Policy paper shifts gears on car benefits
A switch to a new method of measuring vehicle emissions has prompted a proposed reduction in the levels of company car benefit, but only for a limited period.
After a number of years in which we have seen steady increases to the level of benefit in kind charged on a company car, the policy paper which proposes reductions from 2020 is welcome news.
It is particularly encouraging for those in the leasing sector who, given the recent increases in taxation, have seen the number of company cars falling away. It is also good news for those individuals who need a company car for their work.
We have recently seen the UK move from the New European Driving Cycle (NEDC) to the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) to determine the CO2 emission levels of vehicles. A result of this has been that vehicle emission figures are now shown to be higher under the WLTP measure than under the previous regime. This has resulted in a further increase in the benefit in kind for many vehicles.
To mitigate this increase, the proposals suggest the percentage of list price in each car benefit band should be reduced by two points. This, it is believed, will simply bring the benefit in kind back to what it would have been under the NEDC test. So this is not a big give away.
Recent headlines have focused on the government’s proposals for a nil benefit in kind on electric cars in 2020/21, which will extend to hybrid cars which have 130 miles of electric range and CO2 emissions of between 1-50 g/km or zero.
The policy paper suggests that for electric vehicles and plug-in hybrid electric vehicles (PHEV) that are capable of producing 150 miles on a charge that the benefit in kind for 2021/22 will be 1% and 2% in 2022/23.
There are a significant number of articles which have been produced since this announcement which, whilst welcoming the proposal, suggest it will create a lot of new interest in the company car. We wait to see if this is the case.
Whilst from a tax perspective the proposals are great for electric vehicles, they are still expensive to acquire in comparison to a conventional car, and added to this is the fact that in some instances the lessors are taking a very cautious approach to their value at the end of the leasing period. This makes electric cars very expensive to lease.
In addition, there is a limited volume of newly manufactured electric cars in the marketplace meaning there can be significant delays in the ordering process.
It is important that clients when looking at their car fleet, determine in real terms whether the carrot being dangled on electric vehicles make it sensible at this stage to take the leap into this technology.
In looking at the type of cars to lease, the employer needs to consider not only the leasing cost differences but also the running costs. In leasing terms this is looked at in what is called “whole life costs” and the leasing company may be happy to provide assistance in this exercise.
By way of caution, the policy paper suggestions are only proposals, and we wait to see with government changes whether these will actually be introduced.
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Alastair is a leading expert on employment tax, IR35 and international fleet issues. He has considerable experience of all aspects of company car taxation. He is still heavily involved in issues relating to employee car ownership schemes and salary sacrifice.