Car manufacturers are always trying to convince us of the merits of their newest innovations and the most up to date versions of their cars. There is a lot of news about the impact of technology on the cars we drive; from in car entertainment systems, sat-navs, automation and electronic power all informing us about the cars we will have in the next 5 – 10 years.
HM Revenue & Customs’ figures suggest that there are almost 1 million company cars in the UK. The taxation of company cars raises significant revenue for the Government. What will the future company car be like?
The technological advances mentioned above will have an effect on the cars available on the market to be purchased as company cars. In addition, there are changes to the tax rules around company cars which may result in changes to the vehicles made available by employers.
Company cars are taxed based on a set percentage of the ‘list price’ of the vehicle when new. The percentage is based on the CO2 emissions of the car. The Government is in the process of increasing these percentages to encourage employers to provide greener cars and increase the revenue generated for the Exchequer. The percentages have been announced up until 2021 and the rate of increase is set to rise. The current and future percentages are set out in the table below:
* the additional 1% increase for each additional 5g/km of CO2 starts from 94g/km in 2017/18, 2018/19 and 2019/20 but will start from 54g/km in 2020/21.
The affects of these changes means that the cost of most company cars is set to increase over the coming years, with many average vehicles suffering a 7% increase in the percentage used to calculate the taxable benefit in kind.
Let’s take one of the most popular family cars in the UK, a Ford Focus given as a benefit in kind to a basic rate taxpayer earning £30,000 per annum. The Ford Focus Titanium Hatchback with a 1.6 litre petrol engine has a list price of £21,395. The car emits 146 g/km of Carbon Dioxide, for the current 2017/18 tax year that means a benefit in kind charge arises at 28% of the list price. The benefit in kind is therefore £5,990.60 creating an annual tax charge of £1,198.12 to the employee. If the same car is kept until the 2020/21 tax year the annual benefit will have increased to 35% or £7,488.25 which will increase the annual tax bill to £1,497.65. This represents an increase in the annual charge of almost £300.00 for the company car driver. These costs will be doubled for higher rate taxpayers.
Example 1 shows the impact of the increases in the percentages and the resulting cost increases that will accrue on the company car driver. In addition, the Class 1A National Insurance payable by the employer is based on the same percentages and will therefore rise over the next 4 years. The government hopes to encourage the use of cleaner cars that generate less pollution as a result of these measures. Anyone with a company car may therefore want to look for an alternative with lower CO2 emissions when a company car needs replacing over the next few years.
As part of the advancements in technology and the Government’s drive to lower pollution there is a planned overhaul of the way in which low emissions vehicles are to be taxed. As part of the increase outlined above, low emission vehicles including hybrids will see a rise in the benefit in kind costs until April 2020. A new regime will then come in for low emission vehicles for the 2020/21 tax year.
Under the new regime the cost of the benefit in kind for cars emitting between 51g/km and 75g/km of CO2 will continue to rise as outlined in Table 1.
The new regime will lower the tax charge on fully electric vehicles with zero CO2 emissions to 2% of the list price. Hybrid vehicles with CO2 emissions between 1g/km and 50g/km will be taxed based on the electric range of the vehicle. The electric range is the distance (in miles) that can be travelled solely on electric power. The proposed tax levels are outlined in the table below:
Table 2
| Mileage range |
|
| 130 miles or more |
2% |
| 70-129 miles |
5% |
| 40-69 miles |
8% |
| 30-39 miles |
12% |
| Less than 30 miles |
14% |
As recently as 2015/16, a vehicle with CO2 emissions under 50g/km would be taxed using a percentage of 5%; by 2019/20 it will have risen to 16%. This is a large increase in the tax charge on these vehicles and may have discouraged companies in providing hybrid and electric vehicles, which often have a higher list price to start with. This does not fit with the Government’s aim of reducing emissions so the new rates are intended to reverse the situation and provide significant savings to those who have a hybrid or electric vehicle as a company car. The best time to acquire these vehicles will however be when the rates reduce in 2020/21.
The Diesel surcharge of 3% was due to be scrapped but recent scandals involving the emissions testing of diesel cars and research suggesting that they produce more toxic Nitrous Oxide gases than petrol engines, has led to the government reversing the decision to abolish the surcharge. The 3% increase paid by company car drivers looks like it is here to stay for the foreseeable future.
Fuel benefits are also calculated using the percentage used in the car benefit figure against a set figure. The figure is £22,600 in the current tax year and will rise to £23,400 from April 2018.
Example 2
Using the same Ford Focus as the previous example the driver of this vehicle with a fuel benefit will be taxed on £6,328 in 2017/18 resulting in basic rate tax of £1,265.60. The benefit will increase to £7,020 for 2018/19 creating a tax charge of £1,404.00 for a basic rate taxpayer.
Based on example 2 our company car driver will need to drive approximately 14,000 private miles in 2017/18 for the fuel benefit to be cheaper than paying for the petrol personally. The distance has been calculated using fuel consumption of 60 miles per gallon and an average petrol price of £1.18 per litre. The distance will double for higher rate taxpayers. With the percentages and fuel multiplier figure both set to increase these distances will get longer and longer, making company provided fuel an expensive option for most drivers.
When a company purchases a car to provide to an employee it can claim Corporation Tax relief on some of the associated costs, including a claim for capital allowances on the purchase price. Capital allowances are claimed at either 8%, 18% or 100% of the vehicle cost depending on the CO2 emissions of the vehicle. Cars with CO2 emissions exceeding 130g/km attract relief at the 8% rate whilst those under 75g/km attract the full 100% relief, those in between the two limits obtain relief at 18%.
In summary, Government actions are increasing the tax costs of company car ownership for both employees and employers. These may result in less company cars overall. The Government is also seeking to incentivise those that drive vehicles with lower emissions. A key way to keep costs down is for company car drivers to move to vehicles that produce less carbon dioxide. In addition, it will be significantly cheaper in tax terms to have an electric or hybrid vehicle from April 2020 onwards. Additionally, the costs of electric and hybrid vehicles may well fall due to advances in technology and an increase in the number of manufacturers producing these vehicles. It is also worth noting that a company can provide the electricity for an electric or hybrid vehicle without incurring a fuel benefit in kind charge.
The company car of the future may well be more environmentally friendly than they are today. It will also become increasingly rare to receive a fuel benefit alongside a company car as the costs exceed the benefits. Older, higher polluting cars will become less common as company cars, in fact it is rarely beneficial to be running a company car that is more than 3 or 4 years old.
