IN 2002, the government changed the way company car tax (benefit in kind/BIK) was calculated so that it was based on CO2 emissions rather than mileage covered. However, manufacturers’ response to this has been so successful that low emissions have resulted in falling tax revenues.
“There is a yawning deficit and the government and HMRC want to balance the books,” explains Matthew Walters, head of LeasePlan Consultancy Services. “In 2012, where fleet is concerned, we saw the toughest Budget since 2009 and costs are set to increase noticeably.”
And they are likely to continue to do so for the next five years.
To recap the BIK system: company car tax operates on a banded basis, defined by CO2 emissions, each of which attracts a given tax percentage. Diesels carry a 3% supplement on top of that – and will continue to do so until 2016, when it is abolished. In order to calculate the tax, companies multiply the list price of the car in question by the tax percentage, multiply that figure by the employee’s income tax and the resultant figure, capped at 35%, is the tax due.
Since this measure was introduced in 2002, emissions levels on which tax is calculated have fallen and there have not been any major rises in the percentages applied to the tax bands: BIK has risen by 3% over the four years to 2012 but that is low compared to the 6% increases planned for the next four years, starting at this tax year, and in 2016/17, the cap at 35% rises to 37%.
In addition, the five-year exemption for vehicles with zero and ultra-low emissions comes to an end in April 2015, when the smallest bracket, based on CO2 emissions versus distance travelled, is wiped out. It is currently rated at 5% (plus an additional 3% for diesel), but from 2015, tax will be applied at 13%, rising to 15% in 2016/17.
“With the removal of the 3% supplement on diesel engines in 2016, this puts these vehicles on a par with current tax for a BMW 3 Series,” says Chris Chandler, principal consultant at Lex Autolease.
In fact, there may be some light at the end of this particular tunnel because the government announced in the Autumn Statement that HMRC will review the removal of tax incentives for ultra-low and zero emission vehicles. “It is unpopular and is seen by many as damaging to the early uptake of the cleanest, new technology, plug-in vehicles,” he says.
The write-down allowance (WDA), which allows companies (ie. leasing companies and their clients) to write down the cost of buying a vehicle against taxable profits, measured against CO2 emissions, has also been changed, effective from 2013/14. The 100% allowance threshold is reduced for companies that own fleets but leasing companies lose the allowance entirely, which will put up the cost of leasing environmentally friendly vehicles.
The subsequent brackets are redefined and reduced in line with that. The second, 111g/km to 160g/km, allowing an 18% write-down, is lowered to 96g/km to 130g; and the third (8%) applies to anything above 130g/km, formerly 160g. The upside is that lower-emitting vehicles generally have lower fuel consumption.
“We reflect the writing-down allowances in our rental rates but companies buying their own cars will see the allowance changes too, except for the very cleanest of vehicles with the 100% allowance,” explains Chandler. The British Vehicle Rental and Leasing Association (BVRLA) is contesting this change because it thinks it distorts the market.
“Why give a company 100% and not a lessor, when more than half of fleets are on contract hire, not bought?” asks Chandler.
The Lease Rental Restriction has been reformed in line with WDA. Since 2009, organisations have been able to offset 100% of leasing payments against their corporation tax bill for vehicles with emissions up to and including 160g. In the 2012 Budget, the threshold was reduced to 130g/km, so any car with CO2 emissions of 131g/km or more will have a 15% lease rental restriction, meaning they can claim only 85% of the finance element of the rental payments against taxable profits. Companies with super-efficient fleets, with average emissions below 130g, will not be affected by this.
Fuel also takes a hit. The scale charge on which it is calculated has risen from £18,800 (2011-2012) to £20,200 (2012-2013) and rises to 2% above CPI this year.
The removal of the 3% supplement on diesel engine cars is wider-reaching than the sums saved on that alone. “If the current pace of diesel technology development continues, we can expect CO2 emissions to fall at a faster rate than the increase in tax, given the removal of the diesel supplement,” says Chandler – meaning that the popularity of diesel is likely to endure.
And on top of all that, both businesses and employees must pay national insurance at a percentage of those steadily increasing costs.