The future of company vehicles

George Hay Chartered Accountants

The UK Government has pledged that by 2040 all new conventional diesel and petrol vehicles will be banned from sale and vehicles will instead need to be either electric or some form of plug-in hybrid.

However, before this deadline was even alluded to many within the motor industry believed that by 2025 as many as one in three cars will incorporate an electric power plant and with sales of diesel vehicles down significantly, it’s increasingly probable.

This shift has been largely driven by new research which highlights the negative effect that vehicles are having, both on the environment and on people’s health.

The move towards electric is therefore picking up speed which raises the question, what will happen to the company car in the future?

What we know so far

Company cars are considered a ‘Benefit in Kind’ (BIK), as the use of the car is deemed, by HM Revenue & Customs (HMRC), to have ‘monetary value’. For this reason, company car owners are expected to pay tax on the vehicle if they use it privately. The rate of tax is based on several factors including the vehicles value and the type of fuel it uses.

However, the value of the car is reduced and hence the employee pays less tax if:

  • The employee only has access to the car on a part-time basis
  • The employee pays something towards the cost of purchasing the vehicle
  • It has low or no CO2 emissions

Company car tax bands are not the same as normal Vehicle Excise Duty (VED) tax bands as there are currently 30 different levels based upon emissions, compared to just 13 for VED.

The regime dictates that the least polluting company car models pay a lower BIK rate, while the highest polluters pay more. The rates, however, are not static and each tax year the rate applicable to certain types of vehicle changes. For example, from April 2016, electric vehicles (EVs) and ultra-low emission vehicles (ULEVs), which were once exempt from charges, have faced a seven or 10 per cent BIK rate.

In the past, rules on emissions saw many company car owners switch to diesels, with lower CO2 emissions, but they now face a three per cent surcharge compared to petrol models with similar emissions, because they emit more harmful particulates.

As a guide, going forward, BIK tax rates are likely to increase by around 2-4 per cent within each CO2 band year-on-year from 2017 to 2020. However, it is important to note that by 2020 the maximum 37 per cent rate is reached at just 165g/km for petrol cars and 150g/km for diesel.

When calculating tax liabilities resulting from a company car, employees will also need to look at the P11D value, which takes into consideration the list price of the car, including options, but less non-taxable items. If the car costs less to purchase than the official P11D value, it won’t save you tax, as HMRC still says the BIK value is the same.

To complicate matters further, changes are currently taking place in respect of cars which have been offered as part of a salary sacrifice scheme, or if cash has been proffered as an alternative to a vehicle.

From April this year, those who choose the latter will be taxed either on the BIK value of the car offered or on the value of their cash alternative, whichever is the higher amount. This means that drivers who select a car with a low P11D value and/or a car with low CO2 emissions may no longer benefit from a reduced tax bill.

Similar changes will also take place for those who benefit from salary sacrifice schemes. Previously they were taxed on the BIK value of the vehicle and, depending on the choice of vehicle, could make income tax savings by paying for the car out of their gross salary.

From 6 April 2017, drivers are now taxed on the higher value of either the amount of cash forgone or the BIK value of the car, meaning that they will suffer the same fate as those who would choose a cash alternative and will see their tax liability rise as they will have to pay income tax on the full amount of the cash foregone.

For drivers of existing salary sacrifice scheme cars, or those who ordered a new car before 6 April 2017, the existing tax provisions stay in place until 5 April 2021 or until a ‘change in arrangements’ occurs.

So, what’s next for company cars?

Diesel drivers could again find themselves in the firing line when the Autumn Budget is delivered on 22nd November. It is expected that the Chancellor could raise taxes on diesel vehicles to subsidise measures to improve air quality. How exactly these increases will come about, whether via fuel duty, a diesel surcharge added to car tax or a new sales tax remains to be seen.

In addition, there are plenty of other measures either already in place, or due to be implemented that are designed to discourage people from purchasing diesel vehicles; these include scrappage schemes, the London Low Emission Zone and higher parking fees, for example.

With increasing safety concerns and regular breaches of European air quality limits across the UK, drivers of diesel cars will continue to be penalised and the trend towards alternatives looks set to endure, with many in the fleet industry questioning the future of the company car.

At George Hay, we understand that tax is an integral consideration in respect of having control of your business and planning effectively. We aim to save you time, eliminate confusion and maximise your tax efficiency. To find out more contact us on 01480 426500, or fill in one of our online enquiry forms here.

LINK: HMRC Company Car Tax Calculator

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