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Car Scrappage Scheme

Is the scrappage scheme of any value?

THE GOVERNMENT’S car scrappage scheme has received a great deal of media attention, but is it of any real value to businesses and what are the tax consequences?

This article was published a while ago.
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The scheme is set to run from mid-May 2009 until March 2010, or until its fixed £300m budget runs out, if sooner – so it’s a case of ‘first come first served’. What’s on offer is a £2,000 discount on a new vehicle in exchange for surrendering your old vehicle for scrap.

Is There Any Real Saving?
Manufacturers are already offering sizeable discounts in order to prop up falling sales. All the scheme does is enable them to get £1,000 back from the Government when they offer a discount of at least £2,000 from list price. But with discounts at this level and more already on offer, it may only be the manufacturer who makes any real saving, rather than the customer. True savings for customers will only come if manufacturers offer genuine reductions from current discounted prices.

Against this background, it is therefore important that the scheme does not divert attention away from the existing tax consequences of changing a vehicle used in business.

Scheme Details
Both the old and new vehicles must be cars or small vans weighing no more than 3.5 tonnes. You don’t need to swap ‘like for like’, you can swap an old car for a new van, or vice versa.

The scheme effectively guarantees a minimum discount of £2,000 from full list price for brand new vehicles but does not preclude any further discounts which buyers might negotiate. There can be no ‘trade in’ price for the old vehicle, however, as these must be scrapped as part of the scheme.

The old vehicle must have been first registered in the UK before 1st August 1999 and must generally have a current MOT, as well as tax and insurance; although vehicles with a valid ‘Statutory Off Road Notification’ document may also qualify.

Business Benefits
Any owner of a qualifying UK registered vehicle can use the scheme, including companies and other businesses using cars and vans. Those with more than one vehicle are entitled to the same discount for each old vehicle they scrap but must buy an equivalent number of new vehicles.

In theory, a company could therefore save £10,000 by surrendering a fleet of five old vans in exchange for five new cars for its directors.

It remains to be seen whether the scheme will genuinely provide real savings of this nature, but it may at least provide the opportunity for some businesses to save tax.

Trade-ins versus Discounts
Normally, when an old vehicle is surrendered in exchange for a new one, there is a ‘trade-in allowance’. The trade-in allowance is effectively treated as sale proceeds for the old vehicle rather than a reduction in the price of the new one. This will often make a big difference to the capital allowances position.

Jon has an old car which he purchased in 1999 for £20,000. He mostly uses the car for business, with only 10% private use. By March 2009, the ‘written down value’ of Jon’s car for capital allowances purposes is £1,566. Jon wishes to buy a new car which is on offer for £25,000 before any ‘scrappage’ discount or trade in allowance. The new car has CO2 emissions of 175g/km and is therefore eligible for writing down allowances at just 10% (see Business Tax Saver Issue 1).

If Jon were to trade in his old car for £2,000, he would have a balancing charge of £434. He would also get a capital allowance of £2,500 on his new car, giving him a net £2,066 before his 10% ‘private use’ adjustment which reduces this to £1,859.

If Jon uses the scrappage scheme instead, he will buy his new car for £23,000 (assuming the discount is passed on to him). He would then get a balancing allowance of £1,566 on his old car and a capital allowance of £2,300 on his new one. This totals £4,866, which is reduced to £4,379 by his private use adjustment.

By using the scrappage scheme instead of trading in his old car, Jon therefore obtains £2,520 more capital allowances this year.

This demonstrates an important principle which applies whether the scrappage scheme is available or not: where cars are used in business, it is generally better to get a discount on a new car than get a trade in allowance on your old one. This applies to any cars or vans owned and used personally by a sole trader or business partner where there is some private use. It also applies in any case where the old vehicle is a car costing over £12,000 purchased before April 2009.

For vans owned by companies, used by employees or with no private use, the principle must be reversed. In these cases, it is generally better to get as large a trade in price as possible, rather than a discount. This is because the expenditure on these vehicles goes into the business’s general pool for capital allowances.

Betsy Limited has an old van purchased in 1998 which it wishes to exchange for a new model costing £30,000 before any ‘scrappage’ discount or trade-in allowance.

By scrapping the old van, Betsy Limited could buy the new van for £28,000 (assuming again that the discount is passed on). This will be covered by the company’s £50,000 annual investment allowance, meaning that the company will get immediate tax relief for £28,000.

Alternatively, let us suppose that Betsy Limited trades in its old van for £2,000. This would be treated as sales proceeds but, instead of creating a balancing charge, this sum would merely be deducted from the company’s general pool, reducing its capital allowances by only £400 (£2,000 x 20%).

The company is now deemed to have paid the full £30,000 for its new van and gets immediate tax relief for this sum.

The overall net capital allowances produced for the company this year are therefore £29,600; £1,600 more than it got by claiming the scrappage allowance.

In Summary
Whether the scrappage scheme produces genuine cost savings remains to be seen. For most cars used in business, however, it is generally better to get a bigger discount rather than a trade-in allowance, so the scheme may produce indirect savings through capital allowances.

Scrapping a van may actually mean you lose out on capital allowances, so this is only going to be worthwhile where the scrappage scheme produces a genuine cost saving.

Family Planning
To qualify for the ‘scrappage’ discount, the person buying the new vehicle must be the registered owner of the old vehicle and must have held it for at least a year. This prevents anyone from buying up old vehicles in order to cash in on the scheme. It also prevents anyone from using someone else’s old vehicle to get a discount on their new purchase. There does seem to be one way for a family to benefit from the scheme, however, and this is best explained by an example.

Jenny is a young student with an old car first registered in 1998. Her father David lends her £18,000 and this enables her to buy a new car with a normal price of £20,000 when she surrenders her old car.

A little while later, Jenny can sell the new car to her father for, say, £19,000. This would enable her to repay the loan he gave her and buy herself another old car for £1,000.