Consulting » Tax changes – Seen to be Clean

Opting for a growing range of the cleanest, diesel-engined cars could minimise drivers’ tax bills for years to come and ensure employers’ National Insurance payments remain under control as well. The reason lies in rules set down when carbon dioxide became the key to cutting tax bills with the introduction of CO2-based company car tax in 2002.

Since then, company car drivers have paid tax on a percentage of the value of their vehicles, defined by the amount of CO2 their car produces.

The tax band starts at a minimum of 15% for 155 grammes of CO2 per kilometre and rises by 1% for every full 5g/km increase to the 35% maximum rate at 255g/km. However, when the system was launched, concern over particulate emissions from diesel engines persuaded the government to impose a 3% tax supplement on them. So, while a driver of a petrol car producing 155g/km pays tax on 15% of the car’s P11D price, the diesel driver pays 18%, even though his vehicle has the same CO2 figure.

This provoked a storm of protest from the motor industry and, by way of a compromise, the government said the 3% supplement would be waved for diesel engines which met stringent standards, known as Euro IV, which all new diesel cars must meet by 2005.

At the time of the announcement, there were no vehicles that met the Euro IV benchmark, but drivers still turned to diesel engines in their droves, as their low carbon dioxide emissions cut tax bills, despite the 3% supplement.

Last year, nearly 30% of fleet sales were diesel cars and the percentage is set to grow even further this year. Indeed, when more than 100 fleet industry executives were asked, ‘Will the link recently established between diesel and respiratory diseases alter the standing of diesel-powered cars and vans on your fleet?’ 92% responded ‘No’.

At the time of the survey, Glyn Davies of stationery company Staedtler was one FD who will continue to use diesel, irrespective of any health implications. “After the rush into diesel to minimise tax bills, it will be two or three years before changes can be made. I cannot see drivers reverting to petrol vehicles unless further incentives or inducements are on offer. What I find odd is the conflicting signals being put out by the government,” he says.

“The links between diesel particulates and respiratory problems have long been suspected, yet diesel-powered vehicles are being actively promoted by fiscal policy,” says Davies. But the diesel landscape has started to change. A growing number of cars meet the required Euro IV standard and offer significant tax savings.

Among the models that now offer a Euro IV-compliant option are the Vauxhall Astra, Audi A3, Audi A4, Audi A6, Fiat Punto, Toyota Corolla, Toyota Avensis, Volkswagen Touran and Volkswagen Passat. And the list is set to get longer over the next few months, following a series of significant announcements at the Frankfurt Motor Show in September 2003.

For example, Ford has announced a Euro IV-compliant engine for the Mondeo.

Vauxhall also has a series of diesel engine launches planned that meet the benchmark, including Vectra, Astra and Signum. This creates an ideal opportunity for fleet decision-makers to plan ahead and save money. By encouraging a driver to choose a Euro IV-compliant Toyota Avensis 2.0 D-4D, the driver is certain to be in the lowest 15% tax band. But even if the driver opted for the £18,000 T4 specification model, the tax bill would still only be £90 per month for a 40% taxpayer.

If the vehicle were not Euro IV-compliant, the tax bill would rise to £108 per month, an £18 per month rise, equal to an extra £648 over a three-year period, or £64,800 for a 100-vehicle fleet. More importantly from a fleet decision-maker’s point of view, the company has to pay Class 1A National Insurance on a fleet driver’s tax liability. Therefore, the driver’s reduced tax can also save the company money as well.

Recognising the importance of an early move is vital, because if a company car driver opts for a non-Euro IV diesel now, they could be stuck with it for at least three years – the traditional replacement cycle for company cars. “The industry is at a transition point, where Euro IV diesel vehicles will take more of the market,” says Brian Farrell, pricing risk manager for Lex Vehicle Leasing. “Some fleet decision-makers are switched on to this, but I don’t think the implications have been made clear,” he says.

Lance Hicks, head of customer relations at Arval PHH, wonders how a solus arrangement with a manufacturer will impact the choice list companies are offering drivers. “It is very much down to customers to ensure drivers understand the issues, but we are helping with an online tax calculator that is being updated to include Euro IV models,” he says.

The issue highlights the need for fleet decision-makers to ensure they are fully trained to tackle the issues they face in their jobs, according to Stewart Whyte, director of the Association of Car Fleet Operators.

“There is far too little information about to identify which vehicles qualify,” he says. “For drivers, it just as important to know the benefit-in-kind liabilities on a car as it is to ensure the upholstery is the right colour. Everyone has a duty to inform on this, but manufacturers are strangely quiet.”

In fact, it is likely that hundreds of thousands of company car drivers have already fallen into the tax trap, as their new ’53 registration plate vehicles were delivered during September. In most cases, diesel models will not be Euro IV-compliant, whereas a shift in buying policy or a delay could have ensured long-term savings.

“Opting for a Euro IV diesel instead of a Euro III model could equate to a saving of 20% as some drivers move from an 18% to a 15% tax band,” explains Rupert Russell, director of website

A PENNY SAVED … As one of the world’s most well-known charities, Oxfam knows the importance of keeping spending to a minimum to ensure that all available funds are channelled to aid. As such, it is switching drivers to Euro IV-compliant diesel models to cut benefit-in-kind tax bills.

The charity has awarded the contract to manage its fleet to ALD Automotive.

As vehicles come up for renewal, car drivers will be moved from Ford Focus into Vauxhall Astra 1.7 CDTi models, which are Euro IV-compliant.

They emit 124 grammes of CO2 per kilometre and incur a 15% benefit-in-kind bill. Furthermore, they will remain in the lowest tax band next year, when the vehicles have to emit 145g/km or less to qualify for the lowest tax band. They will remain in the lowest band until 2006.

ALD has taken over the management of the charity’s existing fleet from the previous supplier and will replace vehicles as they reach the end of their three-year, 60,000-mile contracts.

All vehicles, which are driven by area retail managers and van drivers who collect donated goods from the public, will be supplied on full maintenance contract hire with accident management. In addition, drivers have access to a 24-hour helpdesk.

Oxfam operates a diesel fleet of 120 vehicles in the UK, including cars, vans and 7.5-tonne trucks, the majority of which are leased, with the remainder outright purchased.

Oxfam’s move follows a major review of its fleet operation that began more than six months ago and involved assessing more than a dozen contract hire and leasing companies.

“Although we need vehicles to provide operational support for our network of 760 shops, we decided to outsource the management and administration of the fleet to ALD Automotive to enable us to focus on our core activities and to reduce costs,” explains Maggie Hamilton, Oxfam supply manager.