counts as a Car
For tax purposes, a car is a vehicle that:
• Is suitable for private use, including motorhomes
• People commonly use for private journeys
• Was not designed for transporting goods
Motorcycles, lorries, vans, and single cab trucks follow different rules and usually qualify for the Annual Investment Allowance.
How Cobble Can Help
The rules for company cars can feel complex, especially with VAT and Benefit in Kind charges. At Cobble, we help you:
• Plan purchases or leases tax-efficiently
• Maximise capital allowance claims
• Manage VAT recovery correctly
• Stay compliant with HMRC rules
Planning to buy or lease a business car? Speak to us first. We’ll help you save tax, manage VAT, and avoid costly mistakes.