Company car drivers should follow the green code

In the first of four articles on recent Budget and tax changes, Anthony Mehigan looks at rules affecting millions of drivers

Drivers face radical reforms to the basis of company car taxation introduced by a Government keen to reinforce its "green" credentials. From next April, carbon dioxide (CO2) emissions replace business mileage in calculating the taxable benefit of a company car.

Drivers face radical reforms to the basis of company car taxation introduced by a Government keen to reinforce its "green" credentials. From next April, carbon dioxide (CO2) emissions replace business mileage in calculating the taxable benefit of a company car.

This may produce some quirky results, those enjoying a "perk" car apparently benefiting at the expense of those with high business mileage for whom a car is an essential tool of the trade.

In broad terms, employees who drive less than 2,500 business miles a year are likely to see a fall in their tax bill from 2002, and those driving at least 18,000 business miles face an increased liability. The belief is that the present system encourages unnecessary driving and that overall business miles will fall when there is no longer a tax incentive for high mileage.

The car's list price remains the first element in the calculation of the taxable benefit under the new rules. Publicity over differentials between UK and Continental car prices has cut prices, and reductions seem likely to continue, good news for the company car driver because that will feed through to smaller taxable benefit. Emission levels are the second element of the benefit calculation.

For the tax year starting on 6 April 2002, cars emitting CO2 of up to 165 grams per kilometre (g/km) will be taxed at 15 per cent of the list price. The percentage increases by 1 per cent for every additional 5g/km, up to a maximum of 35 per cent at 265g/km. The starting point for the charge will be progressively reduced over the next two tax years until 5 April 2005, the hope being that this will encourage manufacturers to continue to concentrate on reducing emissions by means of more efficient engines.

Special rules apply to some vehicles, including diesel cars, cars using new, environmentally-friendly fuels and technologies, and automatic vehicles for disabled drivers.

Employees deciding on a company car now which they will use beyond next April need to pay attention to the CO2 emissions figure. A free guide to emissions figures for all new cars has been produced by the Vehicle Certification Agency and is on its website at www.vcacarfueldata.org.uk/. For older vehicles, the Society of Motor Manufacturers and Traders provides a CO2 emissions enquiry service at www.smmt.co.uk for cars registered from January 1998.

On the green theme, from November 2000, the CO2 emissions figure for tax purposes has been shown on the vehicle registration document. And the green theme, the new graduated rates of vehicle excise duty for cars registered from March 2001 are also based on CO2 emissions.

Company car drivers whose employers also pay for their private fuel have had significant increases in their taxable benefit. For many employees with relatively low private mileage, the tax cost of the benefit is now greater than the cost of the fuel provided. For this tax year, a higher-rate taxpayer with a company car would be better off paying for their own petrol than bearing the tax charge on employer-provided fuel, if their annual private mileage does not exceed the figures in table 1.

Mileage allowances paid to employees using their own cars are also being reformed. Such payments can be made free of tax and national insurance contributions, provided they are within the Inland Revenue authorised mileage rates (IRAMR). From this April, the rates for small cars will be increased, while those for larger cars are frozen (see table 2).

From next April, unified rates will apply for all drivers - 40p per mile for the first 10,000 miles each year and 25p per mile thereafter. The losers are likely to be employees with vehicles over 2,000cc, and those with cars between 1,501cc and 2,000cc who travel less than 5,000 business miles a year.

Also beginning in April 2002, there will be no additional tax relief available to employees for their actual car-running costs in excess of the IRAMR, or for interest on any loan to buy a car used for business travel.

The new rates are intended to provide an incentive for people to use smaller, more efficient cars. The Government also hopes to encourage car sharing, by allowing employers to pay an additional tax and national insurance-free payment of up to 5p per business mile for each passenger sharing a business journey.

The company car is regarded particularly fondly in the UK and is a far more common benefit here than in most of our European neighbours. The Government has always made clear its intention to ensure company car drivers pay an appropriate amount of tax, having regard to the benefit they enjoy, and has increased that tax charge since it came to power.

Yet modern employment practices tend to favour a generally more flexible and individual approach to benefits packages. These two pressures have led to a trend towards employee ownership in place of the employer-owned car. The new tax system from next April is likely to accelerate these trends, prompting a serious re-evaluation of the benefits of cars by many employers and employees and pushing the company car out of favour.

But the underlying problem of a suitable alternative remains - the recently introduced tax breaks for cycle commuters, including VAT-free cycle helmets - are hardly sufficient. Deciding how to distinguish and help those employees with a genuine need for a business vehicle and possibly little option as to the method of its provision, is an issue which the Government has not yet addressed.

The author is a tax partner at Andersen, specialising in employee remuneration and heading the firm's Cars Consultancy group