If the government has its way, the capital allowance regime will usher in the death of the road warrior.

The changes to the capital allowances regime which commenced in April 2009 will affect every business that depends on cars – not as a 'perk' for senior staff, but as an essential tool for employees of all sorts. Perhaps a business has a number of engineers who travel from customer site to site, loaded up with tools, spares and paperwork. Many businesses still use road warriors who may be sales oriented, travelling at least a thousand miles a week by car between appointments, making several visits each working day. For companies that depend on a car, as opposed to a van, to transport their employees around the tax system now uniquely discriminates against them, denying tax relief on essential business expenditure to the extent that some businesses must be wondering what alternatives they can now come up with to minimise the impact on their businesses and cost base.

The true tax situation

To illustrate the position with an example : A typical employee who uses his car as a tool, travelling 30,000 miles a year might drive a Ford Mondeo 2.0 litre petrol. A 5 door model with factory fitted satellite navigation and metallic paint would cost around £20,000. Purchased now, run for three years and sold at the end for £5,000 would attract tax relief as follows :

• On purchase £20,000 is added to the “special rate pool”. It does not attract any special allowances in the first year, so is awarded 10% writing down allowance, leaving it standing at £18,000 for tax purposes.

• In year two it is written down by 10% again – leaving the balance at £16,200, bringing the tax allowances to £3,800. • In year three, again a writing down allowance of 10% is given – bringing the total allowances to £5,420.

• Sale at the end of year three brings in disposal proceeds of £5,000. The cash cost of the car has finally come to £15,000, but the tax allowance given this year is only 10 per cent of the current net value for tax purposes, £958, leaving £8,622 in the pool, and bringing the total tax allowances to £6,378 or 42 per cent of the cash cost of the car.

It's all downhil from here

The remaining £8,622 tax written down value is now written off at 10% of net value per annum. It will take 22 years to gain tax relief on 90 per cent of the written down value, meaning that the tax relief for the cost of the car has been delayed significantly compared to the cash costs. So the business incurs a cash cost of a total of £15,000 over three years, but for tax purposes after 25 years tax has provided relief for only 94% of this amount, as Figure 1 shows.

But, of course the reality is much worse than this, as after year three, the car will be replaced by a new car. If we assume that the costs and residual values of the cars do not change, then the picture over 10 years looks a lot worse. It is probably easiest to appreciate from a diagram, so Figure 2 shows the similar cumulative cash costs and the tax allowances give over a 12 year period:

At the end of year 12, when the driver has gone through four cars, the tax relief given on a cost of £60,000 is £34,636 or 58%. This shortfall will increase over time, with the allowances only available when the business ceases trading and a balancing allowance is given equal to the amount in the pool.