EXPLANATORY NOTE

1. This clause in effect reduces the discounts for business mileage and older cars when calculating the income tax charge on company cars.

2. From 6 April 1999, the taxable benefit will be 25 per cent of the price of the car where a company car driver drives 2,500 to 17,999 business miles and 15 per cent where the driver drives 18,000 or more business miles. The charge is reduced or further reduced by one quarter if the car is four or more years old at the end of the tax year. If the driver is provided with a second company car, the taxable benefit on that car is 35 per cent of the price of the car unless it is driven for 18,000 or more business miles, when the charge is reduced to 25 per cent.

3. These changes pave the way for a major reform of company car tax in April 2002, when the discounts which are now being reduced will be completely abolished and the charge will instead be linked to the level of the car’s carbon dioxide emissions.

4. The existing business mileage discounts have been widely criticised as sending perverse environmental signals, as they give an incentive to drive additional, unnecessary business miles in order to reach the discount thresholds. There is evidence that the extra miles driven in company cars could be as much as 0.3 billion miles a year. The discounts also encourage the misdeclaration of private miles as business miles, leading to tax leakage.

5. The full charge to tax on the benefit of a company car is on 35 per cent of the price of the car. This measure is recognised as representing a full and fair measure of the benefit and so will not be changed. Company car drivers who drive less than 2,500 business miles will therefore continue to be taxed on 35 per cent.

6. Before the changes introduced in this clause, there was a one third discount from the full tax charge where the car was used to drive 2,500 to 17,999 business miles : an effective charge on 22.33 per cent of the price of the car. From 6 April 1999, this is increased to 25 per cent, representing a slight reduction in the discount. Where 18,000 or more business miles are driven, a two thirds discount was previously given : an effective charge on 11.67 per cent of the price of the car. This is being increased to 15 per cent, again representing a reduction in the discount. The reduction of these discounts is the first step towards their complete abolition in 2002, slightly reducing the existing incentives to drive extra business miles and so helping, in a modest way, to ease urban congestion and pollution.

7. The reason for giving a discount to older cars was to reflect the lower taxable benefit after depreciation compared with being provided with a new car. It is, however, now generally recognised that a car’s performance in terms of emissions deteriorates with age, so there will be no case for retaining this discount when the company car tax regime is fundamentally reformed to help protect the environment. The reduction of the discount from one third to one quarter represents a first step towards its abolition in 2002.

8. Previously, where a company car driver was provided with two or more company cars concurrently, the charge on the "second car(s)" i.e. any or all except the one used for business to the greatest extent was reduced by one third (an effective tax charge on 23.33 per cent of the price of the car) if it was driven for 18,000 or more business miles, but otherwise the full charge of 35 per cent applied. There is no environmental justification for a tax incentive to encourage the provision of more than one company car, as this merely adds to congestion. So, this discount will also be abolished in 2002. In the meantime, second cars will generally be charged to tax on 35 per cent of the price of the car, unless exceptionally 18,000 or more business miles are driven, when the charge will 25 per cent, again representing a slight reduction in the existing discount.

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9. Subsection (1) provides for Schedule 6 of the Taxes Act 1988 to be amended.

10. Subsection (2) increases the taxable benefit of a company car (from 35 per cent less two thirds = 11.67 per cent) to 15 per cent of the price of the car where 18,000 or more business miles are driven in a year.

11. Subsection (3) increases the taxable benefit of a company car (from 35 per cent less one third = 23.33 per cent) to 25 per cent of the price of the car where 2,500 to 17,999 business miles are driven in a year.

12. Subsection (4) increases the taxable benefit where a second car is driven 18,000 or more business miles (from 35 per cent less one third = 23.33 per cent) to 25 per cent of the price of the car concerned.

13. Subsection (5) reduces the discount available for cars that are four or more years old at the end of the tax year from one third to one quarter.

14. Subsection (6) provides for the new measures to take effect from 6 April 1999, which is why we need Resolution 25 under the Provisional Collection of Taxes Act 1968.

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15. 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. Company cars include all cars made available for private use to employees (and their families) by reason of their employment.

16. The benefit of a company car is currently taken to be 35 per cent of the price of the car, with discounts of one third where the car is driven for 2,500 to 17,999 business miles and two thirds where the car is driven for 18,000 or more business miles. Where an employee is provided with two or more cars concurrently, there is no discount for any car other than the one used most for business, unless 18,000 or more business miles are driven in a second car, in which case a discount of one third is given. A further one third reduction is given for cars four or more years old at the end of the tax year. This amount is then taxed at the appropriate rate of income tax. The same measure of the benefit is also used to calculate the Class 1A National Insurance Contributions payable by employers (at 12.2 per cent from 6 April 1999).

17. When calculating the benefit, 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 or added after the car was first made available, and fitted after 31 July 1993, with a price of £100 or more. Since 6 April 1998, the calculation has excluded any extra cost of enabling the car to run on road fuel gases i.e. compressed natural gas (CNG) or liquid petroleum gas (LPG).

19. In his Budget speech, the Chancellor announced that he proposed to reward the use of fuel efficient company cars and remove the existing counter productive incentive to drive more miles in order to get bigger discounts. He said a start would be made in this Budget with a measure that would cost the company car user with a typical car around £1 a week. This was a reference to the reduction in the discounts for business miles, older and second cars.

20. A basic rate company car driver with a two year old car, list price £15,000, who drives between 2,500 and 18,000 business miles a year will pay extra tax as follows:

£15,000 x (35%-1/3) x 23% £ 805.00

(15,000 x 25%) x 23% £ 862.50

Increase £ 57.50 per year (£1.11 per week)

21. The increases will be more for higher rate taxpayers driving more expensive or older cars. A worked example appeared in the Daily Telegraph on the day after the Budget, and was referred to again the following day. In that example they calculated that the taxpayer would pay an extra £776 a year (nearly £15 a week) as a result of the tax changes. That calculation was incorrect. The actual tax increase on the facts described would be about £140 (for a basic rate taxpayer) or £243 (for a higher rate taxpayer). This is calculated as follows:

The taxpayer has a car that will be over four years old at the end of 1999-2000. She drives between 2,500 and 17,999 business miles a year. The car’s list price is £19,000. If she is a basic rate taxpayer the extra tax is a follows:

£19,000 x (35%-1/3) - 1/3 x 23% £ 679.65

(£19,000 x 25%) - ¼ x 23% £ 819.26

Increase £ 139.61 per year (£2.68 per week)

If she is a higher rate taxpayer the extra tax she will pay is :

£19,000 x (35%-1/3) - 1/3 x 40% £1182.00

(£19,000 x 25%) - ¼ x 40% £1424.80