Fleet News

Tax in the changing business landscape

'BE prepared' should be the motto of every fleet decision-maker. To help companies assess the impact of future tax changes, Catherine Bowden and Graham Oven of the Automotive Sector Group, Deloitte & Touche, summarise the key challenges ahead.

Over the next few months, employers and employees face some key headaches caused by the Budget and also by the impact of new legislation that is already in place. It is important for fleet decision-makers and drivers to know what the impact of any changes will be, so here we aim to summarise some of the most important issues they will face.

Company car tax

Firstly, the changes to company car tax will have the greatest impact on drivers. When the system was launched in 2002, drivers paid tax on a percentage of their car's P11d price and that percentage was derived from the car's carbon dioxide emissions.

The lowest tax band was 15% for a car emitting 165 grammes per kilometre of carbon dioxide (any vehicle producing less than this still paid 15%) rising by 1% for every 5g/km increase in emissions, to a maximum of 35% (265g/km).

Diesels that do not meet Euro IV emission standards pay an extra 3% and there are discounts for alternatively- fuelled vehicles.

From April 6, the bands change and the starting point for a minimum tax liability of 15% will be 155g/km, so only vehicles at this level or lower will remain in the lowest band.

Furthermore, employers will also be paying Class 1A National Insurance Contributions (NIC) on this extra 2% (see table below). Hopefully, in the 2003 Budget the plans for tax on company cars will be laid out for the tax years after 2004/05, the last year for which we know what the regime will be.

Euro IV standard for diesel emissions

When Chancellor of the Exchequer Gordon Brown launched the new company car benefit-in-kind tax system, a 3% supplement was introduced for diesel vehicles to represent their higher emissions of particulates and fumes. However, following representations from the industry, he added that diesel cars meeting the Euro IV emissions standard would have the supplement removed.

Great news, we cry, except that there are no cars which meet this standard on the UK car market. The Toyota Avensis D-4D will the first Euro IV-compliant diesel when it is launched in May and Vauxhall is promising a Euro IV- compliant Astra in the spring.

Within two years, many of the diesels fleets will be choosing could be in the lowest possible 15% tax band.

Private fuel benefit

FROM April 6 this year, a new system of taxation for the benefit of receiving free fuel for private mileage will be introduced.

The old system that charges drivers according to engine size is being scrapped and instead the new tax uses the same percentage graduations, including discounts and premiums, as used in the company car tax system.

Each year, the benefit will be given a standard value, on which tax will be paid. For the 2003/2004 tax year, the value is £14,400.

As there is some correlation between engine capacity and CO2 emissions, it follows that, generally, the larger the engine the higher the emissions and the greater the tax charge under the new system.

It is probable that an employee who should not accept free fuel for 2002/03 is unlikely to be in a position to accept free fuel under the new rules. It is certainly a more complicated system for employees, but it is easier for fleet decision-makers to calculate because the tax on the benefit can be calculated alongside the company car tax charge.

NIC increases

From April 6, Class 1 and 1A NICs increase by 1%. Employers will pay an increased Class 1A NIC on the provision of company cars and the provision of free private fuel. Coupled with the increases in the car benefit itself and the changes in the rules for calculation of the fuel benefit, it seems likely employers will see a significant increase in Class 1A NICs payable.

If a cash alternative is paid instead of the provision of a company car, the employer will have to pay an extra 1% Class 1 NIC and employees will have pay an extra 1% Class 1 NIC on it also, remembering that this additional 1% charge applies across the board on all earnings without the previous ceiling for higher earners.

Congestion charging

London has now brought in congestion charging and although we know the cost is £5 per vehicle per day, are the costs to employees whose employers pay for the permit so well understood? Those of us who don't travel into London should also take note because – depending on its success – congestion charging may come to a town or city near you.

The basic rules are that if the primary purpose for driving into London is on business (although some private use is made of the trip) the normal rules for allowable business travel expenses apply and there is no benefit-in-kind tax charge.

If the business meeting is cancelled but the trip is still made, the primary purpose is now private and income tax and NIC is payable on any permit settled by the employer.

The Inland Revenue will carefully consider the necessity of the business trip or if the journey in question represents normal commuting when determining if the employer pays for the permit, the trip constitutes a private benefit.

The potential good news for company drivers is that if an employee is already paying car benefit tax, there will not be any additional income tax to pay on any congestion permit paid by the employer for a specific company car.

This is even if you drive into the charging zone in your company car for wholly private purposes.

The Inland Revenue has just confirmed this position.

However, drivers of 'pooled' cars may still face a tax charge where the permit is used solely for a private or commuting journey.

There may only be a short window of opportunity to benefit from this as the Inland Revenue could decide to change their position and instead follow the basic rules and the 'primary purpose'.

With increased taxable car benefit, changes to the private fuel regime, the unknown quantity of which diesel cars will achieve Euro IV standards, increased NICs and congestion charging, it sounds like a tough few months ahead for fleet decision-makers.

Car taxation examples

If we take the example of a Ford Mondeo with a list price of £15,500, a CO2 emission rating of 187g/km and a driver who pays tax at 40%.

This tax year (2002/03) he/she will pay
tax of (40% x 19% x £15,500) ..................................................... £1,178

Next tax year (2003/04) he/she will pay
tax of (40% x 21% x £15,500) .................................................... £1,302

So the basic increase equates to 10.25% tax increase of £124.
This tax year (2002/03) an employer will pay
Class 1A NIC of (11.8% x 19% x £15,500) ....................................... £348

Next tax year (2003/04) an employer
will pay Class 1A NIC of (12.8% x 21% x £15,500) .......................... £417

  • So the employer has an increased NIC contribution of £69 (7.2%). This includes the rise in Class 1A NIC
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