Capital Allowances: Hiring Motor Cars

New Clause 23 – in the House of Commons at 3:46 pm on 15th July 1991.

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'.—(1) Section 35 of the Capital Allowances Act 1990 (motor cars) shall be amended as mentioned in subsections (2) and (3) below.

(2) In subsection (2)(reduction of allowance for hiring cars whose retail price when new exceeds £8,000) at the end there shall be inserted the words "; but this subsection shall have effect subject to subsection (3) below.(3) The following subsections shall be inserted after subsection (2)—(3) Subsection (2) above shall not apply where the hiring is under a hire-purchase agreement under which there is an option to purchase exercisable on the payment of a sum equal to not more than 1 per cent. of the retail price of the motor car when new.(4) In subsection (3) above 'hire-purchase agreement' has the meaning given by section 784(6) of the Income and Corporation Taxes Act 1988.(4) This section shall have effect in relation to any chargeable period or its basis period ending on or after the day on which this Act is passed.'.—[Mr. Maude.]

Brought up, and read the First time.

Photo of Francis Maude Francis Maude The Financial Secretary to the Treasury

I beg to move, That the clause be read a Second time.

The new clause makes a minor and technical amendment to a provision in the Capital Allowances Act 1990 which discriminates between businesses that use hire-purchase arrangements and those that use other methods of finance. It removes hire-purchase transactions from the scope of rules that restrict tax relief for rental payments on the hire of cars costing more than £8,000. Those rules prevent the circumvention of the capital allowances restriction which applies to such cars.

A straightforward hire-purchase agreement is in essence equivalent to an outright purchase financed by a loan. That fact is recognised in the general application of the capital allowances legislation by the granting of capital allowances on the asset in question to the hire purchaser. As a result, the capital allowances restriction for cars bites directly on the hire purchaser and therefore there is no need for the leasing restriction to apply to hire purchase.

The original 1961 legislation on cars made it explicit that hire-purchase agreements were not to be subject to the leasing restriction. But the relevant legislation has gone through several reconstructions and consolidations since then. It appears that the law may inadvertently have been changed in the process. The Revenue has received legal advice that in its existing form the leasing restriction applies to the finance charge element of a hire-purchase payment. If that were allowed to continue, businesses and traders who bought cars on hire purchase would face additional tax and compliance burdens. It is likely that among them would be smaller businesses, the credit status of some of which might require them to obtain finance through hire purchase rather than a straightforward loan.

The new clause will take straightforward hire-purchase agreements—that is those with a nominal purchase option—outside the scope of the leasing restriction, thereby restoring the legislation to its original intention and bringing hire purchase back into line with outright purchase. It is a minor but nevertheless helpful change for businesses which meets anxieties voiced by the leasing industry. We thought it right to introduce legislation at this, the earliest opportunity. I commend the new clause to the House.

Question put and agreed to.

Clause read a Second time, and added to the Bill.