Tax beaters and luxury lose out in the company car race: Senior executives will have to rethink their favourite perk, says Brian Friedman

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The Independent Online
THE much-heralded reform of company car tax was finally announced in Tuesday's Budget. Out goes a system of car taxation based on engine capacity, and in comes a new system based on list price.

The new system is intended to be revenue neutral, but there are distinctive categories of winners and losers under the proposed arrangements.

Until now, many executives have chosen the so-called tax-beater models that are carefully designed to fall below the pounds 19,250 price threshold and the two-litre cylinder capacity threshold. Under the old system an employee driving a pounds 19,000, two-litre car would have been taxed on only pounds 2,770, exactly the same as the driver of a much smaller car costing, say, pounds 10,000. By contrast, under the new system each driver will be assessed by reference to the list price of the car and, hence, the driver of the expensive car will pay proportionately more tax.

The biggest category of losers is likely to be senior executives driving tax-beater models. However, the greatest losers in absolute terms are likely to be company chairmen driving luxury cars. For example, the tax bill on a Bentley Turbo will increase from pounds 3,720 to pounds 11,146. Given that companies now pay employees' National Insurance contributions based on scale charges, there may be some serious re-thinking on the level of cars provided at the very top of an organisation.

But there will also be many winners under the new proposals.

Best off are those driving quite small cars (for example Escorts and Fiestas) who will now benefit from being assessed on their relatively low list price. The other category of winner is the driver of a car that is already over the pounds 19,250 threshold, for example a BMW 5 Series.

The concentration on list price may lead to changes in the motor industry. Increasingly, manufacturers will focus on maintaining a low level of list price and hence we may expect to see an upsurge in the number of low-specification entry models. It will then be up to individual company car drivers to decide whether they want the cars with optional extras, each of which will increase the scale charge.

The previous system based on engine capacity encouraged a 'Christmas Tree' syndrome, whereby manufacturers were encouraged to develop highly specified cars. The environmental impact of the proposed changes may be disturbing. The existing fiscal disincentive to drive a car with an engine capacity of more than two litres has now disappeared and we may see increasing interest in high-performance (but low-specification) company cars.

It is now clear that most company cars are broadly tax neutral and the fiscal benefit of the cars has been fully eroded. We have already seen many manufacturers and leasing companies recognising this and packages have been put in place to ease the transition from company motoring to private motoring.

Manufacturer packages include Ford 'Options', Vauxhall 'Choices' and Rover 'Select'. Pre-eminent in the leasing industry has been Swan Nationals' 'Car Choice'. All of these are packages that seek to emulate the financing advantages of car leasing for private purchasers.

Up until now these packages have mainly been available on new cars only. It is likely, however, that as an increasing number of employees seek to fund their own cars, that similar policies will be available for approved nearly-new cars.

As a result of the changes, more companies are likely to offer a cash alternative to company cars. The conventional, high-mileage business car in many cases will benefit from the new system, so there is no reason to expect company cars to disappear. What we will see, however, is an increasing shift away from company cars in executive remuneration.

The author is the managing director of Stoy Benefit Consulting Limited.

----------------------------------------------------------------- COMPANY CARS - THE NEW COST ----------------------------------------------------------------- Car List Cylinder Current scale 1994 scale Incr/decr price capacity charge charge in tax cost pounds pounds pounds Volkswagen Polo 6,105 1.05 2,140 1,424 -33.0% Ford Fiesta 8,575 1.3lx 2,140 2,001 -6.5% Ford Escort 10,405 1.4l 2,140 2,428 +13.4% V'hall Cavalier 11,435 1.8i 2,770 2,668 -3.7% Rover Montego 13,022 2.0 2,770 3,038 +9.7% Ford Sierra 16,286 2.0 2,770 3,800 +37.0% Saab 9000 18,750 2.0 2,770 4,375 +58.0% Mercedes Benz 19,245 1.9 2,770 4,490 +62.0% BMW 525i 23,350 2.5 5,750 5,448 -5.3% Citroen XM 27,355 5,750 6,383 +11.0% Jaguar Sovereign 33,408 9,300 7,795 -16.2% Porsche 911 48,556 9,300 11,330 +21.8% Bentley Turbo 119,427 9,300 27,866 +200.0% -----------------------------------------------------------------

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