Evaluation of company car tax reforms

The Inland Revenue has published an evaluation report on the impact of the changes to company car taxation that were introduced in April 2002. The report gives interim results only as the full effects of the changes will not be understood until the first three to four year purchasing cycle for company cars is complete. The key findings of the report are:

• Over half of all employers who provide company cars have changed their policies towards CO2 emissions and are actively encouraging their employees to switch to cars with lower CO2 emissions.
  
  
• It appears that the company car tax reform has led to a net year-on-year reduction in recurring compliance costs of £;35 million in 2002/03, saving businesses an extra £;15 million per year more than originally estimated.
  
  
• Removal of the link between business mileage and the company car tax charge has resulted so far in a reduction of between 300 and 400 million business miles in company cars in 2002/03. This is expected to continue in subsequent years. The reduction in business mileage is estimated to equate to a reduction of 25,000 - 35,000 tonnes of carbon emissions in 2002/03. This represents a reduction in CO2 emissions equivalent to about 0.1% of all CO2 emissions from road transport in the UK.
  
  
• It appears that the average CO2 emission ratings of new company cars has decreased from around 196 grams per kilometre (g/km) in 1999 (when the intention to switch to a new company car tax system based on environmental principles was first announced by the Government) to around 182 g/km in 2002. It is believed that, in 2003, there was a reduction of around 0.15 - 0.2 million tonnes of carbon due to the reform. The Government's long-term target is a reduction of 0.5 - 1 million tonnes of carbon per year.
  
  
• The number of company cars has decreased in the two years to November 2003 from around 1.6 million to 1.35 million. This is believed to be attributable partly to the reform in company car taxation and partly to the increased popularity of cash alternatives and employee car ownership schemes. The levels of sales and registrations of diesel cars have also increased and it is estimated that between 40% and 45% of all company cars are now diesel cars. This is expected to increase to between 50% and 60% by 2005.
  
  
• Although a survey of employees and employers suggests that they are prepared to consider a change to alternative fuel cars in the future, the actual effect of the tax incentives for such cars has been minimal and it is believed that no more than 1% of company cars are currently running on alternative fuels.
  
  
• The total tax and NICs receipts for company cars in 2000/01 was £;2,660 million, with an additional £;830 million from the fuel benefit charge. When the reforms were introduced, it was expected that the measures would initially be broadly revenue neutral and that, in the 2003/04 and 2004/05 tax years, there would be a cost to the Exchequer of £;25 million and £;75 million respectively. It is now expected that the costs will be higher, around £;10 million in 2002/03, £;120 million in 2003/04 and £;140 million in 2004/05.

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...back to 7 May 2004


Source: www.inlandrevenue.gov.uk/cars/cct_eval_rep.pdf

Emergency vehicles

Section 81 of the Finance Bill 2004 sets out the rules, effective 6 April 2004, for tax exemption where the use of an emergency vehicle is limited to on-call commuting. Please note that these provisions are subject to change during the Bill's passage through Parliament.

1. No liability to income tax arises under Chapter 6 of the Benefits Code (cars, vans etc) or Chapter 10 of the Benefits Code (residual liability to charge) where
   
   
   • an "emergency vehicle" is made available to a person "employed in an emergency service" for the person's private use,
     
     
   • the terms on which it is made available prohibit its private use other than when the person is "on call" or "engaged in on-call commuting", and
     
     
   • the person does not make private use of it other than in such circumstances.
     
     

2. An "emergency vehicle" is a vehicle that is used to respond to emergencies and that
   
   
   • has fixed to it a lamp designed to emit a flashing light for use in emergencies, or
     
     
   • does not have such a lamp because, if it did, there would be a special threat to the personal physical security of those using it because it would be apparent that they were employed in an emergency service.
     
     

3. The following persons are "employed in an emergency service":
   
   
   • constables and other persons employed for police purposes,
     
     
   • persons employed for the purposes of a fire, or fire and rescue, service, and
     
     
   • persons employed in the provision of ambulance or paramedic services.
     
     

4. A person is "on call" when liable, as part of normal duties, to be called on to use the emergency vehicle to respond to emergencies.
   
   
5. A person is "engaged in on-call commuting" when using an emergency vehicle and
   
   
   • is using it for ordinary commuting or for travel between two places that is for practical purposes substantially ordinary commuting, and
     
     
   • is required to do so in order that it is available for use by the person, as part of normal duties, for responding to emergencies.
     
     

6. An emergency vehicle is also now specifically classified as a "company vehicle" in the context of the payment of passenger payments, where the employer makes a payment (not exceeding 5p per mile) where the employee to whom the vehicle is provided carries one or more passengers for whom the travel is business travel.

Source: www.inlandrevenue.gov.uk/finance_bill2004/index.htm
...back to 9 April 2004

Advisory mileage rates for company cars

In January 2002, the Inland Revenue published advisory mileage rates to clarify for employers the level at which

• payments made to employees for the cost of fuel used for business travel, or
• payments made by employees to repay the cost of fuel used for private travel

in a company car would incur liabilities for income tax and Class 1 NICs. Since January 2002, employers have been able to negotiate dispensations for their mileage payments in order to avoid having to report them on form P11D.

The rates are only intended for use in the two specific circumstances mentioned above. For example, they cannot be used by employees to obtain a tax deduction where lower rates are paid by the employer.

The rates published in 2002 have been updated for the tax year 2004/05. The only changes are to the rates for LPG from 2004/05. The full Table is as follows:

As the rates represent average fuel costs, employers may set rates that reflect their own circumstances, lower if cars are more fuel efficient, higher if the employer can justify a business need for cars with high fuel consumption.

Employer makes payments for fuel used for business travel
As long as the payments are not higher than the relevant rate in the Table, there is no taxable profit and no Class 1 NICs liability. If the rates paid are higher, the excess amounts are subject to PAYE tax and NICs through the payroll. Such higher payments do not give rise to a fuel scale charge, as long as the payment is only in respect of business mileage.

Employee makes payments for fuel used for private travel
There is no fuel scale charge and no corresponding Class 1A NICs liability where the payments are at or above the relevant rate. If lower rates are paid, a fuel scale charge can only be avoided if the employer can demonstrate that the lower rate covers in full the cost of private fuel.

Further review of the rates
The Inland Revenue has again confirmed that the published rates will only be reviewed during a tax year if average fuel prices vary by more than 10% of the prices used to set the rates, i.e. 77p per litre for petrol, 78p for diesel and 41p for LPG.
Source: www.inlandrevenue.gov.uk/cars/fuel_company_cars.htm
...back to 4 April 2004

Company car and car fuel calculator

The Revenue has provided, on a secure website, its own interactive calculator for determining the car benefit and fuel benefit charges. The direct link is shown below, but access is also available through the general page of guidance on company cars at www.inlandrevenue.gov.uk/cars/ .
(Source: www.ir-portal.gov.uk/calculators/cct
...back to 9 May 2003

P11D changes for 2003/04

Two further changes relating to the calculation of the car and fuel benefit charges will be made to form P11D for 2003/04:

• the two boxes for recording the value of accessories will be merged into a single box, covering accessories added when the car is first made available and those added afterwards.
• a new date box will be added to show the date on which the provision of free fuel was withdrawn during the tax year, and a tick box to indicate if the provision of the free fuel was reinstated during the year.

Working sheet WS2 will be amended accordingly.
(Source: IR Notes for Payroll Software Developers)
...back to 18 April 2003

Advisory mileage rates for company cars

Earlier in 2002, the Revenue published, for the first time, a set of advisory mileage rates for company cars. They are intended to reflect the cost of fuel only, in order to prevent the situation where employees profit from the rates paid and thereby incur a tax liability.

Acceptable rates for LPG cars have recently been added to the original rates, as follows:

It must be understood that, unlike the new rules for mileage payments for private cars, a dispensation is needed if an employer is to avoid having to report mileage reimbursements on form P11D at the year end. The advisory rates may be used as the basis for negotiations with the tax office for a dispensation.

There are two principal ways in which employers handle the costs of business travel in company cars and use of the advisory rates depends on the method used.

1. Employer reimburses employees for business mileage

Where the drivers buy the fuel themselves for their company car and the employer reimburses the cost of the fuel used for business travel, there is no taxable profit for either tax or NICs if the rates paid are not higher than the advisory rates. However, the Revenue is prepared to accept higher rates where the employer can show that the fuel costs for certain cars are higher than the advisory rate, e.g. for 4x4s that are used on rough terrain.

If higher rates are paid even though the employer cannot demonstrate that the actual fuel costs exceed the advisory rates, the "profit" will not give raise to the fuel scale charge as long as the payments are solely for business mileage, and not for private mileage. Rather, the excess will be treated as taxable profit and as earnings for Class 1 NICs. Any NICs liability must be handled in the earnings period in which the reimbursement is made.

2. Employees reimburses employer for private mileage

Where the employer provides all of the fuel for the company car, either from a company pump or by providing a fuel card, the employees must repay the cost of the fuel that was used for private travel. No fuel scale charge will arise, and no NICs liability, if the rates paid are not less than the advisory rates. However, the Revenue will accept the payment of lower rates if the employer can demonstrate that the lower rate fully covers the cost of the private fuel.

When the advisory rates were originally announced, the Revenue gave a commitment not to change them unless fuel prices in the future varied by more than 10% from the prices at the time (i.e. petrol 77p, diesel 78p and LPG 39p per litre). To give further certainty, the Revenue has now given assurance that the advisory rates will not change for the remainder of the 2002/03 tax year unless fuel prices fall by more than 15% from those prices.
Payroll Briefing 10 - 7 November 2002

Car or van?

Is a double cab pick-up a car or van? In advance of the outcome of its review of van taxation, the Revenue has given temporary guidance for the 2002/03 tax year.

For tax purposes, a van is defined as a vehicle that is designed primarily to carry goods or other loads and that has a design weight, i.e. a maximum payload, that does not exceed 3,500 kg, i.e. 3½ metric tonnes. There was never any real doubt that an estate car is a car and not a van. But the status of a double cab pick-up is not so straightforward. They are clearly designed to carry loads, but the double cab is as large and often as luxurious as a quality car.

The tax issue is significant. If the pick-up as classified as a van, the current reportable benefit is £;500, giving a tax charge to the driver of £;110 (at basic rate tax), even if free fuel is provided for private use. However, if it is classified as a car, it is taxed as a company car. To illustrate, a Nissan Navara 5-seat double top pick-up has a list price of around £;19,000 and CO2 emission levels of around 260 g/km, at the maximum of the scale. The car benefit charge for 2002/03 would be £;6,650, with a further £;4,200 if free fuel is provided. The driver would pay £;2,387 (at basic rate tax) if the pick-up were treated as a car.

The Revenue's approach to this problem for 2002/03 is to use the definition that applies for VAT purposes, namely that a vehicle with an ex-works payload of 1 tonne or more is not treated as a car. If the pick-up has a hard top, that is deemed to have a weight of 45 kg. Therefore, a double cab pick-up with hard top must have a payload of 1,045 kg in order to be treated as a van for tax purposes. The Nissan Navara 5-seat double top pick-up has a payload of 1,055 kg.

The tax position of these vehicles for future years will depend on the outcome of the Revenue's current review of company van taxation. Further information is available at www.inlandrevenue.gov.uk/cars/company_vans_info.htm .
Payroll Briefing 9 - 24 October 2002

Fuel Benefit charge 2003/04

The current tax year is the last in which the fuel benefit charge is a scale charge based on fuel type and engine size. Typically, the scale charges for 2002/03 are £;2,850 for most cars and £;4,200 for larger cars. From April 2003, as announced in the April Budget, the tax charge for the provision of fuel for private use in a company car will be related to the CO2 emission levels of the car. The Revenue has published guidance on how the tax will be calculated on its website at www.inlandrevenue.gov.uk/cars/fuel_ben_charge_0304.htm .

There are two elements to the calculation. The starting point is a fixed value of £;14,400, set by the Government for 2003/04. It will likely be increased each year, but the Chancellor's formula of increasing the charge by 20% a year for the past five years has now finished. The fuel benefit charge for the year is a percentage of the £;14,400, i.e. the same percentage that is used to calculate the car benefit charge, based on the vehicle's CO2 emission levels.

The effect is that fuel benefit charges for petrol and diesel cars will range from £;2,160 (i.e. 15% of £;14,400) for the most efficient cars, up to £;5,040 (i.e. 35% of £;14,400) for the least efficient.

To illustrate, a fully-expensed company car has a list price of £;15,000 and a CO2 emission rating of 200 g/km. The 2003/04 tax charge for that rating will be 24% of the list price. Therefore,

• the car benefit charge will be £;3,600, i.e. 24% of £;15,000, and
• the fuel benefit charge will be £;3,456, i.e. 24% of £;14,400.

So, for 2003/04, the employee will pay tax on the combined total of £;7,056, and the employer will pay Class 1A NICs on that total at 12.8%.

Also from April 2003, employees will be able to opt out of the free fuel benefit part of the way through the year and be taxed on a proportion of the annual charge. Currently the charge is "all or nothing" and the only time that an employee can choose to give up the fuel benefit is at the start of the tax year.

For example, if an employee makes little private use of a fully-expensed company car, the tax paid on the benefit may be far more than if the employee buys the fuel personally. If the employee asks the employer to withdraw the benefit from 1 June 2003, the fuel benefit charge, using the figures in the example above, will be proportionate to the number of days from 6 April to 31 May. The reportable benefit will be £;528, i.e. £;3,456 ÷ 366 × 56 days.
Payroll Briefing 5 - 28 August 2002

Fuel scale charges

The fuel scale charges that will apply to the provision of fuel for private use for the 2002/03 tax year have been announced in advance of the delayed 2002 Budget, so that they are known from the start of the tax year. This is the last of five annual increases that have followed the formula of raising the charge by 20% above increases in pump prices. As the price of fuel has fallen since March 2001, the net increase in the fuel scale charges is 16%.

The old and new rates are as follows:

Consultation has already taken place on a new method of determining fuel scale charges from 2003/04 onwards using carbon dioxide emission levels as the basis.
Payroll Briefing 221 - 12 April 2002

Coding notice problems

The formula for taxing company cars changes from April 2002. All employers with company cars were asked by the Revenue to provide the CO2 emission ratings for those vehicles during 2001, so that the necessary changes to tax codes could be issued in time for the start of the 2002/03 tax year. It would appear from a Revenue announcement in January that a majority of employers has not supplied the necessary figures. The notice reads: "Because, in most cases, we don't have all the information we need to calculate the value of the benefit using the new rules the amounts of car benefit in recently issued PAYE Coding Notices for 2002-2003 are based on estimates and probably need to be changed."

Two further problems have aggravated the situation. A leaflet should have accompanied the estimated coding notice sent to company car drivers, asking them to supply the necessary information to correct the tax code, but it was not sent in most cases. Another leaflet will be sent by the beginning of March, hopefully to get the car emission details back in time to get the code right by the start of the tax year.

In other cases, where the correct information had been provided, the codes were wrongly calculated, apparently giving a 15% charge in all cases, because there were problems transferring the details between the Revenue's computers. Revised coding notices are now being sent out to correct this problem. The Revenue have apologised for this chapter of errors.
Payroll Briefing 218 - 14 February 2002

Fuel scale charge

As mentioned in the last issue of Payroll Briefing, the Government is planning to link the fuel scale charge, as reported on P11Ds for company car drivers who are provided with fuel for private use, with carbon dioxide emission levels from April 2003. The Government has already linked Vehicle Excise Duty with CO2 emission rates, since March 2001, and the car benefit charge will be based on emission rates from April 2002.

A Consultation Paper has now been published that presents three options for creating such a link from April 2003. Please note that the multiplier figures given for options 1 and 2 below are made up by the author and have not been suggested by the Revenue.

Option 1

This would link the car charge directly with the emission rating by multiplying it by a set amount. For example, if the multiplier were 15 and a car's CO2 emission rating were 209 g/km, the car charge would be £;3075, i.e. 205 (rounded down from 209) × 15.

A variation on this option would be to set a lower multiplier for more efficient cars, for example, using a multiplier of 12 for cars up to 185 g/km, and 15 for higher ratings.

Option 2

This would use the percentage that will be used for the car benefit charge from April 2002, and multiply it by a set amount. For example, the percentage charge for a car with an emission rating of 185 g/km in 2003/04 will be 21%. If the multiplier were £;12,000, the fuel scale charge would be £;2520, i.e. 21% of £;12,000.

This option has the particular advantage of reflecting the supplement for diesel engines and the discounts for alternative fuels that will apply to the car benefit charge from April 2002.

Option 3

This would mirror the new structure for Vehicle Excise Duty. There would be four bands of emission ratings, up to 150 g/km, 151 to 165, 166 to 185, and over 185. The charge would then vary according to the type of fuel, i.e. petrol, diesel, and alternative fuels.

Readers who would like to give the Government their views on these options should obtain a full copy of the Consultation Paper from www.inlandrevenue.gov.uk/consult_new/fuel_scale_charge.pdf The following questions are posed:

• Which of the three options do you prefer, and why?
• Which option will have the biggest environmental impact, i.e. encourage the use of low emission cars and discourage the provision of
free fuel for private use?
• What would be the administrative impact of each of the options for employers and employees?
• For cars with no emission ratings, would the best option be to use a flat rate charge based on engine size?
• Instead of being an "all or nothing" charge, would employers and employees be encouraged to give up free fuel for private use during
a tax year if the charge were reduced proportionately in the event of the benefit being withdrawn during a tax year?

The deadline for responses is 8 February 2002.

Note that, from April 2002, fuel scale charges will continue to be linked to engine size and fuel type and we should expect the Chancellor to increase the rates for the fifth year in succession by 20% plus increases in pump prices. - Payroll Briefing 215 - 3 January 2002

CO2 emission levels

In an open letter to the magazine Accountancy Age, the Revenue has clarified a number of matters about the arrangements in place to help employers provide their tax offices with CO2 emission level ratings for their company cars.

The Inland Revenue commissioned the Society of Motor Manufacturers and Traders (SMMT) to compile a database of cars and their emission levels to enable employers to supply their tax offices with the necessary details before the start of the 2002/03 tax year, the first year in which the new rules for taxing company cars come into effect. Use of the SMMT's website (www.smmt.co.uk) to find the emission level figures for individual cars registered before March 2001 is free but, for employers with large car fleets and for whom individual searches would be very laborious, the SMMT provides the details by e-mail at a price, starting from £;30 for up to 50 cars, and rising to £;750 for the entire database.

In recent months, the SMMT's database has been audited by the Vehicle Certification Agency and, where discrepancies have been found, the CO2 emission ratings have been corrected. The Revenue now states: "We are therefore confident that we can point employers towards the SMMT database to find the figures they need for returns to the Revenue." The Revenue is also planning to make the SMMT database available to its own staff, in order to help employers without Internet access.

Employers are expected to take care in obtaining the correct figures for their company cars and the Revenue says that they should not worry if any figure later turns out to be "not exactly right". However, the Revenue's advice is that employers should be able to explain how they obtained their figures and suggest, "a printout would be fine". Therefore, each time the SMMT database is used for individual cars, the resulting table should be printed and retained for future corroboration. - Payroll Briefing 208 - 13 September 2001

Guidance on company cars

Booklet IR172 Income Tax and Company Cars has been republished by the Revenue to explain, to both employers and employees, the new tax calculations based on CO2 emissions that start from April 2002. It would be appropriate for all company car drivers to be given a copy by their employers. - Payroll Briefing 205 - 4 July 2001

Car reporting

A new P46(Car) form comes into use from April 2001 to enable CO2 emission levels and fuel type category letters to be reported. The new form does not show a category letter for diesel cars that meet the low emission Euro standard 4. Such vehicles will not bear the 3% diesel premium tax charge.

If any such vehicles are obtained during 2001/02, employers are asked to advise their tax office when the P46(Car) form is submitted. A revised form showing a new category letter will be issued from April 2002.

Employers will be contacted during June 2001 and asked to provide CO2 emission levels for all vehicles in place before 6 April 2001. The information required will be:

• for cars registered between 1 January 1998 and 5 April 2001, the approved CO2 emission figure and the type of fuel used
• for cars registered before 1 January 1998, the engine size in cubic centimetres.
- Payroll Briefing 197 - 15 March 2001