Fleet News

Government urged to reform company car tax system

tax

A complete overhaul of the company car tax regime has been called for by nine out of 10 respondents to a Fleet News poll.

The Government announced in the 2013 budget that this year it would review the incentives for ultra-low emission vehicles (ULEVs)  in company car tax, to inform decision-making on the regime from 2020-21 onwards. It is expected to make an announcement in the March 16 budget.

However, 94% of respondents to the Fleet News poll have urged the Treasury to take the opportunity to conduct a root and branch review of benefit-in-kind (BIK) tax.

Colin Tourick, Grant Thornton professor of automotive management at the University of Buckingham business school, said: “The current system stretches fairness and certainty to the limit, so perhaps now would be a good time to put things right.”

In an open letter to the Chancellor, Tourick says that BIK tax is designed to charge the employee for the benefit of having a car that is available to use for private mileage.

“In truth, an employee doesn’t benefit from having a car sitting on their drive at night, they benefit when they actually drive the car,” he said.

“However, BIK tax charges the employee the same amount whether they drive one or 10,000 private miles per annum. Can this be fair?”

Alastair Kendrick, tax director at MacIntyre Hudson, continued: “A fairer way would be to take in to account the actual benefit enjoyed by the driver, adding in an adjustment based on private over total use.

“This would be very much in line with the methodology adopted in other EU countries.”

The existing company car tax regime came into force in April 2002, replacing a system which had been worked out on the mileage covered during the course of business travel (see panel below).

Kendrick said: “I know that when the present rules were introduced HMRC liked the idea of some private use recognition, but this was considered difficult.

“However, now with mileage capture being in vogue this is something that could be seriously considered. It would be a far fairer basis.

“The question is about whether fairness comes into the debate. Or will the Government be concerned it may impact on their tax take.”

There is also the suggestion that, as well as CO2, company car tax should take account other pollutants such as nitrogen oxides (NOx).

The UK is currently breaching European Union air-pollution limits, as set out in the 2008 Air Quality Directive, with poor air quality estimated to cause 29,000 premature deaths each year.

Tourick said: “If you are going to change the tax system for business cars, you now have a golden opportunity to base it on more than one emission, including CO2, nitrogen oxides and particulates.

“The whole system – capital allowances, lease rental  disallowance, BIK tax, national insurance and VAT – should reflect this.”

However, fleet body ACFO is wary of changing the current CO2-based regime.

It argues that it is “simple and straightforward” making it easy for fleet decision-makers and company car drivers to understand.

ACFO chairman John Pryor said: “Any tax system must be fair and equitable and ACFO believes that is the position with the current regime.

“Choice lists can be compiled and drivers can make their selections in the full knowledge of what their personal tax position will be.

“Contrast that with the previous regime, which encouraged employees to clock up mileage in pursuit of lower tax bills. That was not only unfair, but it also encouraged journeys, which contributed to traffic congestion and pollution.”

The British Vehicle Leasing and Rental Association (BVRLA) recently met with Treasury officials at a business vehicle taxation roundtable in London.

It is urging the Government to deliver a simpler, fairer company car tax regime and has made four policy recommendations to the Treasury.

They include: re-instating first year capital allowances; reversing the decision to keep the 3% diesel supplement until 2021; continuing to incentivise the purchase and use of ULEVs; and reforming BIK ratings, especially at the lower end of the emissions table.

Tourick said: “There appears to be a disconnect between the Government’s desire to encourage employees to take up low CO2 cars and the steep rise in tax that will be payable on these cars over the next few years.”

A company car driver with a vehicle emitting 1-75g/km of CO2 was taxed on 5% of the car’s list price last year and in four years’ time this will almost quadruple to 19%.

Peter Kowalczyk, fleet manager at Gamestec, believes the Government could incentivise ULEV drivers in other ways, not just through the tax regime.

“There should be a real benefit to change rather than a reduction in BIK tax,” he said.

“Free parking, free tolls, electricity rebates and free weekend public transport passes would provide a real incentive for fleets and drivers to switch to an ultra-low emission vehicle.”

David Millar, procurement manager at REL, added: “I believe that 100% electric vehicles should continue to  enjoy 0% tax for at least a few more years to help encourage their uptake.”

Whatever the future direction of company car tax, what is abundantly clear is fleets require certainty to enable long-term decision-making.

Pryor explained: “It enables company car choice lists  and vehicle selections to be made in the full knowledge of what the tax burden will be during a company car’s typical lifecycle.

“The Government must retain that policy of announcing tax rates four or even five-years in advance.”

It is exactly the reason why the fleet industry was unified in its condemnation of the chancellor’s decision to retain the 3% diesel supplement.

Pryor said: “The decision was a knee-jerk reaction to an issue external to the tax system. That does not aid long-term company car policy planning and undermines fleet confidence in the Government.”

How and when did the current regime start?

The Government announced its intention to reform the company car tax system in order to help protect the environment in 1999.

The details were announced in the 2000 budget and the new rules came into force in April, 2002, replacing a regime which had been worked out on the mileage covered during the course of business.

The new system was instead based on a percentage of the car’s P11D price, graduated according to its carbon dioxide (CO2) emissions.

It was designed to provide  financial incentives for employers and company car drivers to choose cars that produce lower CO2  emissions. It was also aimed at encouraging carmakers to develop and introduce greener cars.

The new rules were part of a wider package of measures aimed at tackling climate change and greenhouse gas emissions, which were introduced by the then Labour Government.

 

Leave a comment for your chance to win £20 of John Lewis vouchers.

Every issue of Fleet News the editor picks his favourite comment from the past two weeks – get involved for your chance to appear in print and win!

Login to comment

Comments

  • Derek Webb - 09/02/2016 12:12

    Whilst I agree that the current BIK system is inflexible and in very many cases unfair but like most "reviews" of taxation this will probably mean an increase in tax in one form or another so I do wonder if Salary Sacrifice car schemes will fall under perceived BIK in this review. Can a person walking into a showroom to buy a car get the same deal on the same car as someone on an employers SS scheme ?

  • Edward Handley - 09/02/2016 21:45

    Be careful what you wish for: The primary purpose of any form of taxation is not fairness but to raise money for the Government. Fairness when achieved is purely incidental to that primary purpose. The Chancellor may state that he wants to cut taxes, but the taxes he wants to cut are the ones that will win votes. Company car tax does not feature high on his list, so a root and branch review will be likely to result in a considerable hike in the revenue raised. Environmental benefits are wonderful camoflage raising extra revenue, and the general effect of such "green taxes" is to push company car drivers towards vehicles which are seen as more environmentally friendly. That's fine if you want to drive a Mitsubishi PHEV that actually does nearer to 35 mpg in real life than the claimed 160 odd mpg which is theoretically possible, or a Prius which does less mpg that a VW Polo Blue Motion. Which brings us on to the VW emissions scandal. The more "environmental" the tax regime gets the more murky the rules become and the bigger the incentive to manufacturer's to achieve amazing mpg and emissions figures by one means or another, and that leads to a very slippery slope. We need to beware of the Law of Unintended Consequences. A fairer company car tax regime could result in your next Company car being a Renault Twizzy - a fun and amusing little car for local journeys, but not much fun at all with the weather we have been enjoying recently.

    • Chris Byrne - 10/02/2016 08:53

      Great points Edward and very well made. The major 'unfair' aspect of Company Car Tax in my view is that a 40% tax payer will pay double the amount for an identical car that a 20% tax payer does. To my mind that proves the point that the system is just about raising revenue

  • steven richards - 25/03/2016 02:56

    I wish the current bureaucrats in power could explain to me why i have to pay over £2000 per annum in company car tax when i only ever use my company car for work purposes. we also have a private landrover which we use all the time at weekends. As far as i am concerned my company car is a tool of my job which i could not do without. However the car is made available for private use by the very nature of having a company car..i simply do not use it for private use and yet have no choice but to be ripped off every month. They should bring back the mileage scheme.

Compare costs of your company cars

Looking to acquire new vehicles? Check how much they'll cost to run with our Car Running Cost calculator.

What is your BIK car tax liability?

The Fleet News car tax calculator lets you work out tax costs for both employer and employee