The Government is being warned that a failure to recognise the impact of the new emissions testing regime on tax could cause long-term damage to the fleet sector and the environment.
It is looking at the issue after launching a review into the effect of the Worldwide harmonised Light vehicle Test Procedure (WLTP) on Vehicle Excise Duty (VED) and company car tax last month.
The fleet sector is being asked to respond to a series of questions around whether vehicle tax changes are required once WLTP is adopted for tax purposes from April 2020.
However, the review will not consider increased costs caused by CO2 figures derived from the interim EU tool called CO2MPAS, or the impact of WLTP on other emissions-based taxes such as capital allowances and lease rental restrictions.
Furthermore, the Government says that, given climate change targets and air quality concerns, doing nothing to the tax regime to soften the impact of WLTP on a million company car drivers and 35 million private motorists is under consideration.
“If no tax changes are made, this could have a positive impact in helping to achieve our climate change and air quality targets,” it said.
The British Vehicle Rental and Leasing Association (BVRLA) said it would be “totally unacceptable” for the Government to ignore the inflationary impact of the WLTP test on taxation.
“Failing to make an adjustment would be unfair on fleets and motorists and would undermine Government attempts to encourage the uptake of newer, low emission vehicles,” said BVRLA director of policy and membership Jay Parmar
The association is calling for a two percentage point cut in benefit-in-kind (BIK) for affected cars.
Fleet operators also believe a failure to amend rates could cause long-term damage to the company car market.
Caroline Sandall, deputy chair of fleet representative body ACFO and director of ESE Consulting, told Fleet News: “Driver perception has changed and many drivers – and companies – are questioning the long-term benefit of a traditional company car provision.”
Doing nothing would be “hugely damaging to the industry”, said Sandall, and would harm the Government’s Road to Zero ambitions.
The fear is that drivers may increasingly opt out of having a company car, driving up grey fleet numbers, and increasing average CO2 emissions, because vehicle choice will not be so constrained.
John Webb, principal consultant at Lex Autolease, said: “If no adjustments are made, the cost implications will push more company car drivers to take cash.”
WLTP EMISSIONS INCREASE
Initial evidence provided by manufacturers suggests that more than half of cars will see an increase from NEDC-correlated CO2 figures to the new WLTP value of between 10% and 20%.
However, drivers taking delivery of company cars over the past few months have already seen increases in CO2 emissions of 10%, on average, equating to some 10-15g/km, from the new correlated figure.
For example, the Mercedes-Benz E 220d saloon AMG Line Fleet News had on test last year, went up three BIK tax bands, with CO2 emissions rising from 112g/km to 127g/km.
It meant a 40% taxpayer would pay an additional £478 per year, with a business paying £165 more in national insurance contributions (NICs).
Almost nine out of 10 (88.2%) respondents to a Fleet News poll believe the Government should be looking at how WLTP is impacting NEDC-correlated figures.
Sandall said: “It should be taken into account – it is only fair and reasonable to do so – drivers should not have to pay more purely as a result of this change.”
Respondents to the poll also vented their frustration. One said: “As a company car-user for many years, it is just too expensive and no longer a benefit, more a liability. I’m waiting on the Budget, although I will probably go for cash option and then buy a private, petrol car which is one or two years old and has emissions some 40% higher.”
The Treasury told Fleet News that the review would not consider the impact of correlated-figures, instead saying it wanted to focus on the potential impact of WLTP from 2020.
OTHER EMISSIONS-BASED TAXES
However, the Treasury did say it would continue to review whether other policies linked to reported CO2 emissions, such as capital allowances and lease rental restriction, “remain correct”.
Webb says the impact of WLTP on vehicle taxation “needs to be considered holistically”, taking into consideration VED, capital allowance and lease rental restriction as well as BIK.
Under capital allowance rules, cars purchased by companies that emit up to 50g/km are eligible for 100% write-down in the first year; for those emitting 51-110g/km, it’s 18% a year; and for more than 110g/km it is 8% a year, reducing to 6% from April 1.
Under the lease rental restriction, new cars with emissions of 110g/km or less are eligible for 100% of their lease payments to be offset against corporation tax. For those with emissions of 111g/km or more, only 85% is claimable.
For both, rising CO2 emissions under WLTP will see many cars moving band, which means increased costs for employers.
GOVERNMENT TAX RECEIPTS
Although the magnitude of the WLTP impact remains uncertain, at Budget 2018 the Office for Budget Responsibility (OBR) assumed an increase in revenue for the Exchequer by adjusting the VED and company car tax forecasts from April 2020.
It suggests VED receipts will increase by around £200m a year on average from 2020-21 onwards.
Company car tax receipts – through income tax and NICs – are forecast to increase £100m in 2020-21, rising to £400m in 2023-24.
A Treasury spokesman insisted it would “continue to strike the right balance between protecting consumers from rising costs and leaving our environment in a better state. This is a review and no final decisions have been taken.”
In the review, it clarified: “Any change to VED and company car tax must balance the need for revenues to remain sustainable over the longer term while maintaining the environmental incentives.”
KEEP IT SIMPLE
If the Government does decide to make changes to the tax system, it says it only wants to make a “simple” adjustment, such as a change in rates, because the “fundamental structure of VED and company car tax is correct”, including the diesel supplement.
This suggests it has no plans to consult on a replacement scheme for company car tax, which many believe will be necessary if tax receipts from BIK fall as employees opt for efficient ultra-low emission and electric cars.
In addition, in the Government’s recent response to last year’s Business, Energy and Industrial Strategy (BEIS) committee report on electric vehicles, it outlined an ambition to announce company car tax rates at least two years before implementation, far less than the five years requested by the fleet sector in the Fleet News Fleet Budget Manifesto.
This will result in long-term uncertainty over future BIK costs for drivers who keep their company cars for three or more years and for employers on national insurance contributions.
WLTP IMPACT ON CO2
The Worldwide harmonised Light vehicle Test Procedure (WLTP) was introduced by the EU to better align reported CO2 emissions measured in the laboratory with those achieved during real world driving conditions.
This, says the Government, will help reduce the current gap of around 40% that exists between the old NEDC (New European Driving Cycle) results achieved in the laboratory and actual emissions.
WLTP testing has been required for all new models from September 2017, and all new car registrations since September 2018.
In the Autumn Budget 2017, it was announced that cars registered from April 2020 would be taxed based on WLTP. Cars registered before April 2020 would maintain their current tax treatment, paying emissions-based taxes according to converted NEDC figures under the EU’s CO2MPAS equation.
The Government has also said new vans will be liable to pay VED based on CO2 emissions when first registered from April 2021.
However, the consultation says WLTP impact on vans will be considered in a separate review.
WLTP for heavier vans does not become mandatory for new registrations until September 2019.
Click here to read the the thoughts of Dan Rees, associate director, head of cars and fleet consulting at Deloitte, on the impact of WLTP.