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Tax changes afoot for car users

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29th Sep 2005
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Rebecca BennyworthBy Rebecca Benneyworth

A variety of tax changes will impact business motoring costs next year, adding upward pressure to that already exerted by the rising price of fuel. These changes have all been legislated for, variously by Finance (No 2) Act 2005 and statutory instrument, so company car drivers and the self employed will need to consider their impact on costs and their own tax position.

The benefit in kind tax changes will produce an increase in tax for 2006/07 for those driving 'green' vehicles. The plan to simplify the alternative fuels calculations of benefits was announced in the 2005 Budget and the necessary secondary legislation is already in place. The changes mean that on average drivers of cars running on LPG and hybrid vehicles with both petrol and electric motive power will pay tax on a benefit of at least 1% more of list price next year. The Table below shows the comparative rates of discount from the normal petrol based calculations. This change will affect all drivers of cars in the relevant categories.

The second area of change was announced last year, but has only now filtered through the legislative process. Drivers of 'green' diesel (Euro VI Type approved) cars will see a potential rise of 3% of list price in their benefit taxation, but only on newly registered cars. This is because, to encourage drivers to choose 'green' diesel models over conventional diesel, the 3% addition for diesel vehicles does not apply to green diesels. Drivers are thus taxed as if their car were a petrol driven vehicle, but of course the very high mpg that these cars give means the benefit in kind is low. This alternative is often selected by high mileage company car drivers to keep the benefit in kind tax costs down. In January 2006, according to the HMRC information, drivers will only be able to purchase Euro VI Type approved vehicles, so an incentive is no longer appropriate. Thus from April 2006, drivers of new green diesel cars will lose the 3% discount and return to the normal diesel scale. Drivers of cars registered before 1 January 2006 will retain the advantage for the life of their car.

Drivers planning to change their car over the winter should therefore seek out a 'pre registered' model, or bring forward the date of change to benefit from the continued discount for the life of the vehicle. On a car with list price of £15,000 the additional tax for a higher rate taxpayer will be £180 per year. Employers will also see their Class 1A NIC on these cars increase as a result.

Comparative table: The current rate of discounts for alternative fuel vehicles, and the new rates are shown in the table below:

Fuel Type
Current rate
2006-07
L - low emission diesel
+ 0%
+ 3%
H - Hybrid electricity and petrol
-(2% + fuel adjustment%)
-3%
B - Bi fuel original manufacture
-(1% + fuel adjustment%)
-2%
C - converted to run on road gas
-1%
No adjustment
E - electricity
-6%
-6%

VAT changes
The bad news continues with VAT. It is widely anticipated that the right to recover VAT on fuel mileage rates will end later this year ' the UK lost their case before the European Courts in which we appealed to retain this right. The Courts would have none of it, and we are awaiting an announcement by HMRC that this will end. This will affect companies with company car drivers and employees using their own cars for business motoring, as both methods of reimbursement currently permit VAT recovery on the fuel element reimbursed. This move will not affect the employees concerned unless companies reduce their mileage rates to reflect the lost VAT.

More bad news comes with the Finance (No 2) Act 2005, in which the proposal to return VAT fuel scale charges to align with benefits in kind has been enacted. This change will affect the self employed motorist, in addition to companies with company car drivers. The fuel scale charges allow a business to recover VAT on all fuel purchased for a car, and then pay a fuel scale charge to recognise the cost of fuel used for private travel. Generally speaking under the current regime businesses will benefit from VAT recovery on fuel if the motorist travels around 10,000 to 12,000 miles a year (combining business and private mileage).

The new rules which will probably take effect in the next Budget will mean that most drivers will need to travel in excess of 25,000 miles a year to make it worthwhile recovering VAT on fuel, and in smaller cars that could be in excess of 30,000. This means that VAT recovery on fuel will radically reduce next year, adding yet more cash to Gordon's coffers!

There is one tiny bright spot in all of this gloom. HMRC published new fuel only recommended rates for car drivers this summer, reflecting the increases in fuel prices. From 1 July 2005 fuel only rates for petrol and diesel vehicles increased by 1p per mile. There is also a promise to raise the rates again if average fuel prices remain high.

By Rebecca Benneyworth

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
05th Oct 2005 17:44

Fuel not as good as I suggested
Paul, you are quite right, my sweeping statement was misleading. It is hoped however that HMRC might raise the rates still further - the base price for petrol in their model is 88.1p. It is difficult to get a fix on the average price of petrol across the UK, but in theory if this exceeds 97p per litre we shold see another increase (10% increase in fuel price) - we probably aren't there yet!

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By rtrussell01
30th Sep 2005 12:43

LPG and hybrids
If you look at factory-built hybrids and dual fuel vehicles it is clear that the company car tax percentage will be the same or less in 2006/7 bar one exception. Drivers of the Honda Insight will be walloped with a 20% increase. Although there aren't many out there, it is ironic that the early adopters of one of the lowest emission cars ever will be the only drivers adversely affected.

Details of other cars can be seen at www.comcar.co.uk/dir1in.cfm

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Teignmouth
By Paul Scholes
06th Oct 2005 11:34

I can wait
Thanks Rebecca - to be honest it's all a bit academic and I'll also be glad to drop the VAT claim on my fuel mileage. At 80mpg in a Smart Diesel it's the 40ppm that will make my fortune!

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Teignmouth
By Paul Scholes
03rd Oct 2005 18:35

Bright Spot?
Rebecca mentions at the end a 1p increase in fuel only rates whereas the HMRC page shows no increase for vehicles below 2000cc and for >2,000cc engines a 2p increase for petrol and 1p increase for diesel.


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