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Cars and fuel the future taxation policy is made clear

The Chancellor has set out the future for the taxation of company cars. The present tax rules will have been in place for 10 years at April 2012 and it was unclear what would be the future policy. There is no intention to significantly change the way in which the benefit in kind is calculated, however, the changes announced will mean that company cars will be more expensive for employees unless the vehicle has lower CO2 emissions.

The rates at which the benefit is charged are significantly adjusted from April 2012. The 10% rate will apply to company cars with CO2 emissions up to 99g/km (against 120g/km at present). All CO2 emissions thresholds will be moved down by 5g/km.

This change is no surprise; it had been suggested that the 10% rate band may have been moved even lower. The 10% band was introduced to entice manufacturers to produce lower CO2 emission vehicles and a significant number of cars are now available within this category. It will be interesting to see if the announcement in the Pre-Budget Report will further encourage the manufacturers to find more engine efficiencies.

We have seen allied to the availability of low CO2 emission cars the leasing industry promoting salary sacrifice arrangements, and these may be affected by the announcement by the Chancellor. It is likely these will be less attractive and employees’ tax savings reducing or even disappearing. Employers will need to consider taking action for employees with arrangements which will continue after the change in the taxable benefit calculation. It is possible employees will be out of pocket.

The Chancellor also announced a significant tax break for those who take a electric company car: employees will not have a benefit in kind for the next 5 tax years. It was reported recently that out of around 1 million company cars there are only 50 electric cars. Will this change encourage more electric vehicles? There are concerns over whether the Government is committed to this form of power for cars in the long term and how they will be priced for leasing. Unless there is confidence over the future residual value of these cars, they may (even with no benefit in kind) still work out more expensive than a traditionally powered car

The tax break extends to electric vans with no benefit in kind on these also, and the owner of the van claiming 100% capital allowances

The taxable benefit for those receiving private fuel for vans and cars increases in line with expectation from April 2010.

Employers should again look at their car policy and decide whether they should be restricting the type of cars they provide to employees or indeed to be buying some employees out of this benefit. Employees provided with free private fuel should question if the tax cost exceeds the vaule of fuel.

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