PracticeAccounting FirmsFleet special: driving the green agenda

Fleet special: driving the green agenda

New tax legislation could make company cars cheaper and greener as well

I have a client in Switzerland whose company car fleet is quite large even by
UK standards. The most popular car on the fleet is the Porsche Cayenne (the big
four wheel drive).

It’s interesting that in the UK such a thing probably wouldn’t happen ­ and
yet there are plenty of companies out there with high numbers of well-heeled
employees who might aspire to such a car.

A large part of the reason is undoubtedly the decision taken by the
government at the beginning of this century to base company car tax on the CO2
emissions of the cars.

With further changes, which came into effect from April 2008, the lowest tax
charge is now 10% of the list price of the car and the highest 35% ­ so a canny
employee can reduce their personal tax bill by 71% by choosing cars with the
lowest CO2 emissions.

The result has been a clear switch by employees to lower emission, diesel
engine cars. If you sit in a traffic jam on a British motorway, take a look
around and you’ll be surrounded by mostly German four-cylinder diesels ­ the
Audi A4, BMW 318 and 320d and Mercedes C200 and C220Ds.

If you consider that the new BMW 520D emits just 136g/km, you can see that
cutting CO2 doesn’t necessarily mean downsizing.

What’s good for the goose is also good for the gander ­ savings in employee
tax equate also to savings in NIC and in fuel ­ which will often be one of an
employer’s most significant costs of operating a company car fleet. So, as the
employees have cut their tax costs, employers have also seen relative savings.

Our own research suggests that a typical company car now emits less than
154g/km, while a typical private car acquired with the cash alternative emits
195g/km. And while the vast majority of company cars are new when acquired, 52%
of cash allowance cars are second hand. Older cars often emit significantly more

This is one of the problems with the 2002 changes to company car tax ­ for
many it meant switching to cars with lower emissions to save tax and NIC ­ which
is great ­ but a lot of employees ‘took their ball home’, opting for cash and
ignoring the financial stimulus to go green.

HM Revenue & Customs estimates that around 400,000 employees have opted
out of company cars since 2002.

If all of these opted back in ­ assuming a typical average total mileage of
18,000 per annum and they shave just 26g/km off their average CO2 emissions ­
the UK would save total annual CO2 of around 300,000 metric tonnes ­ the
equivalent to just over 1,700 Boeing 747 flights from London to New York.

Many employers see as much as 90%+ of their employees now opt to take the
cash rather than the company car, where offered, and worry about the
implications not just for their carbon footprint, but also for health &
safety concerns.

Since 2002, the government has continued to change the tax system in the UK
to encourage employers and employees to lower emission cars.

In April 2003 changes were made to the way that private fuel provided for a
company car is taxed ­ also linking it to CO2.

In April 2008 a new lower band for company car tax and NIC was introduced for
cars emitting 120g/km or less ­ 10% for petrol, 13% for diesel. This represents
a 33% reduction in the tax charge for a petrol engine car and gives us the
lowest company car tax charge in a generation.

And now in April 2009, further changes will be introduced which mean that the
lease cost and tax relief for the employer will reflect CO2 as well. In effect
this completes the set.

Under these new rules there are two CO2 hurdles for a car to get under ­
basically 110g/km or below is excellent and you get the big carrot, 160g/km and
below is OK and above that is bad and you get the stick.

This is slightly confusing because (as has already been stated) the lower
limit for company car tax and NIC remains 120g/km (at least for now).

The main impact of these changes will be on capital allowances. As many
employers now lease their cars ­ and these new rules probably mean that more
people will opt to lease ­ you might wonder why capital allowances are of
concern as they only affect businesses that buy cars?

The answer is that the lessors will see their allowances change, which they
will pass on in the rentals they charge lessees. So the impact will be felt
through the cost of leasing a car.

The new rules mean that for 110g/km or less, the allowance will be 100% in
the first year, as now. When the car is then sold, the proceeds will be deducted
from the 20% writing down allowance pool.

For the middle group of cars (111-160 g/km of CO2) the cars will go into the
20% pool and be written down at 20% per year. The £3,000 cap is gone so relief
will initially be accelerated for cars costing over £12,000.

For 161g/km and above, the expenditure goes into the 10% writing down pool,
but again no £3,000 cap applies.

The big change is that, as the cars will all go into either the 20% or 10%
pool, this means an end of balancing allowances and charges on cars.

So what does it all mean? More small capacity diesels? Fewer cars emitting
more than 160g/km?

Almost certainly yes. In fact many employers are moving to ban cars that emit
161g/km or more from their company car choice lists, while others are asking
employees to pay a higher contribution for cars that emit higher CO2. And yes,
we may see further leakage to cash allowances where there is little concern paid
to emissions, and where the employer is left to worry over the health and safety

However there is something quite exciting happening ­ the combination of the
new 10% and 13% tax rate for low emitters and these new rules for capital
allowances are encouraging some employers to look at introducing the concept of
salary sacrifice into company cars, potentially for all employees.

In the seven years that have passed since the 2002 changes to company car tax
we have seen significant changes to our company cars. Today they have lower CO2
emissions than ever, but they are also less numerous with many more business
journeys being undertaken in cars acquired, often second hand, with cash

However, changes in 2008 and now in 2009 may be about to make all the
difference. Who knows, in another seven years the company car may once more be

Harvey Perkins is a director within
KPMG’s company car

Greener cars, lower costs

This long overdue reform of capital allowances will help the UK’s battered
business and private car markets. Used car traders will welcome greener, less
thirsty ex-fleet cars because they are what today’s highly cost-conscious
secondhand buyer wants. That means better depreciation performance and more
competitive lease rentals for a larger number of cars.

Many businesses are already aiming policy below the 160g/km threshold. A
140g/km diesel car should use 14% less fuel and will save its driver 21% in tax
compared with a 159g/km diesel car. And in the very fuel and tax-efficient
120g/km category, Alphabet has seen orders rise from 2% of sales two years ago
to 15% at the end of 2008.

New products for a reshaped market

With the reform of capital allowances, the move to align all company car tax
to CO2 is almost complete. Suppliers are responding with new and improved

  • Whole life cost calculations. State-of-the-art software models prices,
    funding costs, benefit and corporation taxes, depreciation and mileage to set
    optimum replacement cycles and funding method, and selects the best cars for a
    choice list.
  • Salary sacrifice. A highly tax-efficient way to provide staff with a company
    car or car benefit. It takes advantage of situations where BIK is preferable to
    income tax and is particularly effective for sub-120g/km cars.

Mark Sinclair is director of
Alphabet, a fleet funding
company and part of the BMW Group

Emission possible

Under new rules for tax rates for low emitters, and capital allowances, the
employee sacrifices gross pay and receives instead a company car from the 120
g/km or below group. Overall savings are exciting – the tax and NIC on the car
is a fraction of that charged on the salary foregone. If the car emits under 110
g/km there are enhanced Capital Allowances – equating to an even lower rental.
And in the current climate, deals are there to be done with manufacturers to
even further lower the cost – and therefore the amount of the sacrifice. See
below for a worked example.

Honda Civic MA

As a private car
Annual net vehicle cost (Rental & maintenance): £3,525
Annual insurance: £600
Employee’s annual cost of leasing car privately: £4,125

As a company car with salary sacrifice
NET salary sacrifice @ 20 %: £2,781
Tax at 20% on company car benefit: £311
Employee’s net annual cost of taking option: £3,092

Annual saving to employee : £1,033

Employer position
Gross salary sacrifice from employee: £4,030
Plus employers NIC: £516
Total: £4,546

Less rental & maintenance for the car: £3,231
Less insurance: £600
Less class 1A Nic on company car benefit : £199

Employer costs: £4,030

Annual employer savings: £516

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