Fleet News

HMRC tax take increases from fewer company cars

Row of parked cars

The amount of tax collected from company car drivers and their employers by HMRC in the 2018/19 tax year has increased by £170 million (7.5%) to £2.46 billion.

That’s despite the number of company cars falling by 30,000 to 870,000 vehicles, down from 900,000 the previous year – a 3.3% decline.

The amount of benefit-in-kind (BIK) tax paid by employees increased by £110m, from £1.62bn to £1.73bn – a 6.8% increase.

Meanwhile, tax revenue from National Insurance Contributions (NICs), paid by employers on the cars they operate, was up by £60m to £730m – 9% higher than the £670m collected in 2017/18, provisional figures suggest.

The increasing tax take, despite the dwindling company car parc, means the amount of tax the Government yields from a company car has, on average, increased by an eye watering 11.2% or £284, from £2,544 in 2017/18 to £2,828 the following tax year.

The increase also follows a 9.7% uplift in the average yield from 2016/17 to 2017/18 and a further 7% increase on the previous tax year.

At the start of the decade (2009/10), a company car was worth, on average, £1,680 in BIK and NICs revenues to the Treasury, at £1.63bn (£830m less), when there were 970,000 company car drivers – 100,000 more than in 2018/19.

The higher tax take between 2017/18 and 2018/19 can, in part, be explained by the increase reported in the taxable value over the same period.

ANNUAL INCREASE IN TAX RATES

The taxable value of the company car benefit was worth £5.27bn, up from £4.88bn the previous year, according to HMRC figures. However, the vast majority of the revenue increase has been down to the annual two percentage point increase in BIK rates, first introduced in 2015/16 (in previous years there had typically been a one percentage point increase).

The higher incremental company car tax increases were decided in combination with the removal of the three-percentage point diesel supplement, which was announced in the 2012 Budget and expected to take effect from April 2016.

However, shortly before it was due to be axed, the then Chancellor, George Osborne, announced he was delaying its removal until 2021 in light of ‘dieselgate’.

Two years later, Chancellor Philip Hammond announced he was raising it to 4% from April 2018.

He also announced that diesel cars that are RDE2-compliant would be exempt from the diesel surcharge.

Coupled with sweeping changes to salary sacrifice through the introduction of Operational Remuneration Arrangements (OpRA) in 2017, a lack of clarity over the future tax treatment of company cars and the impact of the WLTP (Worldwide harmonised Light vehicle Test Procedure), fleet decision-makers warned of a growing move away from company cars to cash.

DECLINE EACH YEAR SINCE 2015/16

The number of company cars has now fallen each year since 2015/16, when HMRC reported 960,000 employees receiving the benefit.

In 2016/17, the company car parc fell to 940,000, before dropping to 900,000 vehicles in 2017/18 and 870,000 in 2018/19.

HMRC, however, argues that the dramatic decline seen in the number of company cars since 2017/18 is, in part, due to employers moving from submitting P11D returns to collecting tax on company cars through payroll.

In 2016/17 employers were not able or required to submit more detailed information about company cars when collecting tax on this benefit through voluntary payrolling.

But, the following tax year (2017/18) employers payrolling car benefit were able to provide more detailed data about the cars being provided through their FPS (Full Payment Submission), which HMRC previously told Fleet News would rectify the situation.

However, providing this data did not become mandatory until 2018/19 and HMRC says that a significant number of company cars were not reported from 2016 to 2019.

Officials say it is not possible to give accurate estimates of the number of unreported company cars, but HMRC analysis suggests they account for a “high proportion” of the reduction.

Prior to last year’s release of provisional data for 2017/18, Lex Autolease predicted a large decline in company car drivers, with the number of employees receiving the benefit expected to fall to 875,000 in 2018/19 and 832,000 for the last tax year (2019/20).

Coronavirus now threatens to drive down the numbers further, with a company car parc of fewer than 800,000 vehicles a distinct possibility.

More than half (51%) of fleet decision-makers told a recent Fleet News Covid-19 survey they believe more company car drivers will choose cash ahead of a company car.

Two-in-five (42%) of respondents that already offer a cash alternative have seen an increase in enquiries since the crisis started, with some drivers becoming frustrated with paying for a benefit they no longer use.

The same survey showed just less than half (45%) of fleets believe they will be operating fewer company cars as a result of the economic impact of Covid-19. Of those, 48% predict a reduction of less than 10% while 37% foresee a 10-30% reduction.

Given the decline seen in previous years, a 3% cut from 2018/19 to 2019/20, followed by a 10% fall this tax year, would leave just 750,000 company cars on UK roads.

Leasing companies have reported early terminations and contract extensions from fleets as job losses mount and employers look to manage the economic uncertainty.

Meanwhile, new data from the Office for National Statistics (ONS), published last month, shows the unemployment rate grew to 4.5% in the three months to August, compared with 4.1% in the previous quarter.

Redundancies also rose to their highest level since 2009.

An estimated 1.5 million people were unemployed between June and August, while redundancies stood at 227,000.

Furthermore, the number of people claiming work-related benefits reached 2.7 million in September – an increase of 1.5 million since the beginning of the crisis in March.

The Bank of England has previously warned that UK unemployment is expected to peak at 2.5 million by 2021, with more than a million jobs expected to be lost in the second half of this year.

BANK OF ENGLAND WARNING

Addressing the House of Lords Economic Affairs Committee at a virtual hearing last month, Bank of England governor Andrew Bailey warned of structural change to the UK economy, which could lead to “persistent unemployment”.

“My view is the recovery will take time,” he told the committee. “The hard yards are still ahead of us and, unfortunately, since we first said that back in August, things have become even more stark.”

Analysis from Citibank paints an even bleaker picture, with an unemployment rate of 8.5% in the first half of 2021, equating to more than three million unemployed, a level not seen since the early 1990s.

A surge in redundancies, however, coupled with the warning that company car drivers are enquiring about cash alternatives, will not necessarily drive down vehicle numbers further, according to the Association of Fleet Professionals (AFP).

Paul Hollick, AFP chair, told Fleet News: “We very much expect this trend to be reversed by low and zero benefit-in-kind taxation on electric vehicles (EVs).

“We are hearing stories of people returning from taking cash to re-enter company car schemes on a large scale – and this will only grow with increased awareness about the tax situation and improving availability of EVs.”

The Government cut BIK tax on zero-emission company cars from 16% in 2019/20 to 0% in 2020/21.

Hollick explained: “These 2018-19 figures would not reflect this and there would only be a limited impact in 2019-20 but, after that, we would expect to see real signs of a new trend. In every sense, these figures are a matter of timing.”

The AFP has previously argued that the company car remains a highly effective tool for businesses and, in many instances, the only viable transport option.

Hollick continued: “It is true that official company car numbers might have been falling, but fleet management as a whole is almost certainly growing with the rapid expansion that we are seeing in areas such as grey fleet and salary sacrifice schemes.”

This article was first published in the October edition of Fleet News.

For more on this story, read why Harvey Perkins, director at HRUX, believes high company car tax rates are no friend of the pursuit of lower emissions.

Click here for fleet procurement best practice and procurement insight

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

No comments have been made yet.

Related content

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