The number of tax-paying company car drivers plummeted from 1.6 million to 1.35 million in the two years to November 2003.
Although the changes to company car tax revealed in 2002 have been a factor, the Inland Revenue also puts the exodus down to increased popularity of cash alternatives and employee car ownership schemes.
As a result, revenues from company car tax have dived from £2.66 billion in 2000/2001 by £120 million for 2003/2004 and will fall by a further £140 million in 2004/2005.
Experts are now examining what has caused the change in company car levels at a time when the economy is relatively healthy. One key area is the impact of generous tax and National Insurance-free Authorised Mileage Allowance Payments (AMAP), which allow private vehicle drivers to claim 40 pence per mile for the first 10,000 business miles covered in private cars and 25 pence per mile for further mileage.
If employers don't pay the full sum, drivers can reclaim a tax break for the shortfall.
The AMAP rates are also a key aspect of many structured personal leasing schemes, allowing employers to generously reimburse private vehicle drivers for business mileage without incurring tax or NI liabilities.
The Inland Revenue may look at cutting the rates in future, although nothing has yet been decided.
Details of the change were revealed in the Inland Revenue's Report on the Evaluation of the Company Car Tax Reform. The report said: 'The reform of the company car tax system does appear to have been a factor in this reduction alongside the increased popularity of cash alternatives and employee car ownership schemes.
'It is early days in the new company car tax system and we will continue to monitor how the tax system influences choice as understanding of the charge grows.
'We will review the charge for employer-provided free fuel for company car drivers, which was reformed in April 2003 to follow the emissions basis of the new company car tax system.
'We will also look at the interaction of company car tax with the statutory AMAP system to see how this impacts on the decisions employees make regarding the car they use for business purposes.'
The Inland Revenue will spend the next year collecting evidence about causes of the mass opt-out, and is likely to advise the Government by April 2005. In the introduction to the report, John Healey MP, Economic Secretary to the Treasury, said: 'The Government recognises that company cars are very important to UK businesses and to the economy as a whole.
'We will continue to monitor and evaluate the company car tax regime to ensure that the charge is appropriate and achieving our goal in driving down harmful emissions and pollutants.'
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