Car perk tax could rise 40%: Michael Harrison on why up to 700,000 business executives face higher bills

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The Independent Online
MOTOR manufacturers hit out at the Government last night after the Treasury announced plans to raise company car tax by as much as 40 per cent for some drivers.

The Society of Motor Manufacturers and Traders said it was 'extremely concerned' about the increases faced by drivers of mid- range executive cars.

But Stephen Dorrell, Financial Secretary to the Treasury, defended the proposed changes, saying there would be nearly twice as many gainers as losers.

The changes in the taxation of Britain's 1.9 million company car drivers, set out in an Inland Revenue consultative document, would mean higher tax bills for 700,000 drivers and lower bills for 1.2 million.

Under the proposals, company car taxation would be based on the price of the car rather than its engine size, as at present.

The changes, which are unlikely to be introduced until 1994, are designed to make the car tax system fairer, and encourage companies to buy more fuel-efficient models.

Worst hit would be drivers of high-specification saloons costing between pounds 15,500 and pounds 19,500, such as the Ford Sierra 2.0i Ghia, whose weekly tax bill could rise from pounds 13.31 to pounds 18.59. There are 200,000 drivers in this category.

However, about 750,000 drivers of basic saloons such as 1.6 Cavaliers, could save between 10 and 25 per cent on their tax bills.

Those driving cars costing just over pounds 29,000, for instance bottom- of-the-range Jaguars, would gain by more than 30 per cent.

But all those high-paid executives with cars costing more than pounds 39,000, such as large, luxury saloons and high-performance sports cars, would lose.

The Inland Revenue proposals follow the commitment given by the Chancellor, Norman Lamont, in the last Budget to introduce a fairer and simpler system for taxing the company car perk.

Treasury ministers pledged that the overall effect would be to keep the tax take from company cars at pounds 1.4bn a year.

Launching the consultative document, Mr Dorrell said: 'The prime driver behind these proposals is to make the tax system fairer.' He added that the proposals were designed to iron out distortions in the car market and encourage company car drivers to opt for more fuel-efficient vehicles.

Under the present system, employees driving 1.8-litre diesel Ford Fiestas or 1.7-litre diesel Vauxhall Astras, for example, paid the same tax as those driving a Mercedes Benz 190 or a BMW 318. 'We want to get things fairer,' said Mr Dorrell.

Although Mr Dorrell said he was open to suggestions on how the new system should be introduced, the indications are that tax charges will be linked to price bands.

The alternative system, favoured by car makers, would be to make the taxable benefit a straight percentage of the car's price.

There would be no change to the present system whereby company cars driven mainly for private use attract a higher tax charge, and those driven more than 18,000 business miles a year are taxed less heavily.

The RAC attacked this omission on the grounds that drivers would still be encouraged to clock up excessive business miles to qualify for a reduction in their tax charge.

The Inland Revenue favours basing price calculations on manufacturers' list prices rather than original market value, as at present.

The motor industry is likely to lobby strongly in an attempt to persuade the Inland Revenue not to opt for price bands.

Roger King, director of external affairs at the Society of Motor Manufacturers and Traders, said: 'Introducing price bands would just mean exchanging one faulty system for another, because these cut-off points create bunching in sales. That will only distort the market place which, in turn, could affect jobs.'

Motor manufacturers also claim that drivers will be tempted to order cars without safety features, such as anti-lock braking and air bags, to get into a lower price band.

Mr Dorrell said that the changes were unlikely to have a substantial impact on the new car market, nor was that the Treasury's intention.

Andrew Evans, a partner in the accountancy firm Price Waterhouse specialising in executive benefits, predicted that more companies would be likely to offer staff a choice between a company car or cash allowances as a result of the planned overhaul in taxation.

(Photograph omitted)