Car or cash? Choose by emission

Whether the government is friend or foe to the company or private car, top of its motoring agenda is a shake-up of company car taxation to whip ‘green’ habits into UK driving public.

Environment-friendly legislation will come as a surprise to sceptics who thought Kyoto international climate change targets in 1997 were hot air that would remain a long way from the reality of sitting in a five-mile tailback on the M40 outside Birmingham or the M25.

The new laws

New laws will emerge on the UK driving horizon on 6 April 2002 – and will cover most new cars acquired now and over the next two years. Kyoto set down a challenge to the motor-centric western economies to cut by 2010 greenhouse gases by 12.5% from 1990 levels, of which 75% are carbon dioxide (CO2).

Two years ago chancellor Gordon Brown pinpointed the transport sector for carbon dioxide reductions, and economic secretary Patricia Hewitt has since targeted the company car market.

‘Half of all new cars are brought by companies,’ she says. ‘They are driven more miles on average than private cars and in time most of them feed into the secondhand car market.’

The Treasury logic behind targeting the company car market is to improve their rate of CO2 emission and initiate a ‘disproportionately beneficial effect on the environment’ – in short, companies are being squeezed to change the way their staff use their cars and petrol.

Neutral measures

And whatever industry and the private motorist say about the shift in present government policy, the Exchequer is adamant its brave new environmental laws are not a huge drain on revenue resources.

Inland Revenue policy advisor Mary Braim says: ‘These measures are revenue neutral and are only going to be a small cost to the revenue. They are one of a number of measures that are part of our green policy.’

The company car market is not the only target of the push to reduce pollution. Transport minister Lord Whitty at the Birmingham Motor Show last week confirmed all new cars from 1 March 2001 will be bracketed in one of four bands according to their CO2 emission.

He says: ‘From next March, 95% of new cars will pay less tax than they would do now. And those buying new cars in the lower tax bands won’t just be paying less tax – they will also be cutting overall running costs by choosing a fuel-efficient car.

‘Our message is clear – the less you pollute, the less you pay. Motorists, like everyone else, have a role to play in protecting the environment.’

Alison Chapman, partner at Deloitte & Touche says: ‘From the drivers point of view there will definitely be winners and losers – and the interesting question is whether the losers will shift to taking cash alternatives and running their own private cars for business use.’

She believes this could have a potentially serious loophole in the Exchequer’s strategy, which could cut a considerable slice of revenue from the £2.4bn expected from company car tax.

She says: ‘Although the new rules are not complicated, if the driver does not have access to the scale charge calculator produced by the Inland Revenue or to a software product that correctly performs the calculations, he will not be able to work out how much he will be better or worse off.’

Tim Holmes, director and head of HSBC Vehicle Finance, agrees: ‘As cars acquired today will be affected by a new benefit in kind taxation systems, which comes into effect in April 2002, companies and drivers need to understand the full implications now.’

The new system will be based on a percentage of the car’s list price against its carbon dioxide (CO2) emission (see box) based on the number of grams per kilometre. Companies will only need to work out the cost of a car at the beginning of its fleet life, and the calculation can be used annually from then onwards.

The taxman has fixed the charge on the percentage of the list price, with a high of 35% and a low of 15%. Experts say the drivers who are most likely to lose out are those who drive more than 18,000 miles a year, who at the moment pay tax on 15% of their car’s list price.

Company drivers who motor less than 2,500 business miles per year will not be worse off, and he or she will be in a better financial position if they get out on the road in an environment friendly car that produces less than 265 grams of CO2 per km.

Chapman argues that perk drivers will not benefit from the tax reliefs running a private car for business use.

She says: ‘If Joe has a 2,200cc car, the generous 63p and 36p allowances, free of tax and national insurance under the fixed profit car scheme, will be of little use if he only drives 300 business miles per year’.

She adds that even if the company driver only puts 2,499 business miles on the clock, they will only receive a cash benefit of #1,574 per year to set against the costs of the private car.

She argues interest relief, which is calculated via the ratio of business to private miles, will also deter the perk driver with only low business mileage drivers in line for a sizeable return.

‘Under the 2002 tax system, the two deciding factors will be the list price of the car and its emission,’ she says.

‘Ironically, this means he may be able to change to a less environmentally friendly car than his current company car, but still reduce his tax charge in 2002/3 if the new car is a cheaper car.’

And if a shrewd driver wants to reduce that bill further, then opting for both a cheaper car with low pollution rates will reap the greatest benefits. ‘If he’s happy with this, everyone’s a winner,’ she says.

Emissions

The 15% charge proposed for 2002 will only apply to cars emitting less than 165 grams of CO2 per km, which will increase at a rate of one per cent for each five grams per kilometre up to a limit of 35% for emission in excess of 265 g/km.

The CO2 emissions figure for a car will need to be rounded down to the nearest five grams per km, so that an emissions rating of 169 g/km when first registered will be charged on 15% the following tax year, 17% in 2003/4 and 19% in 2004/5

Understanding tax on cars

View a table of how the old and new systems compare