Let’s talk tax

Chancellor George Osborne’s 2014 Budget included significant changes to company car tax over the next five financial years. Damian James, ACFO Chairman, summarises the key points

Air quality concerns remain uppermost in the thoughts of Government, which is why in Budget 2014 Chancellor of the Exchequer George Osborne is driving fleets down the ‘green’ road at an ever more rapid speed.

All vehicle-related taxes – company car benefit-in-kind tax, Vehicle Excise Duty, capital allowances and the lease rental restriction – are all linked to carbon dioxide (CO2) emissions and the Chancellor’s message could not be clearer: choose zero or low emission vehicles or pay the price.

Vehicle manufacturers have already been introducing a wide range of low emission cars and over the coming months and years the choice will progressively widen.
    
While the Chancellor did not tinker with Vehicle Excise Duty, capital allowances or the lease rental restriction in this year’s Budget he has announced increases in company car tax over the next five financial years to the end of 2018/19.
    
Taken at face value it cannot be denied that the increases may appear significant, but ACFO continues to believe that company cars represent good value for money notably when compared with paying tax and National Insurance – a tax in all but name – on salary.
    
Therefore, it could be that demand for salary sacrifice car schemes across the health sector could rise as employers and staff do the maths and discover that by giving up some of their earnings – and choosing the ‘right’ low emission vehicle – company cars really are a valuable benefit.

Replacement cycles
But let’s first look at what the Chancellor announced in this year’s Budget in relation to company car benefit-in-kind tax.
    
Fleets are extending replacement cycles to cut costs and as a consequence of the ever‑increasing reliability of today’s vehicles.
    
That is why ACFO has been calling on HM Treasury to announce company car benefit‑in‑kind tax rates further into the future.
    
Historically we have only known benefit‑in-kind tax rates for three years, and occasionally four years, in advance.
    
However, as businesses have retained company cars into a fourth and even a fifth year in some cases, employers and employees have been left in the dark as to what benefit-in-kind tax bills will be in the final year or two of operation.
    
Budget 2014 changed that with tax rates now known for the next five years – up to and including 2018/19. ACFO hopes that this five-year benefit-in-kind announcement cycle is retained in future Budgets.

BIK changes
Benefit-in-kind tax rates up to the end of the 2016/17 financial year were already known. Changes already announced mean that from April 6, 2015 the introduction of two new company car tax bands at 0-50g/km of CO2 and 51-75g/km of carbon dioxide (CO2); and from April 6, 2016 the removal of the current 3 per cent tax surcharge on diesel company car thereby treating them the same as petrol-engined models for benefit-in-kind purposes. That means drivers of diesel cars with emissions above 75g/km will actually incur the lowest tax bill rises over the next five years.
    
In the Budget the Chancellor announced that in 2017/18 and 2018/19 the appropriate percentage of list price subject to tax would increase by two percentage points for cars emitting more than 75g/km of CO2, to a maximum of 37 per cent.
    
However, the Chancellor has changed his mind in relation to previously announced increases in rates for the two lowest thresholds – 0-50g/km and 51-75g/km – and altered the differential between those rates and the 76-94g/km threshold. In Budget 2013, the Chancellor said that the differential between the 0-50 and 51-75g/km CO2 bands and between the 51-75 and 76-94g/km bands would be three percentage points in 2017/18 reducing to two percentage points in 2018/19.
    
However, in Budget 2014 he said the differential would be four percentage points and three percentage points respectively reducing to two percentage points in 2019/20.
     
An incentive?
By maintaining a higher threshold differential than was previously announced the Chancellor can claim to be incentivising the take-up of ultra-low emission low emission cars – defined by the Government as those with emissions of 75g/km and below; but the reality is that in choosing such models drivers will still face major increases in their tax bills over the next few years.
    
For example, an employee choosing a pure electric Nissan Leaf (0g/km) will have 0 per cent tax liability in 2014/15 rising to paying 13 per cent of the model’s P11D value over the next five financial years. Meanwhile, an employee choosing a Toyota Prius Plug-in hybrid 
(49g/km) will see their tax charge rise from 5 per cent in 2014/15 to 13 per cent in 2018/19 – an eight percentage point increase and more than doubling their tax liability.
    
Move up a further tax band threshold and the driver of a Lexus CT200 Hybrid (87g/km) will see the tax charged moving from the 11per cent bracket to the 19per cent bracket over the next five years.
    
That eight percentage point rise for the Lexus driver is identical to the rise for the employee at the wheel of a Ford Fiesta 1.0 Zetec (99g/km) and for other drivers choosing cars with higher emissions.

Tax winners
However, because the Government has chosen to abolish the diesel tax surcharge in 2016/17 the tax “winners” will be employees at the wheel of diesel models. For example an employee choosing a Peugeot 208 1.6 e-HDi (95g/km) will see their tax charge rising from 15 per cent to 20 per cent over the next five years having actually reduced in 2016/17 compared with 2015/16.
    
Simultaneously, while employees will see their company car benefit-in-kind tax bills rise employers will incur increases in Class 1A National Insurance contributions, which are due on benefits-in-kind.
    
Although there has been much focus on the increased taxation of company cars, especially zero and ultra low emission vehicles, it remains ACFO’s belief that company cars continue to offer value to employees and employers alike.

Not only that, but there remains significant concern among employers across the public, private and voluntary sectors in respect of employees driving their own cars on business from a occupational road risk management perspective.
    
It should be remembered that it is easier to manage a company car from a work-related road risk perspective than a privately-owned car and, in most cases, those vehicles will be more environmentally‑friendly because they are newer.
    
Managing employees’ privately owned cars can be administratively time-consuming for managers with checks on vehicle documents including insurance, services and MoTs having to be routinely undertaken.
    
Today, an employee paying basic rate tax choosing a Ford Fiesta 1.0 Zetec three-door (99g/km) will pay £249.58 in benefit-in-kind tax (11per cent) rising to £508.82 in 2018/19 (19 per cent).
    
In the five years 2014/15 to 2018/19 that employee’s total company car tax bill will be £2,008.50. It is impossible for that same employee to buy, maintain and insure the same car at a similar cost.
    
Therefore, while ACFO acknowledges that benefit-in-kind tax rates will rise over the next five years, employees choosing low emission vehicles will pay a lower rate of benefit-in-kind tax than previously envisaged due to the Chancellor delaying the reduction in differentials between the three lowest CO2 tax thresholds for longer.  

Careful management
However, look at the value of a company car another way. The zero-emission electric Nissan Leaf costs £25,990 and in 2014/15 is 0 per cent-rated for benefit-in-kind tax, but that will rise to 13per cent in 2018/19 when the liability for a basic rate taxpayer will be £676 or 2.6 per cent of the value of the car.
    
Car salary sacrifice schemes are proving to be extremely popular and it could just be that using this mechanism to analyse a car’s value versus the cost of salary could further boost interest in the solution.
    
After all the cost for a basic rate taxpayer of choosing salary is 32 per cent – tax (20 per cent) and National Insurance (12 per cent).

For higher rate taxpayers the effective tax rate of a company car rises from 2.6 per cent to 5.2 per cent, but their tax and NIC liability increases to 42 per cent.
    
Undoubtedly what is required by fleet decision-makers is the careful management of vehicle choice lists, while keeping a watchful eye on the technology improvements being made by vehicle manufacturers to ensure employee tax bills are kept to a minimum.
    
Taking that course of action will prove rewarding with tax bills under control and an organisation’s carbon footprint reducing.