Current legislation treats any company car costing more than £12,000 as 'expensive', thereby restricting capital allowances – the taxman's equivalent of depreciation – to a maximum of just £3,000 per year.
However, at the end of a company car's fleet life, firms can make a catch-up balancing adjustment to the capital allowances already claimed to ensure they achieve full tax relief for the depreciation.
This system involves delayed cash or tax flow advantages for companies, and requires greater fleet administration at the end of a car's fleet life when finance departments have to reconcile the £3,000 annual official capital allowances claimed with the full depreciation suffered by the car to establish the balancing adjustment.
The threshold was last changed in 1992 and Tory Treasury spokesman Howard Flight MP claims it is unrealistic to treat a £12,000 car as expensive.
He believes £24,000 is a realistic threshold and says increasing capital allowances commensurately to £6,000 per year would not lose the Treasury any tax revenue.
'Surely we are approaching a stage where businesses should simply be allowed to deduct depreciation,' said Flight, citing the case of plant and machinery that is generally written down at a rate of 25% per year.
He proposes that an 'expensive' car threshold of £24,000 and an annual writing down allowance of 25% could replace any end-of-fleet life reconciliation between allowances claimed and actual depreciation suffered.
However, John Healey MP said the Government had 'a developing strategy for the use of fiscal and economic instruments to encourage the use of cleaner, more environmentally friendly cars'.
He added: 'Raising the £12,000 limit for cars would work against this environmental aim because it could benefit the users of larger and more expensive cars which tend to be more environmentally polluting.'
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