Government changes to company car tax rates will fail to soften the blow of an increase in CO2 emissions triggered by the new vehicle testing regime.
The vast majority of drivers will still face a rise in their annual benefit-in-kind (BIK) tax bills, while the new tax regime could penalise one company car driver over another.
In its long-awaited response to the review of company car tax, HM Treasury announced it was binning previously published BIK rates for 2020/21, in an effort to mitigate more accurate, and as a result higher, vehicle CO2 emissions shown in the Worldwide harmonised Light vehicle Test Procedure (WLTP).
Instead, it revealed two new BIK tables for company car drivers: one for those driving a company car registered after April 6, 2020, based on WLTP CO2 figures, and one for those driving a company car registered before the same date, based on NEDC-correlated CO2 figures.
Despite a new eye-catching rate of 0% for pure electric vehicles (EVs) from April 2020, some company car drivers could face a year-on-year increase of more than 10%, while others could be paying hundreds of pounds more to drive exactly the same company car as a colleague.
Fleet association ACFO described the new company car tax rates as a “token gesture” in mitigating the increase in CO2 from WLTP.
ACFO deputy chair Caroline Sandall said HM Treasury “seems to have calculated the amount of money that it wanted to raise from company car BIK tax and merely tweaked rates accordingly”.
WLTP IMPACT ON CO2
Fleets had already seen CO2 values increase by 10% or between 10-15g/km, on average, for cars tested under the old NEDC emissions testing regime compared with NEDC-correlated figures derived from the new WLTP value, resulting in higher tax bills.
However, evidence provided by manufacturers showed that more than 50% of cars would also see an increase from NEDC-correlated emissions to WLTP values, of between 10% and 20%, when they would be used for tax purposes for cars registered after April 6, 2020.
Fleet News highlighted the discrepancy in CO2 values and how it was impacting fleets, and drivers, in its submission to the Government company car tax review.
It also was the first to highlight the potential tax implications of the new emissions testing regime on the company car market back in 2014.
A Volkswagen Golf 1.6TDi Match, for example, has an NEDC-correlated CO2 value of 108g/km; its WLTP value is 128g/km – up 18.5%. Today, the 108g/km car would equate to a 29% BIK tax rate or, with a P11D value of £25,640, a company car tax bill of £1,487.12 for a 20% taxpayer.
Under HM Treasury’s original rates, in 2020/21 the BIK percentage would have increased from 29% to 30%, equating to a new annual charge of £1,538.40 – a 3.5% year-on-year rise.
The new BIK table for cars registered before April 6, 2020, maintains that 30% rate for the next three tax years, up to and including 2022/23.
However, if a fleet replaces that Golf with an identical model next April, the driver would incur a 32% BIK rate due to the higher WLTP-calculated CO2 figure, resulting in a year-on-year increase of more than £150 or 10.5%.
Furthermore, two drivers could have exactly the same model registered days apart, but one would pay £102 more than their colleague during the same tax year (2020/21) thanks to the different tax rates and CO2 emissions calculations the Government intends to employ.
The disparity would also grow year-on-year; by £153 in 2021/22 and by more than £200 the following year.
There are similar discrepancies for a 40% taxpayer; take a BMW 320d M Sport, for example. It has a NEDC-correlated value of 118g/km, with a WLTP range from 133-139g/km, almost an 18% increase at the upper end. The original 2020/21 rates would have resulted in the BIK rate increasing from 31% to 32%, equating to a new annual charge of £4,655.36 – a year-on-year increase of just over 3%.
The new BIK table for cars registered before April 6, 2020, maintains that 32% rate for the next three tax years, up to and including 2022/23.
However, replace that car with exactly the same model next April, at 139g/km (WLTP) it attracts a BIK rate of 34% and, with a P11D price of £36,370, leaving the driver facing an increase of almost 10% or more than £430, year-on-year.
Furthermore, two drivers could have exactly the same model registered days apart, but one would pay £290 more than their colleague during the same tax year (2020/21) thanks to the different tax rates.
The disparity would again grow year-on-year; to £430 in 2021/22 and to £580 the following year.
WLTP NOT TAX NEUTRAL
Sandall said: “Far from the implementation of WLTP testing being tax neutral, as the Government initially indicated, it is likely to result in the company car remaining a ‘cash cow’.”
Many company car drivers are also ‘job-need’, some 71.5%, according to analysis of some of the UK’s biggest fleets in the Fleet 200, with little vehicle choice.
“Drivers of those vehicles, who will in many cases will be high-mileage where the diesel option is best for operational purposes and possibly lower salaried, have no cash allowance option and so a limited opportunity to reduce, or control, their BIK tax,” said Sandall.
The 4% diesel supplement stays, with RDE2-compliant diesels exempt from the charge.
Fleets started taking delivery of the first RDE2 diesel cars earlier this year, with manufacturers promising that more models will follow.
Claire Evans, Zenith head of fleet consultancy, said that, while with some cars the move to WLTP may result in a higher company car tax, it was important to remember the savings RDE2-compliant diesels will bring.
“Great news for businesses where diesel is still the most efficient option for drivers who complete higher mileages,” she said.
Mercedes-Benz and Jaguar Land Rover have launched RDE2 models, while BMW told Fleet News that the new 1 Series will be its first model classified as RDE2 and Vauxhall says the new Astra will be the first of its RDE2-compliant models.
It will be plug-in drivers who will enjoy the greatest savings under the new company car tax regime, however, thanks to the new 0% tax rate for pure electric EVs in 2020/21.
EV company car drivers were already looking forward to a much reduced rate of 2% for 2020/21; the 0% BIK tax rate will now mean they pay no company car tax at all for 12 months from next April. The rate for zero emission cars then increases to 1% in 2021/22 and 2% in 2022/23.
For a 20% tax-payer, driving a Nissan Leaf 62kw e+ Tekna, with a P11D price of £39,340, their company car tax bill will fall by £1,259 from April, 2020.
The BIK rate was due to fall to 2%, before the new rates were published, so there was already a significant saving to be had by choosing a zero emission car.
HMRC statistics published days before Treasury issued the new tax tables show that in 2016/17 – the last available data set – less than 1% drove a zero emission car while 3% had a car with emissions between 1-50g/km of CO2.
However, more company drivers are considering making the switch. FN50 data showed last year, that 3.4% of all cars that the top 50 vehicle leasing companies had on order were pure electric, and a Fleet News poll, taken before the new rates were announced, revealed that one-in-five respondents (21.4%) were considering a pure EV as their next company car.
A further poll following the new rates announcement shows many more will consider a pure EV, with almost three-quarters of respondents (73.6%) saying they were ready to make the switch.
British Vehicle Rental and Leasing Association (BVRLA) chief executive Gerry Keaney welcomed the changes. He said recognising the “value of the company car market in supporting the transition to zero emission technology” was a “positive endorsement for our sector”.
“The Treasury is giving back some of the unfair company car tax windfall it was set to receive as a result of WLTP,” he said.
Questions have been raised about the availability of pure electric cars, however, with lead times potentially hampering the ability of company car drivers to take advantage of the new rates from next year.
Sandall said because “lead times are lengthy”, the real value of the 0% rating will be “extremely limited”.
She explained: “Most major motor manufacturers have announced plans to introduce numerous plug-in models over the next 18 months and the Government needed to take account of model launches and availability in its calculations.”
Carmakers have already seen demand for alternative fuel vehicles outstripping supply and the situation may not improve anytime soon due to a lack of batteries.
ICFM chairman Paul Hollick said: “While the Government has slightly incentivised the take-up of zero emission models, it has failed to take account of the lack of availability of those vehicles in today’s marketplace.
“For fleets and company car drivers to truly embrace the plug-in vehicle revolution, the Government needed to take model launches and availability into account in reviewing tax rates.
“Plug-in vehicles – and particularly zero emission models – remain a very niche product and what availability there is does not meet fleet and company car driver requirements in the majority of cases.”
CAR vs CASH
The lack of long-term tax rates for company cars and the impact of WLTP have been cited by the fleet industry for more employees choosing cash over a car.
HMRC said initial analysis suggests a new way of reporting company car tax for some employers may have “significantly” skewed the figures.
Dan Rees, associate director, head of cars and fleet consulting at Deloitte, told Fleet News earlier this year, that the rate of employees/employers opting out of company cars for cash allowances was the “highest we’ve seen in recent times”.
Furthermore, ACFO claims that, despite the new BIK rates, more employees are likely to opt out of company cars due to an increasing tax burden for the majority of drivers.
However, the Government dismissed claims WLTP was to blame. The Treasury said: “Significant evidence was not provided (from the consultation) to suggest that WLTP will cause individuals to opt-out of company cars, or that these individuals would substitute for higher emitting models in the private market.”
It has also now provided a view of future company car tax rates up until April 2023.
It says that “by providing clarity of future appropriate percentages, businesses will have the ability to make more informed decisions about how they make the transition to zero emission fleets”.
It added that rates beyond 2022-23 remain “under review and will be announced at future fiscal events”.
“The Government aims to announce appropriate percentages at least two years ahead of implementation to provide certainty for employers, employees and fleet operators,” Treasury said.
Lex Autolease head of fleet consultancy Ashley Barnett told Fleet News: “The lack of clarity on the long-term tax regime for company cars has severely hampered uptake, clearly reflected in the most recent car registration figures from the SMMT and the reduction in the number of people paying company car taxation.”
The Government announcement on company car tax, he concluded, gives a “degree of much-needed certainty” to company car drivers and fleet managers.