With a new tax regime being introduced on company cars and a changing landscape between petrol, diesel and electric vehicles to consider, Alister Biggar looks at the implications for business users.
A staggering 55% of new cars registered in the UK go to the fleet market, and even though the landscape is changing between diesel, petrol and electric, business users still account for a massive proportion of the new cars that we see on our roads each year.
But there are several factors that you should take into account before choosing which models to go for and with a new tax regime being introduced on company cars, we definitely recommend that you read this article first.
What is Benefit in Kind and what will it cost me?
A company car is absolutely essential for many people’s work, but it is seen as a perk by HMRC. The Government calls it a Benefit in Kind (BiK) and, therefore, it is liable to tax.
The taxable value of a company car depends on a number of factors, including the model’s CO2 emissions, the list price of the car plus any extras added when bought. The taxable value is based on the list price, note that there is no reduction for the age of the car.
There are currently 29 Benefit in Kind bands, each based on a model’s CO2 emissions. The lowest polluting cars attract a 13% BiK rate, whilst vehicles with the highest emissions are charged at 37%. Until quite recently, electric cars were exempt from these BiK charges, but these zero-emissions vehicles are now taxed at the lowest 13% rate. Crucially, this figure is set to increase each year and in 2019, electric vehicles will be levied at 16%.
It is also worth keeping in mind that diesel models have a 4% surcharge over petrol models with the same emissions. So, it is worth making sure that you do enough miles to merit the fuel savings that a diesel offers when weighed against the higher BiK bills that you can expect to pay.
The final part of the company car cost calculations involves your salary. If you fall into the 20% income tax bracket, you’ll pay 20% of the P11D value, while Scottish higher-rate earners will pay 41%.
In addition to the Income Tax paid by the employee on the company car value, employers are also subject to 13.8% employer’s National Insurance Contributions on it.
New tax regime for company cars?
As mentioned in the introduction to this article, the government has just launched a review of vehicle taxes linked to CO2 emissions and rumours are that official emissions levels will rise.
The accuracy of CO2 figures produced by car manufacturers has been the subject of debate for a long time. There is no suggestion that manufacturers are falsifying figures, only that the criteria for testing produces unrealistic results. The government is therefore switching to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) for CO2 testing and its review is asking for responses on the consequences of doing so.
Switching to WLTP
All vehicle models produced from September 2017 will be assessed using WLTP. Initial results indicate that in doing so, the CO2 levels are on average around 20% higher than those produced by the previous assessment method, the New European Driving Cycle (NEDC). As a result, there have been scaremongering reports in the media that income tax and vehicle excise duty on company cars will increase by the same amount.
However, the government has indicated that a large increase in company car tax isn’t its intention. Rather, by using more realistic CO2 figures, tax can be more accurately targeted by identifying which cars cause more pollution.
This is because while one model’s WLTP test might show 20% more emissions than using NEDC, another might show only a 10% difference. Once the government has all the new emissions data it will amend the company car tax rates so that overall there is no major tax hike. The existing rates are likely to be retained for pre-September 2017 vehicles for a transitional period.
The re-configuring of the tax rates based on WLTP will not take effect until 6th April 2020. So, if your company is investing in new cars between now and then, remember to look at the WLTP results not the NEDC.
Whilst the government says that it does not intend to introduce a general increase in tax charges because of the new CO2 testing, there is no doubt that some cars will fare worse when compared with others. When buying new cars for your business, you should definitely check emissions using the new regime.
It is clear however, that current orders for diesel vehicles are being delayed in case any further tax increases are announced which could make them prohibitively expensive. Equally, the question about whether tax incentives will be maintained for electric vehicles will determine whether and when the investment in an ultra-low emission vehicle will pay off. Fasten your seatbelts.