Taxing questions

As
new tax regulations on company cars come into force, Simon Kent urges firms to
take stock of their fleets and ensure they are being used in a cost-effective
way

With new company car tax regulations being introduced on 6 April, there has
never been a greater need for organisations to get to grips with their fleet.
In the new tax year, organisations need to consider the CO2 emissions produced
by their fleet to determine whether drivers are using suitable vehicles and,
indeed, whether those vehicles are supplied in the most cost-effective way.

Currently, the benefit in kind value of a company car on which an employee
pays tax depends on the number of business miles travelled. Drivers clocking-up
over 18,000 miles a year pay tax on 15 per cent of the vehicle list price,
while those driving under 2,500 miles pay 35 per cent. The system equates long
distance with use of car as a business tool and therefore penalises long
distance drivers less. The new regime, revenue neutral for Inland Revenue and
environmentally driven, will link the benefit in kind value to the vehicle’s
CO2 emissions. Cars emitting levels of CO2 at 165g/km will be taxed on 15 per
cent of list price, rising by 1 per cent for every additional 5g/km of
emissions to a maximum of 35 per cent.

Changes to the rules

Toyota’s Jon Pollock explains that under the existing rules, a Lexus IS
200E, with a list price of £20,050 and travelling under 2,500 miles a year, is
liable to a 35 per cent benefit in kind charge, which for an employee paying
tax at 40 per cent would mean an annual bill of £2,807. In the next tax year,
the same car will result in a bill of £2,165, since CO2 emissions of 229g/km
attracts a lower charge of 27 per cent.

Take the same car with higher mileage and you have a different story.
Currently the 40 per cent tax payer is taxed only £1,203 for the car – 15 per
cent of list price. The new £2,165 tax bill therefore represents an increase of
80 per cent. Moreover, with CO2 linked percentages due to rise by 2 per cent
per year, the high-mileage driver’s tax bill will have doubled on last year’s
cost by 2004-05.

In general, the new tax scheme means drivers completing under 2,500 business
miles per year will be better off, while those over 18,000 will be worse off.
Drivers in between these distances will win or lose according to car driven,
income tax paid and miles completed.

One way to tackle the tax increase is to avoid it completely. Under a ‘cash
for cars’ scheme, the employer adds the financial value of running the company
car to the employee’s salary and leaves them to sort out transport
arrangements.

Unfortunately, this may not always result in a saving. According to HSBC,
the total annual cost after tax for a company to provide a Ford Mondeo 1.8 LX,
driving 3,000 business miles per year, will be £3,238 in the next tax year.
Delivering the same car through a cash scheme would cost the company an
additional £358 to compensate for employee’s taxes and the higher cost of a
Personal Contract Purchase (PCP) scheme compared to company contract hire
presuming no additional cost by the employee.

In spite of this, some leasing companies – such as Lex Vehicle Leasing –
promise to convert company car fleet contracts into PCP schemes while maintaining
the same cost and service levels. The individual employee becomes responsible
for the car, but a full maintenance and service plan is provided. In this way
the employee avoids paying tax while the organisation is still guaranteed a
fully functional fleet.

Any cash for cars plan needs careful consideration as to how employees will
receive their cash – one lump sum for the year or broken into monthly
instalments. It must be remembered that the employee now has continued
responsibility for the car for the duration of the purchase or hire plan taken
out: "If the employee is made redundant the car becomes their
problem," says Graham Biggs of BMW.

Philip Jerome, sales and marketing manager at Zenith, notes there can be
serious legal problems with any scheme which places the vehicle into employee
rather than company ownership. "If the employee has an accident while on
business, that is not their problem, it is the organisation’s," he says.
"Any benefit you make through cash for cars would be quickly outweighed by
a serious lawsuit if the appropriate insurance is not in place."

Move to diesel

Another option already having an impact in the market is to move to diesel.
Generally delivering a lower CO2 emission level, such vehicles attract a 3 per
cent surcharge due to other engine emissions (particulates, nitrogen and
sulphur dioxide). This surcharge falls as CO2 levels rise. Therefore, a low
emission diesel (165g/km) attracts 15 per cent tax plus 3 per cent surcharge
while at 255g/km the tax reaches 33 per cent and the surcharge falls to 2 per
cent. At 35 per cent emission tax there is no surcharge.

"Over the past 12 months we have seen the switch to diesel," says
Tim Holmes of HSBC Vehicle Finances. "In 2000, 20 per cent of the vehicles
we delivered were diesel. Last year, it was about 50 per cent."

The diesel option has become popular thanks to improvements in diesel engine
technology. At the same time, fuel economies delivered by these vehicles mean
that, after a certain level of personal mileage, the additional cost paid by
the employee in tax will be outweighed by gains achieved through increased
miles.

Ultimately it is likely that rather than delivering a single policy for all users,
organisations will have to create a range of options to match the range of
cars.

However, if the company car pool is to be maintained over a number of years,
it will be in the company’s interest to invest in lower emission vehicles now
which do not mean compromising on model or performance. "From the company
perspective, if employees drive cars with lower emissions, the tax bills will
be lower and the company’s travel bill will come down as well," says
Philip Jerome.

The new car tax regime

– Employees will be taxed according
to income bracket (22 per cent or 40 per cent) on a percentage of list price
(P11D value) according to the vehicle’s CO2 emissions. Tax starts at 15 per
cent for cars emitting CO2 levels of 165 g/km and rises by 1 per cent for every
additional 5g/km of emissions to a maximum of 35 per cent.

– Diesel cars attract a 3 per cent surcharge due to other
engine emissions (particulates, nitrogen and sulphur dioxide). Surcharge falls
as CO2 levels rise – therefore, a low-emission diesel (165g/km) attracts 15 per
cent tax plus 3 per cent surcharge. At 255g/km the emission tax reaches 33 per
cent and the surcharge falls to 2 per cent. At 35 per cent emission tax there
is no diesel surcharge.

– Authorised Mileage Rates (how much an employee can be
reimbursed tax-free for using a personal car for business purposes) are
standardised, regardless of engine size. The first 10,000 miles is reimbursed
at 40p per mile, subsequent miles at 25p.

– The percentage of list price to be taxed is set to increase
over the next two years. Organisations should be aware that the effect of
taxing CO2 emissions will grow in the future and not stay constant.

– Tax calculators and comparisons between company cars and cash
for cars can be made through www.cartax.co.uk
 (Deloitte & Touche) or www.lvl.co.uk (Lex Vehicle Leasing).

– CO2 emission figures for vehicles can be found at www.vcacarfueldata.org.uk

– The Rough Guide to Company Cars – published this year by Rough Guides in
partnership with the BBC’s Top Gear Magazine and sponsored by Lex Vehicle
Leasing – contains everything you have ever wanted to know about company cars.

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