Cars – A tool for getting from A to B? Or an amazing mass of cool metal full of snazzy gadgets like park assist? Whatever it may be, you will probably be aware of the fact that you get tax relief for the part of your car running costs which relate to business use. Your specialist dental accountant will have sat down with you and agreed a suitable percentage with you.

But did you know you also get tax relief on the actual cost of the car, and further that the way this is calculated changed with effect from 6 April 2009?

Under the old rules, the maximum capital allowances you could claim would have been the lower of either:

Your business usage percentage multiplied by £3,000, or

25% of the brought forward tax written down value multiplied by your business usage percentage (try saying that after you’ve been down the pub!)

From 6 April 2009, these rules changed and were replaced by three bands of capital allowances based upon the CO2 emissions of your car – for cars with CO2 emissions under 110g/km – 100% capital allowances will be available. For those with CO2 emissions of between 111g/km and 160g/km – capital allowances will be at 20% and for all those cars with emissions over 160g/km – just 10%!

That may sound amazing, but in reality it is just a cash-flow advantage as any benefit you will get in year 1 will be clawed back from you when you sell your car. Let’s look at this for each class of car assuming each car is used 50% for business use.

Robin buys a new Toyota Yaris 1.4 D-4d for £11,000 which has co2 emissions of 109g/km on 7^th April 2009. He uses his car 50% for business use. He is a higher rate tax payer and uses the car for three years before selling it for £3,500.

Year 1 – Robin will get capital allowances on this car of £11,000. He will get tax relief on half of this at his highest rate of 40% = £2,200.

Year 2 – The car has a tax written down value (what we accountants affectionately refer to as TWDV) of £0 so no tax relief on the actual cost of the car.

Year 3 – He sells the car for £3,500 when it actually has a TWDV of £0 – therefore he is deemed to have made a £3,500 surplus on it and tax will be clawed back on half of this as he uses his car 50% for business. Therefore additional tax to pay of £700.

Total tax relief - £1,500

Let’s now look at James, who buys a VW Beetle 1.9 Tdi for £14,500 with CO2 emissions of 143 g/km. He keeps the car for three years before selling in year three for £4,500.

Year 1 – James will get capital allowances on this car of 20% of £14,500. He will get tax relief on half of this at his highest rate of 40% = £580.

Year 2 – The car has a TWDV of £11,600 so he will get capital allowances on this car of 20% of £11,600 amounting to £2,320. He will get tax relief on half of this at his highest rate of 40% = £464.

Year 3 – He sells the car for £4,500 when it actually has a TWDV of £9,280 – therefore he is deemed to have made a £4,780 loss on it and will get tax relief on half of this as he uses his car 50% for business. Therefore tax relief of £956.

Total tax relief - £2,000

Let’s now look at Rose finally, who buys a BMW Z4 2.0I for £20,000 with CO2 emissions of 176g/km. She keeps the car for three years before selling in year three for £6,200.

Year 1 – Rose will get capital allowances on this car of 10% of £20,000. She will get tax relief on half of this at his highest rate of 40% = £400.

Year 2 – The car has a TWDV of £18,000 so he will get capital allowances on this car of 10% of £18,000 amounting to £1,800. She will get tax relief on half of this at his highest rate of 40% = £360

Year 3 – She sells the car for £6,200 when it actually has a TWDV of £16,200 – therefore he is deemed to have made a £10,000 loss on it and will get tax relief on half of this as she uses his car 50% for business. Therefore tax relief of £2,000.

Total tax relief - £2,760.

It is worth bearing in mind that though you will get tax relief at your highest rate on the business proportion of all running costs, the higher the co2 emissions of the car, the higher these running costs are likely to be. Therefore, though it may seem that you will get more tax relief if you buy an expensive "dirty" car, this may cancel out by high running costs.

Priya Kotecha (ACA, CertPFS) is a Chartered Accountant, with Mac Kotecha & Company, where her and the senior partner deal exclusively with dentists and have been established for over 27 years. They offer Accountancy, Taxation & Payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues. Contact on 020 8346 0391 or go to www.specialistdentalaccountants.co.uk