TaxPersonal Tax21 MARCH 2000 BUDGET-REFORM OF COMPANY CAR TAXATION

21 MARCH 2000 BUDGET-REFORM OF COMPANY CAR TAXATION

The Government has confirmed that it is proceeding with the revenue-neutral reform of company car taxation. Cleaner and more fuel efficient cars are to be rewarded by linking the tax charge to the car's exhaust emissions.

The Government has confirmed that it is proceeding with the revenue-neutral reform of company car taxation. Cleaner and more fuel efficient cars are to be rewarded by linking the tax charge to the car’s exhaust emissions. This reform will help tackle global warming and improve local air quality, saving up to one million tonnes of carbon by the end of the decade.

From 6 April 2002, the Government will:
– base the tax charge on a percentage of the car’s price graduated according to the level of the car’s carbon dioxide (CO2) emissions. The charge will build up from 15 per cent of the car’s price, for cars emitting 165 grams per kilometre (g/km) CO2, in 1 per cent steps for every additional 5g/km over 165g/km. The maximum charge will be on 35 per cent of the car’s price;
– abolish existing business mileage discounts when the new system starts. These have, unintentionally, provided tax incentives to drive more business miles in order to get bigger discounts and have been responsible for up to 300 million extra miles being driven each year. Their abolition will help to reduce pollution and congestion. Age-related discounts, which provide an incentive to keep older, more polluting cars, will be abolished at the same time; and
– subject diesel cars to a 3 per cent supplement in recognition of their higher emissions of pollutants that damage local air quality. This will not take the maximum charge above the current maximum of 35 per cent of the car’s price.
– Following further consultation, details will be announced of a waiver for very low emission diesel cars and discounts for other environmentally friendly cars, such as those that run on electricity or a combination of petrol and gas or electricity (which could reduce the charge below the usual minimum of 15 per cent of the car’s price).

There will also be increases in fuel scale charges for company cars, in line with the 5 year programme announced in Budget 98.

For the longer term, the Inland Revenue will be considering how the authorised mileage rates for drivers who use their own cars for business journeys might be improved, on a revenue neutral basis, to send better environmental signals.

DETAILS

A Company cars

1. Following an announcement in last year’s Budget of a major, revenue neutral, reform of the taxation of company cars, and a period of informal consultation with interested parties, the Government today outlined details of how the reform will work in practice.

2. From 6 April 2002, the existing system, based on 35 per cent of the car’s price, subject to business mileage and age-related discounts, will be abolished. The new system will, therefore, apply to all company cars, including second cars.

Calculating the charge

3. The starting point for calculating the tax payable remains the car’s price. The charge will be based on a percentage of that price graduated according to the car’s carbon dioxide (CO2) emissions measured in grams per kilometre (g/km). The exact CO2 figure will be rounded down to the nearest 5g/km for company car tax purposes.

4. Cars emitting CO2 at or below a specified level will be taxed on 15 per cent of the car’s price (the usual minimum charge). This qualifying level of CO2 emissions will gradually be reduced over the first few years of the reform, reflecting anticipated improvements in the fuel efficiency of new cars. The level of CO2 emissions qualifying for the minimum charge will be as follows:
– 2002-03 165g/km CO2
– 2003-04 155g/km CO2
– 2004-05 145g/km CO2

5. The table in Annex A shows how cars will be taxed in the first three years of the reform. A car emitting 168g/km CO2 when first registered, for example, will be charged to tax on 15 per cent of the car’s price in 2002-03, 17 per cent in 2003-04 and 19 per cent in 2004-05.

CO2 emissions data

6. The Vehicle Certification Agency produces a free, indicative guide to the fuel consumption and emissions figures of all new cars. This guide is available on the Internet at www.roads.detr.gov.uk/vehicle/fuelcon/index.htm. For all cars first registered from at least November 2000, the definitive CO2 emissions figure for tax purposes will be recorded on the Vehicle Registration Document (V5). Under an agreement with the Inland Revenue, the Society of Motor Manufacturers and Traders (SMMT) is providing a CO2 emissions enquiry service over the Internet at www.smmt.co.uk for cars first registered from January 1998.

Diesel cars

7. Diesel cars emit less CO2 than petrol cars and so would be taxed on a lower percentage of the car’s price if the charge was based purely on CO2 emissions. This tax advantage is unwarranted, however, as diesel cars emit greater quantities than petrol cars of the two local air pollutants of most concern (particulates and oxides of nitrogen), and are expected to continue to do so even with the introduction of tighter vehicle emission standards. In order to ensure the new system does not have any adverse air quality implications, a supplement of 3 per cent of the car’s price will, therefore, apply to all cars that run solely on diesel. This means, for example, that a diesel car emitting 177g/km CO2 in 2002-03 will be charged to tax on 20 per cent of the car’s price (17 per cent plus 3 per cent). The table in Annex A illustrates how the supplement will be capped to ensure it does not increase the maximum charge above 35 per cent of the car’s price.

8. Recent developments in diesel after-treatment technologies have the potential to offer significant emission reductions, to the extent that some diesel cars could eventually have comparable emissions performance to the cleanest petrol cars. Following proper evaluation of these emerging technologies, provisions will be put in place so that the diesel supplement is waived for these very low-emission diesel cars. Further details about the criteria for exemption will be issued in due course. Consideration will also be given to the case for granting a discount, expressed as a percentage of the car’s price, to these cars. Comments would be welcome on the nature of any exemption from the diesel supplement.

Alternative fuels and technologies

9. Cars that are propelled by alternative fuels and vehicle technologies have the potential to offer significant environmental benefits. These cars also tend to be more expensive than similar conventional vehicles so employees could potentially face a higher tax liability. Therefore, following consultation, discounts expressed as a percentage of the car’s price will be introduced to mitigate the impact of their higher price.

Bi-fuel gas powered cars

10. Cars that are propelled by a mixture of petrol and road fuel gas, such as compressed natural gas (CNG) or liquefied petroleum gas (LPG), will receive special treatment. If the car has a type approved CO2 emissions figure for gas (that is, a bi- fuel car produced by a manufacturer and first registered from 2000 onwards), that figure will be used to calculate the percentage of the car’s price charged to tax. If the car does not have a CO2 emissions figure for gas (because it registered before 2000 or has been converted to run on road fuel gas post-production), the CO2 emissions figure appropriate to the petrol element will be used to calculate the percentage of the car’s price charged to tax.

11. For those cars assessed on their petrol CO2 emissions figure, the element of the car’s price solely attributable to the equipment necessary to allow the car to run on gas, or the costs of the conversion, will be ignored for tax purposes. For bi-fuel cars assessed on their gas CO2 emissions figure, the full price of the car will be used.

12. Following consultation, provisions will be put in place so that gas powered cars qualify for discounts, expressed in terms of a percentage of the car’s price. This is in recognition of the air quality benefits from these cars, as well as their higher price.

Hybrid electric cars

13. Cars propelled by a combination of petrol and electricity, the so-called “hybrid electric” cars, have the potential to deliver very low CO2 emissions, as well as producing lower emissions of local air pollutants and less noise, but they are expected to have a higher price than conventional models. Following consultation, provisions will be put in place so that these cars also qualify for a discount expressed in terms of a percentage of the car’s price.

Electric cars

14. Cars that are propelled solely by electricity will be charged to tax on 15 per cent of the car’s price, as these vehicles do not produce any tailpipe CO2 emissions. Following consultation, provisions will be put in place so that these cars also qualify for an appropriate discount expressed in terms of a percentage of the car’s price, in recognition of their higher price.

Cars with no CO2 emissions figure

15. Cars first registered after 1 January 1998 that have no approved CO2 emissions figure, perhaps because they have been imported from outside the European Community (EC), will be assessed on engine size as follows:
Engine Size (cc) percentage of car’s price charged to tax
0 – 1,400 15 per cent
1,401 – 2,000 25 per cent
2,001 and more 35 per cent

16. If the car is one without a cylinder capacity, it will be taxed on 15 per cent of the car’s price (if it is a car propelled solely by electricity), and 35 per cent in all other cases (rotary engine cars).

Older cars

17. Car manufacturers have been obliged to report CO2 emissions for all new cars on sale in the EC from January 1998. There are no reliable sources of CO2 emissions data for cars first registered before that date. These cars will, therefore, be taxed according to their engine size as follows:
Engine Size (cc) percentage of car’s price charged to tax
0 – 1,400 15 per cent
1,401 – 2,000 22 per cent
2,001 and more 32 per cent

18. Older cars without a cylinder capacity will be taxed on 15 per cent of the car’s price (if it is a car propelled solely by electricity), and 32 per cent in all other cases (rotary engine cars).

Disabled Drivers

19. If an employee is obliged to drive a company car with automatic transmission because of his or her disability, the CO2 emissions figure appropriate to the closest make and model of car with manual transmission will be used, if it is lower, to calculate the percentage of the car’s price charged to tax.

Employee Contributions

20. There are no changes to existing rules. Payments by employees for the private use of a car will continue to reduce the value of the benefit pound for pound. Contributions of up to 5,000 pounds made by employees towards the cost of the car and/or accessories will continue to reduce its price for tax purposes.

Classic cars

21. The rules for classic cars remain unchanged. If the car is 15 or more years old at the end of the tax year, and has a market value of 15,000 pounds or more (which is higher than its list price when the car was first registered), the price of the car for tax purposes is its then open market value on the last day of the tax year.

Company car available for only part of the year

22. The rules remain unchanged. The value of the benefit is reduced proportionately if the car is unavailable for part of the year. The benefit is also reduced if the car is not available for a continuous period of at least 30 days.

B Fuel Scale Charges

23. The following table shows the increased fuel scale charges for 2000-01 where free fuel is provided for private motoring in company cars:
Engine Size Scale charges Scale charges
cc for 1999-00 for 2000-01

PETROL UK Pounds
0-1,400 1,210 1,700
1,410-2,000 1,540 2,170
2,001+ 2,270 3,200

DIESEL 0-2,000 1,540 2,170
2,001 2,270 3,200
Cars without a 2,270 3,200 cylinder capacity

NOTES FOR EDITORS

Company cars

24. Directors and employees earning at a rate of #8,500 a year or more (including the value of expenses payments and benefits in kind) are taxable on benefits in kind. Income tax is charged on the benefit of a company car and separately on the benefit of free fuel where this is provided for private motoring in a company car. Cars provided exclusively for business use and which are not available for private use are not taxed.

25. References to company cars in this press release include all cars made available for private use to employees (and their families) by reason of their employment.

26. For 2000-01 and 2001-02, the tax treatment of company cars remains as follows:
– where a company car driver drives less than 2,500 business miles in the car in the tax year, the full tax charge is on 35 per cent of the price of the car;
– for 2,500 to 17,999 business miles, the tax charge is on 25 per cent of the price of the car;
– for 18,000 or more business miles, the tax charge is on 15 per cent of the price of the car;
– the tax charge is further reduced by one quarter if the car is four or more years old at the end of the tax year; and
– second cars are taxed on 35 per cent of the price of the car each year. If, exceptionally, the second car is also used for at least 18,000 business miles a year, the charge is reduced to 25 per cent.

27. For income tax purposes, the price of the car will usually be:
– the UK list price of the car (including delivery and VAT) at the time it was first registered, plus
– the price of any accessories:
– provided with the car when it was first made available to the employee;
– added after the car was first made available to the employee, and fitted after 31 July 1993, with a price of 100 pounds or more; but
– excluding, since 6 April 1998, the extra cost of enabling the car to run on road fuel gases.

28. The price of a car is restricted to an upper limit of 80,000 pounds (including accessories) for the purposes of the tax charge so that where the price of the car exceeds this figure, its price for those purposes is taken as 80,000 pounds.

Timing of the change

29. The new system will start on 6 April 2002. It will, therefore, apply in 2002-03 and in subsequent years to all company cars. This timetable gives people time to prepare. From April 2001, the employer reporting requirements will be revised so that employers can provide emissions data on forms P46 (car), where a car is changed or first supplied. Further guidance will be issued in due course.

Cost/yield implications

30. The reform will be revenue neutral so that it produces around the same yield in 2002-03 as in the year preceding the reform. Inland Revenue estimates show that, after behaviour, the reform will have a cost of around 25 million pounds in 2003-04 and around 75 million pounds in 2004-05. These estimates are uncertain, particularly because of the scale of anticipated changes in behaviour. The cost or yield in future years will depend upon behavioural change, the prices of company cars and advances in technology and fuel efficiency.

Free fuel

31. The taxable value of petrol provided for private motoring is fixed by reference to three bands of engine size:
1,400 cc or less;
1,401 to 2,000cc and
over 2,000cc.

Two bands are used for diesel: 0 to 2,000cc and
over 2,000cc.

A car without a cylinder capacity is treated as if had over 2,000 cc capacity.

32. The new scale charges give the amounts on which employees provided with free fuel will pay tax in 2000-01. The charge is apportioned if a company car (but not the fuel alone) is available for only part of a year. The charge is reduced to nil if the employee makes good the cost of all the fuel used for private journeys, including miles driven in commuting from home to work.

33. In 1997-98, of the 1.73 million directors and employees who had a company car, over half (990,000) got free fuel for private motoring. Those who continue to get free fuel will pay more tax on this benefit. This will be collected by adjustment to PAYE codes in May, so no action need be taken by those affected, or their employers.

Class 1A National Insurance contributions 34. The car benefit charge and fuel scale charges are also used as the basis for employers’ Class 1A National Insurance contributions (NICs). A preliminary guidance leaflet, CWG5 – “Class 1A National Insurance Contributions on Benefits in Kind” was issued in the Employer’s pack earlier this year. Class 1A NICs are charged (for 2000-01) at 12.2 per cent of the taxable value of the benefit.

Regulatory Impact

35. The reform introduces a simpler and easier to operate system of taxing company cars, which dispenses with the need to keep business mileage records for tax purposes. It lets the majority of employers calculate the tax and Class 1A NICs due at the outset, by reference to readily available list prices and emissions data, rather than having to wait until the end of each tax year.

Impact Assessment

36. An Integrated Impact Assessment covering the environmental and regulatory impacts of the reform has been prepared and is available from the address given below or on the Internet at www.inlandrevenue.gov.uk/cars.

Further details

37. More details about the company car tax reform, including a series of questions and answers and worked examples, have been placed on the Internet at www.inlandrevenue.gov.uk/cars. Details about the reform of Vehicle Excise Duty (VED) which will also link the amount charged to the car’s rate of CO2 emissions, may be found on the Internet at www.dvla.gov.uk/newved or in the Budget Day press notice HMT/DETR 1.

Consultation

38. Comments on the proposals to waive the supplement for very low emission diesel cars, give discounts to environmentally friendly cars and on the anticipated compliance cost savings following the first year changeover are welcome.

39. Comments may be sent to:
Kim Linton
Personal Tax Division
Room 81, New Wing
Somerset House
Strand
London, WC2R 1LB
e-mail Kim.Linton@ir.gsi.gov.uk
By 31 July 2000

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