EMPLOYERS are wasting hundreds of millions of pounds a year running inefficient opt-out schemes when company cars could be a better alternative, a major taxation review has revealed.

In-depth analysis of tax income by HM Revenue & Customs (HMRC) has revealed that drivers receiving a cash option are paying out £360 million in taxes and National Insurance Contributions (NICs) on their benefit.

Rather than using tax-efficient ways of paying staff, such as employee car ownership schemes, most fleets simply pay out a cash lump sum, which then loses at least one-third of its value in taxes and NICs.

According to HMRC’s Report on the Evaluation of Company Car Tax Reform: Stage 2, the tax-take makes up for the tax savings companies aim to achieve by opting out in the first place.

The report reveals: ‘The majority of employees who no longer have company cars receive extra pay subject to income tax and NICs in compensation. The extra income tax and NICs collected on this extra pay has offset most but not all of the income tax and NICs revenues that would have been collected.

‘The revenue gains for the Exchequer due to this have been estimated to be around £360 million for 2004/2005.’

The report is further evidence that the company car is the most tax-efficient way of reimbursing employees, as an average fleet car costing £16,000 and taxed at 20% would cost an employee, paying 22% tax, £704 a year.

By comparison, the same employee receiving a £5,000 cash option would pay £1,100 in tax. Opting out has changed the face of the company car parc in the past few years, with HMRC figures showing the fleet car parc dropped from 1.6 million in 1999 to 1.2 million in 2005, driven mainly by changes to the company car tax regime.

The Government lost £120 million in tax revenue from company cars in the 2005/2006 tax year, latest analysis suggests. But this is not all due to opting out, as drivers and employers chose company cars that have lower CO2 emissions, meaning they paid less tax.

In addition, the Government’s campaign to reduce the number of employees taking free fuel for private mileage meant a £180 million loss in tax revenue for 2004/2005.

A spokesman for opt-out expert Provecta said: ‘The Exchequer is no worse off today when the VAT gains of a private car versus a company car on contract hire or finance lease are taken into consideration. Assuming 70% of the 400,000 cash opt-out drivers had contract hire or finance lease and bought the same value new car, over the four-year period this equates to £319.2 million more VAT revenue.’

A separate Government consultation document, Modernising Tax Relief for Business Expenditure on Cars, published last week as part of the Budget, looked at how businesses get tax relief on their company cars.

Executives at LeasePlan say the preferred option put forward, that companies pool their ‘expensive’ cars – costing more than £12,000 – rather than having to track each one separately for tax purposes, would reduce administration costs.

Finance director John Boon said: ‘This option also includes a proposal to introduce first-year tax allowances that would benefit businesses that own cars, including leasing firms.

‘It would allow them to offset some or all of the cost of cars against profits, depending on the vehicles’ CO2 emissions.’

A spokesman for the British Vehicle Rental and Leasing Association (BVRLA) said: ‘It sets out potentially radical changes to the allowances companies can claim on their business cars and the current rental disallowance – something for which the BVRLA has long been arguing.’