IR4 9 March 1999 IMPROVING THE ENVIRONMENT: MAJOR CHANGES TO THE TAXATION OF COMPANY CARS A major reform of the taxation of company cars to help protect the environment was announced by the Chancellor today. The package of reform, which takes effect from April 2002, will: be introduced in a revenue neutral way, - remove any incentive to drive unnecessary extra business miles, - give company car drivers and their employers a tax incentive to choose more fuel efficient cars, and - encourage manufacturers to produce cars with lower carbon dioxide emissions. The Chancellor's decision follows a review of how the company car tax regime might be altered to send better environmental signals. From April 2002, the existing income tax charge based on 35 per cent of the car's price, subject to business mileage and age-related discounts, is to be abolished. This will be replaced by a charge on a percentage of the car's price graduated according to the level of the car's carbon dioxide emissions. The Inland Revenue will be undertaking further consultation on the precise details of the linkage between carbon dioxide (and possibly other) emissions and the tax charge, with a view to bringing forward legislation in the 2000 Finance Bill. To pave the way for this reform, the Chancellor has also announced reductions in the existing business mileage, age related and second car discounts to take effect from 6 April 1999. There will be no increase in the full tax charge on a company car, which will remain at 35 per cent. There will also be increases in the fuel scale charges for company cars, in line with the programme announced in last year's Budget. DETAILS A. The value of the benefit of a company car 1. The following details apply for 1999-2000, 2000-01 and 2001-02. From 2002-03, the charge on the benefit of a company car will be graduated according to carbon dioxide emissions, and none of the discounts mentioned below will apply. The full tax charge 2. The full tax charge on a company car remains at 35 per cent of the price of the car. This charge will apply when a company car driver drives less than 2,500 business miles in the car in the tax year. Business Mileage discounts 3. Where a company car driver drives 2,500 to 17,999 business miles in the car in the tax year, the tax charge will be 25 per cent of the price of the car. 4. Where a company car driver drives 18,000 or more business miles in the car in the tax year, the Chancellor proposes a tax charge on 15 per cent of the price of the car. Older car discounts 5. The tax charge, after taking into account business miles, will be further reduced by one quarter, rather than one third, if the car is four or more years old at the end of the tax year. Second car discounts 6. Generally, second cars will be taxed on 35 per cent of the price of the car each year. If, exceptionally, the second car is also used for at least 18,000 business miles a year, the charge will be reduced to 25 per cent. Yield 7. These increases in company car tax will yield #270 million in 1999-2000, #265 million in 2000-01 and #260 million in 2001-02. B. Increased Fuel Scale Charges 8. The following table shows the increased fuel scale charges and the additional weekly tax payable for 1999-2000 where free fuel is provided for private motoring in company cars: Engine Size Scale charges Scale charges Increased weekly tax for 1998-99 for 1999-00 (basic rate taxpayer) # # # PETROL 0-1,400 1,010 1,210 0.88 1,401-2,000 1,280 1,540 1.15 2,001 + 1,890 2,270 1.68 DIESEL 0-2,000 1,280 1,540 1.15 2,001 1,890 2,270 1.68 Cars without 1,890 2,270 1.68 a cylinder capacity NOTES FOR EDITORS Company cars 1. Directors and employees earning at a rate of #8,500 a year or more (including the value of expenses payments and benefits in kind) are taxable on benefits in kind. Income tax is charged on the benefit of a company car and separately on the benefit of free fuel where this is provided for private motoring in a company car. Cars provided exclusively for business use and which are not available for private use are not taxed. 2. References to company cars in this press release include all cars made available for private use to employees (and their families) by reason of their employment. 3. For 1998-99, the full tax charge is on 35 per cent of the price of the company car, with discounts of: one third where the car is driven for 2,500 to 17,999 business miles; or two thirds where the car is driven for 18,000 or more business miles; and a further one third reduction for cars four or more years old at the end of the tax year. 4. For income tax purposes, the price of the car will usually be the list price of the car (including delivery and VAT) at the time it was first registered, plus the price of any accessories - provided with the car when it was first made available to the employee - added after the car was first made available to the employee, and fitted after 31 July 1993, with a price of #100 or more - excluding, since 6 April 1998, the extra cost of enabling the car to run on road fuel gases - compressed natural gas (CNG) or liquid petroleum gas (LPG). 5. The price of a car is currently restricted to an upper limit of #80,000 (including accessories) for the purposes of the tax charge so that where the price of the car exceeds this figure, its price for those purposes is taken as #80,000. 6. The reductions to the discounts which take effect from 6 April 1999 mean that 1.55 million company car drivers will pay more tax on the benefit of their company cars. 7. The Inland Revenue will alter PAYE codes in May this year to collect the additional tax payable. Company car drivers and their employers need take no action themselves. Free Fuel 8. The taxable value of petrol provided for private motoring is fixed by reference to three bands of engine size - 1,400 cc or less, 1,401 to 2,000cc and over 2,000cc. Two bands are used for diesel - 0 to 2,000cc and over 2,000cc. A car without a cylinder capacity is treated as if had over 2,000 cc capacity. 9. The new scale charges give the amounts on which employees provided with free fuel will pay tax in 1999-2000. The charge is apportioned if a company car is available for only part of a year. The charge is reduced to nil if the employee makes good the cost of all the fuel used for private journeys including miles driven in commuting from home to work. 10. Of the 1.7 million directors and employees who have a company car, under half (820,000) get free fuel for private motoring and so will pay more tax on this benefit. Again, this will be collected by adjustment to PAYE codes in May, so no action need be taken by those affected, or their employers. 11. The car benefit charge and fuel scale charges are also used as the basis for employers' Class 1A National Insurance Contributions and the Inland Revenue will be issuing guidance to employers on the new level of charges shortly. 12. There has been a change to the way that budget measures, where the tax is collected through PAYE, are to be reported in the Financial Statement and Budget Report (FSBR) this year. From 1999 onwards, entries will be shown on a 'cash withholding' basis, to reflect when the income tax is actually deducted from employees' pay packets. Previously in the 1998 FSBR, entries were reported on a 'receipts' basis which reflected when the PAYE would actually be paid over to the Exchequer. Reform of the structure of the tax charge on company cars 13. Comments on the proposal to abolish the discounts for business miles, older cars and second cars altogether, and replace them with adjustments to the percentage of the car's price charged based on the car's rate of carbon dioxide emissions (in grams per kilometre) would be welcome. Comments are particularly invited on whether this charge should also take into account local pollutants (such as particulates and nitrogen oxides) as well as carbon dioxide emissions. 14. Comments may be sent to: Sara Woollard Personal Tax Division Room 87, New Wing Somerset House Strand London, WC2R 1LB by 31 May 1999. INLAND REVENUE PRESS OFFICE Media Enquiries to : 0171 438 6706/6692/7327 (Out of hours : 0860 359544) Non media enquiries to 0171 438 6420/6425 (Office hours only) Inland Revenue information is on the Internet: www.inlandrevenue.gov.uk # = pounds sterling