Careful, they've got their eye on your company car

By Anthony Mehigan

12 April 2000

Transport is a key policy area for the Government, if somewhat controversial, and ministers have made a public commitment to introducing transport policies that result in environmental improvements.

One consequence will be substantial changes to company car taxation over the next few years and the average company car driver can expect to find himself or herself paying an even higher financial price for the comfort of an employer-provided vehicle.

Cars have been much in the news in recent months. A fierce debate continues to run over the level of new car prices in Britain, with a growing number of companies sourcing vehicles for company car fleets from the Continent perhaps via one of the several internet sites now offering this service. The cost savings to be made are clearly attractive but less apparent are the implications for residual values, warranty periods and maintenance contracts, which should not be overlooked.

Meanwhile the Competition Commission report into the UK car market, published on Monday by the Department of Trade and Industry, has reignited a heated debate on car pricing and in particular the issue of list price and fleet discounts. From the Chancellor's point of view, any drop in list prices will dent his tax calculations. He has just announced major changes to the current system of company car taxation from April 2002, under which list price remains the starting point for calculating taxable benefits in kind.

The second determining factor for calculating the benefit-in-kind charge from 2002 is that carbon dioxide emissions replace business miles. The environmental objective underpinning this change is the Government's belief that the current system based on mileage acts as an incentive for company car drivers to undertake 'unnecessary' business miles. They believe these "unnecessary" journeys may amount to between 100 million and 300 million miles every year. While it is difficult to verify the validity of these figures, there is strong anecdotal evidence to support the Government's view.

At the same time, the reduction in the benefit for cars more than four years old is being removed, presumably to encourage the use of newer, "greener" vehicles. Overall, employees who drive fewer than 2,500 business miles each year are likely to see a reduction in their tax charge from 2002 and those driving at least 18,000 business miles a year, an increased tax liability.

This is likely to produce some peculiar results, with perk drivers being potentially taxed at a lower rate than those employees who regard their car as a tool of the job. It will be interesting to see whether the Chancellor responds to any pressure to reintroduce discounts for drivers with high business mileage for broader political reasons.

The Government has been careful to stress that the changes will be revenue neutral. But an analysis of many company car fleets indicates that, while there are a good number of drivers who travel more than 18,000 business miles each year, there are relatively few who report driving less than 2,500 business miles. The aggregate tax charge for many fleets may therefore rise.

Furthermore, the reference to revenue neutral is as compared with the yield in the tax year immediately preceding the reform. Reading between the lines, this leaves open the option for the Government to increase company car taxation further for 2001-02.

The Government has also produced figures suggesting that abolishing business mileage discounts will save some 250,000 employers £25m a year. This is said to result from the fact that business mileage records will no longer need to be maintained. If it proves to be true, this is clearly very welcome.

But the logic of this comment needs questioning, as the requirement to keep mileage records in connection with fuel provision remains. It seems unlikely that pointing to a Budget press release as justification for not having retained mileage records will satisfy a request from the Inland Revenue three years on to provide evidence you do not supply fuel for private motoring.

For the million company car drivers in the UK who get free fuel for private motoring, 6 April brought an unprecedented increase in their taxable benefit of almost 41 per cent. This was way beyond the 20 per cent rise for each of the five years to 2002, announced in 1998.

If this continues, it is likely to prompt more employees to conclude that the tax cost of the fuel benefit is greater than the true cost of the fuel, and look to their employers for more tax-efficient forms of remuneration. As an example, with petrol prices at £3.50 per gallon, a 40 per cent taxpayer with a 2,200cc company car on 30mpg would need to travel at least 11,000 private miles each year to benefit from employer-provided free fuel.

While many employers argue that employees will continue to use cars until suitable public transport options are available, they need to begin considering alternatives to company cars. These may include cash allowances, easing personal contract purchase, or encouraging employee-ownership arrangements. The UK is one of, if not the, biggest providers of company cars in Europe. This may be about to change.

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