Rebecca Benneyworth considers future strategy for drivers based on the recent budget changes.
There were a number of changes announced in the Budget affecting business motoring – for both company employees and the self employed. The general thrust of these, and changes announced earlier but taking effect now is to use the tax system to further reduce carbon emissions from car travel. So has the best strategy for motorists needing to drive for business altered as a result of these changes, and what does the future hold?
Benefits in kind
The best news for some motorists is the significant reduction in benefit in kind charges for those driving the greenest cars. Those driving cars emitting no more than 120g/km of CO2 see their benefit in kind reduce from 15% to 10%, while those vehicles propelled by diesel will trigger a benefit of 13% of list price, rather than 18%. The range of petrol cars meeting the limit is small, but there is a fairly wide range of diesel cars available to the canny driver, so those with company cars do now have the opportunity to limit their tax bill by driving very low emission cars. Naturally, the benefit will also be very low for private fuel, with a benefit in kind of £1,690 on petrol models, giving a tax charge of £676 for a higher rate taxpayer, or £388 for a basic rate payer. At over £1 per litre, this would buy the higher rate taxpayer around 650 litres of fuel, or 140 gallons of unleaded fuel. The smallest of these cars will return around 60mpg on a combined cycle, which would allow 8,400 miles of private motoring, or 4,200 for the basic rate taxpayer. So for those willing to use cars such as the Toyota Aygo, Peugeot 107 and Citroen C1 (essentially the same vehicle) for business journeys, the return of the company car may be in sight. These cars are extremely cheap to run, and will benefit from a reduction in road fund licence next year when the structure of vehicle excise duty changes.
All other drivers see their tax bills rise this year, as a result of the changes to the car scale table announced in 2006. The lowest figure on the table reduces by 5g/km so that drivers of cars emitting over 139g/km will pay tax on an additional 1% of list price this year – apart from those driving the highest emission vehicles, who will continue to pay at 35% of list price. Thus, the increase in tax this year for other drivers is between 0% and 6.7%. They will also pay more for the benefit in kind on fuel, as the basic element of benefit has increased for the first time in four years from £14,400 to £16,900.
Obviously, the above changes will also affect employers, as these changes will increase (or reduce) the Class 1A NIC paid next July.
Employee use of private cars for business journeys
Those employees who gave up their company car some time ago, to replace it with a privately owned car are not affected by tax changes this year. The amount on which they can claim tax relief, or which they can receive tax free for business miles remains 40p for the first 10,000 miles, and 25p thereafter. Small cars can be run adequately for this amount, even when depreciation is taken into account, but larger cars, perhaps more suited to longer journeys, will cost significantly more than this to run. It was expected that these rates would change this year, as part of HMRC’s review of ECOS (Employee Car Ownership Schemes), but there are no changes at present. Of course all drivers will be affected by the changes in vehicle excise duty which take effect next year, with drivers of very low emissions vehicles paying less road fund licence next year, and those driving the highest emissions vehicles paying considerably more.
Capital allowances
The only change implemented immediately is to reduce the emissions for the greenest cars in relation to capital allowances. The previous 100% allowance given for the purchase of new registered low emission cars – emitting no more than 120g/km – has been replaced by an allowance at the same rate on new cars emitting no more than 110g/km. If the list of less than 120g cars is fairly short, the list of those emitting no more than 110g is even shorter! It does include the Toyota Prius and Honda Civic hybrid, plus the three small cars mentioned above, emitting 109g/km each. Beyond that, it is the Mini diesel which pretty much completes the list – in both the Cooper and Clubman versions. Once again, cars costing more than £12,000 will be added to the main pool after receiving the first year allowance, thus ensuring that no balancing charge is crystallised when the car is sold – provided the pool can stand the deduction of sale proceeds. No doubt the short list of contenders will increase significantly over the life of this allowance (until April 2013).
The self employed
Those working for themselves, and partners in firms have the easiest situation of all. For those businesses turning over no more than the VAT threshold – currently £67,000 – they have a choice of either claiming tax relief on their business motoring costs as a percentage of their total motoring costs, or of charging the Authorised Mileage Allowance Payment rates of 40p and 25p against the business. If the taxpayer wants to change his basis of claim, he must wait until he changes the car to change methods. If full motoring costs are to be apportioned, then the taxpayer will also claim a proportion of capital allowances – including the 100% rate on very low emission cars. However, for the self employed taxpayer (including partners) there is a sting in the tail of the allowance. When the car is sold, it will attract a balancing charge, as with even a small adjustment for private use, the car will be set in a single asset pool, and thus crystallise a balancing charge on disposal.
The future
The plans to revamp capital allowances on expensive cars which have been under discussion for some time have now borne fruit. Budget 2008 saw the announcement of a new capital allowance regime for all cars. From April 2009, new cars emitting no more than 110g/km will continue to attract 100% first year allowances. Cars emitting up to 160g/km, including second hand low emission cars will be included in the main pool irrespective of cost. They will therefore attract 20% writing down allowance on a reducing balance basis. Cars emitting more than 160g/km will be added to the special rate pool and will thus attract 10% per annum WDA. In both cases, however, the significant loss of balancing allowances on the most expensive (and probably high emissions) cars will be a serious issue. Under the current system the allowances on expensive cars are weighted to the end of the car’s life, but over that life the full cost of the car is allowed for tax. In future, companies will be carrying significant values in their pools, long after the cars have been sold.
Once again, the self employed and partners are winners, as a private use adjustment will trigger the car into a single asset pool, on which the balancing allowance will be available at the end of the life of the car (when it is sold). Perversely, these motorists will see a significant acceleration in allowances when the car has cost in excess of £30,000, with 10% of written down value allowed each year, and the balance of the cost in the year of sale.
One final point to note is that it is not clear how the transition from the current system will work in 2009. It is expected that the new pooling arrangements will apply only to cars purchased from the date the new rules commence, but no clear statement either way has been publicly made. Finance Bill 2008 does not include the relevant legislation, so we shall have to await further announcements before we know what is the best policy – to accelerate the purchase of new cars before the rule change, or, for the self employed, to delay.