Consulting » Tax – Green light from Brown.

Although it is now more than a year since Chancellor Gordon Brown turned company car taxation on its head, many companies are misguidedly taking the view that they have to do nothing until March 2002. Yet any car that is purchased now on a three- or four-year operating cycle will be subject to the new strictures.

The changes have been on the horizon for some time, so no one should be surprised that the government is pursuing its stated intention to protect the environment by encouraging drivers into more fuel-efficient cars.

Leasing company Velo predicts an increase in demand for small perk cars such as the Mercedes A Class or Renault Scenic. The 5-door 1.6-litre Classic A160 will incur #1,913.10 tax in 2001-02, but only #874.56 under the new rules in 2002-03, a decrease of 54% (based on a higher rate tax payer driving 1,000 business miles a year).

Other changes to the tax structure are less sensible. Those who travel more than 18,000 miles a year – and sales reps, engineers and many others easily do that in the course of business – will be penalised. This travesty of commercial common sense is based on the premise that many of those who use their company car as a business tool are driving extra miles in order to cash in on the tax break in the current system for those travelling in excess of 18,000 miles.

Barry Chaplin, director of fleet for ARVAL PHH, says that even if some drivers do drive further in pursuit of tax breaks, they are very few.

“If ministers drove their own cars, they would realise it is not much fun driving these days. The last thing you would do is drive extra miles for a tax break. The sort of people who need their company cars for business are doing way over that level anyway. The government is hitting the wrong people and the implications are enormous. I foresee demands for salary rises to compensate for the extra tax some drivers will pay,” he says.

Alastair Kendrick, tax director of Ernst & Young, says: “If companies decide not to recompense employees, the knock-on effect could be damaging because high-mileage drivers are customer-facing people, and they may no longer be motivated to go out and sell. Organisations need to be thinking through what they will do.”

Communication is a vital factor. “It is important that employees are informed of how the change will impact on them, and that they understand it,” says Kendrick. “Some organisations have been good about talking to employees and putting details regarding tax changes on their intranets.

They cannot afford to bury their heads in the sand.” Yet, according to an ARVAL PHH survey, 52% of fleet managers have done nothing to address the communication issue.

However, some fleet management companies are more gung-ho. According to Andrew Cope, managing director of Zenith Vehicle Contracts, many drivers will be in a neutral position. “Senior executives who are 40% tax payers and are doing big mileage in big cars will suffer most,” he says. “Someone covering 18,000 miles in a Jaguar has been paying 15% tax, but under the new rules will almost certainly be paying 35%. This is a staggering rise. But most people, especially those with an environmentally friendly car, will be in a neutral position.”

Gerard Gorner, tax manager for Lex Vehicle Leasing, takes a similar view. He says that low- and high-mileage owners drive the same car, which they don’t pay for, and get the same private enjoyment. “The new method of taxation fits more closely with the business ethic, but there has been a knee-jerk reaction,” he says. “The Vauxhall Vectra, a sales work horse, will incur a #9 increase in tax, taking into account the lower list price of the car and a reasonably efficient engine. There will be winners and losers, but, with a good fleet policy, many drivers will remain in a neutral or near-neutral position.”

The decision-making process for the finance director used to be quite simple. Either the company owned the vehicles, and took the risk on residual values, maintenance and repair. Or it abdicated the risk, and went for contract hire, which has the added advantage of being off-balance sheet.

Actually, Chaplin suspects that the appeal of contract hire for FDs had more to do with predictable costs than the balance sheet. “FDs hate the unknown,” he says. “They like to be able to predict outlay, and forthcoming changes in accounting rules will probably bring such costs back on to the balance sheet.”

Now, because of government legislation and benefit-in-kind (BIK) tax changes, everything has become much more complicated. The first decision is no longer how to fund company cars, but whether to have them at all.

“The government predicted an increase in the national car park of 200,000 vehicles, as a result of the new tax,” says Chaplin. “But up to 30% of our clients are reassessing whether to carry on with company cars. And, although there is much talk about how the new BIK tax will affect drivers, companies will be liable for dramatically increased NIC contributions, which will rise in line with the tax.”

Velo has a high proportion of City clients, many of whom are going for cash deals, or a cash or car choice. “Because so many of them get the train into work and leave the car at home, it makes sense for them to opt out,” says marketing coordinator Spencer King. “But it is essential to consider vehicles fit for the purpose. Establish the objective of the fleet and then assess whether to reconsider the entire car policy or let it ride.” King also points out that few company car policies allow for trading down.

One effect of the new BIK rules is a proliferation of innovative personal leasing schemes, especially personal contract plans (PCPs) or structured PCPs. With PCPs, the company gives an employee cash and the employee pays a deposit and a monthly fee, which is calculated on the anticipated depreciation of the car, plus APR. At the end of that period, he or she may make what is known as a balloon payment to acquire the car; hand it back to the lease company; or extend the PCP. This relieves the driver of the problem of residual values. The monthly payments may also be adjusted to provide a care package that includes maintenance, insurance, roadside assistance, and more.

In a structured PCP, the cost of running the car is converted into the rental fee, which is guaranteed or paid by the employer and then deducted from the employee’s salary. In both cases, the driver holds the title of the vehicle.

A household electronics firm, which is a client of Zenith, has opted for structured personal leasing. “Drivers buy from their employer on a loan-based scheme and we provide the loan, plus all the support and services drivers have been enjoying with a company owned vehicle. Because the car is owned by the individual from day one, they no longer pay P11D,” says Cope.

There are other ways of giving tax benefits to employees, too. Companies may make interest free loans to employees of up to #5,000pa and these can be used as part of the car allowance with a structured PCP to make it more tax efficient. In addition, IR mileage allowance rates allow further tax-free cash injections.

It helps that the less polluting small vehicles are improving all the time. They are much more comfortable than they were five years ago and specifications are considerably higher. Diesel ranges are improving, too. Cope highlights the VW Bora TDi, plus Audi, BMW and Mercedes diesels. Peugeot is also pushing back the frontiers. “Drivers changing from a BMW 528 to a 530 diesel reduce their tax liability by 10%,” says Cope. “At the quality end, the cars are just as quick, you do not have to fill up as often as with a petrol engine, and they are not as noisy as they used to be. Although diesel is subject to a 3% supplement it is still cheaper than petrol. This generation of diesel cars is great,” he says.

Liquefied petroleum gas (LPG) is also an alternative. The main problem with this has been a lack of fuel sites. “There are 800 sites in the country, which is not sufficient, but it is a huge step from 18 months ago,” says Gorner. “And the cost is fantastic. LPG is only 38.9p per litre.”

The main problem for companies is that cars are not simply vehicles for getting from A to B. They are a highly emotive issue. Although some drivers need a particular size of car simply to contain the amount of gear they travel with, to most, size equals status. Barry Chaplin drives a Jaguar S-Type. “My equivalent in France drives a Laguna. But status is all part of the package in the UK. If someone agrees to take a small car, to go green, they may want to be compensated,” he says.

Cars also play an important role in recruitment and retention. This is particularly true in areas where there is low unemployment, such as Swindon. According to Cranwell business school, a car is still the most attractive perk. And then there are questions of safety. If someone is spending many hours in their car, they need to be safe and comfortable. Primary legislation has already been published that is designed to ensure companies can be held responsible for management failings should they result in death or serious injury. Cars and commercial vehicles are officially an extension of the office environment and companies have duty of care over them. That legislation applies even if employees own their cars via a PCP. There is no limit on fines and courts will be looking for someone to hold up as an example. But drivers also have a right to a car in which they can cover long distances without getting tired – and it is always less tiring to make long journeys in a more powerful vehicle. This has nothing to do with driving like an idiot in order to get there quicker.

Kendrick thinks the tax changes have created an opportunity for companies to start with a clean sheet and look again at their fleets. He suggests: reducing business travel by encouraging working from home; use of the phone and video conferencing; offering cash instead of car; and running a fleet of pool cars for company business use.

“It is time companies thought hard about what they ask their employees to do,” Kendrick says. He thinks they should look for the positives in the tax changes and revolutionise the way they do business. It’s likely the Chancellor would be very pleased with this line of thought


From 6 April 2002, the government will base BIK tax on a percentage of a company car’s price graduated according to the level of the car’s carbon dioxide (CO2) emissions irrespective of mileage driven. The charge will build up from 15% of the car’s price, for cars emitting 165 grams per kilometre (g/km) CO2, in 1% steps for every additional 5g/km over 165g/km. The maximum charge will be 35% of the car’s price.