A consultative document from the Inland Revenue is expected to recommend that the present system of taxing company cars according to their engine size be scrapped in favour of a banding system based on price.
The proposals come just two days before K-registered cars go on sale with the depressed motor industry looking for a revival in August registrations to revive its flagging fortunes.
Changes in the method of taxing the company car perk were foreshadowed in the last Budget. Norman Lamont, the Chancellor, described the present system as arbitrary and unfair and announced that the Inland Revenue would be issuing a consultative document this summer.
At present tax scale charges vary according to engine size on cars costing up to pounds 19,250. Beyond that they are based solely on price. For instance, a driver on basic rate tax driving a 1600cc car an average number of business miles a year pays pounds 13.32 a week in tax.
But the system has been widely criticised because it discriminates against both diesel-engined cars and luxury models such as Jaguars and causes car sales to bunch just below the lower scale charges.
The motor industry is likely to be disappointed by the new proposals because it had lobbied for a system where tax was levied on a straight percentage of the price of the car with a cut-off point for very expensive models.
What was not clear last night is the number of price bands the Inland Revenue plans to introduce and at what prices they will be introduced. Treasury sources said, however, that the intention was to benefit those with cheaper cars at the expense of drivers of expensive models.
Industry sources said that linking taxation to price bands would mean 'exchanging one faulty system for another'. This would distort the market, hamper sales and threaten jobs.
The consultation period will last until November and the earliest the new system could be introduced is in next year's Budget.