EXPLANATORY NOTE

1. Clause 58 and Schedule 11 provide for a fundamental reform of the taxation of company cars. From 6 April 2002, the existing income tax charge will be abolished and replaced with a charge based on a percentage of the car’s price graduated according to the level of the car’s carbon dioxide (CO₂) emissions.

2. The new charge will build up from 15 per cent of the car’s price, for cars emitting up to a specified rate of CO₂ emissions measured in grams per kilometre (165g/km in 2002-03), in 1 per cent steps for every additional 5g/km over that level. The maximum charge will be on 35 per cent of the car’s price. Diesel cars will face a 3 per cent supplement in recognition of their higher emissions of pollutants that damage local air quality, but this will not take the maximum charge above 35 per cent of the car’s price.

3. Regulation making powers have been taken so that, following consultation, provisions can be put in place to waive the diesel supplement for very low emission diesels and provide discounts for cars using fuels and technologies that are particularly environmentally friendly. The charge for cars registered before January 1998 will be based on price and engine size.

4. Budget 99 first announced a major, revenue neutral, reform of company cars taxation to help protect the environment. It was proposed that the existing tax incentives to keep older, more polluting cars and to drive extra, unnecessary business miles would be removed when the reform took effect in 2002. Company car drivers and their employers would instead be given a tax incentive to choose more fuel efficient cars. This, is turn, would encourage manufacturers to produce cars with lower emissions.

5. Following informal consultation, details of the reform were announced in Budget 2000, confirming that, from April 2002, cleaner and more fuel efficient cars will be rewarded by linking the tax charge to the car’s exhaust emissions. After further consultation, details will be announced of a waiver for very low emissions diesel cars and discounts for other environmentally friendly cars such as those that run on electricity or a combination of petrol and gas or electricity (which could reduce the charge below the usual minimum of 15 per cent of the car’s price).

6. By encouraging the use of cleaner cars, it is estimated that, in the medium to long term, the reform will produce a saving of 0.5 to 1 million tonnes of carbon on a full year basis, making a substantial contribution to meeting the UK’s targets for reducing greenhouse gas emissions. The supplement on diesel cars will contribute towards achieving the Government’s air quality targets.

7. Clause 58 introduces Schedule 11, which has effect for the tax year 2002-03 and subsequent years.

8. Paragraph 1 subparagraphs (1) and (2) provide for the calculation of the cash equivalent of a car benefit to be amended. Accordingly, Schedule 6 of the Income and Corporation Taxes Act (ICTA) 1988 is amended by replacing paragraphs 1 to 5 with new paragraphs 1 to 5G.

9. New paragraph 1 provides for the cash equivalent of the car benefit for the tax year to be a percentage of the car’s price, subject to reductions for periods when the cars is unavailable and for payments for private use of the car.

10. New paragraph 2 notes that the method for working out the appropriate percentage for the tax year is laid down in the following paragraphs 3 to 5G.

11. New paragraph 3 prescribes the method for calculating the appropriate percentage for the year for cars with an "applicable CO₂ emissions figure".

12. New paragraph 3 (1) defines those cars that have an applicable CO₂ emissions figure.

13. New paragraph 3 (2) defines the actual "applicable CO₂ emissions figure" for cars first registered from 1 January 1998 to 30 September 1999, and for cars first registered from 1 October 1999, in terms in grams of CO₂ emitted per kilometre driven. If more than one CO₂ emissions figure is recorded, the figure to use is the one described as the CO₂ emissions (combined) figure. The final sentence of subsection (2) provides that the applicable CO₂ emissions figure may, instead, be established under the rules set out in paragraphs 5 and 5A if the car is a bi-fuel car, or if the employee is disabled.

15. New paragraph 3 (4) provides that the percentage will be increased in 1 per cent steps for every additional 5g/km CO₂ emitted over the lower threshold, up to a maximum of 35 per cent.

17. New paragraph 4 sets the lower threshold of CO₂ emissions qualifying for the 15 per cent charge in each of the first three tax years of the reform. It also provides a regulation-making power to reduce the threshold in subsequent years.

18. New paragraph 5 provides special rules for bi-fuel cars (cars that run on a combination of petrol and road fuel gas). For cars first registered from 1 January 2000, there will be two CO₂ emissions figures, one for each fuel. The lower figure (invariably the gas figure) will be used to calculate the percentage of the car’s price.

19. New paragraph 5A sets out special rules for disabled drivers. If the employee holds a disabled person’s badge, and is obliged to drive a car with automatic transmission because of his or her disability, the CO₂ emissions figure of the closest equivalent make and model of car with manual transmission will be used, if it is lower. This ensures disabled drivers do not face an unexpected penalty as cars with automatic transmission tend to have higher CO₂ emissions.

20. New paragraph 5B defines the terms "EC certificate of conformity," "EC type approval certificate" and "UK approval certificate" (these being the respective documents on which the applicable CO₂ emissions figure will be recorded, depending on date of first registration).

21. New paragraph 5C (1) prescribes the percentages that will be used for cars that are first registered from 1 January 1998 but do not have an applicable CO₂ emissions figure.

22. New paragraph 5C (2) sets the percentages that will apply for these cars if the car has an internal combustion engine; at 15, 25 or 35 per cent, depending on engine size.

23. New paragraph 5C (3) sets the appropriate percentage if the car does not have an internal combustion engine: 15 per cent if the car is electrically propelled, otherwise 35 per cent (that is for rotary engined cars).

24. New paragraph 5C (4) notes that the appropriate percentage found under the rules of paragraph 5C may be increased by the diesel car supplement (subject to the over-riding maximum percentage of 35 per cent) or reduced in accordance with any discounts laid down in regulations.

25. New paragraph 5D (1) provides that the appropriate percentage will be increased for cars that run solely on diesel and are first registered from 1 January 1998.

26. New paragraph 5D (2) sets that increase at 3 per cent of the car’s price, but the increase cannot take the percentage above the over-riding maximum percentage of 35 per cent.

27. New paragraphs 5D (3) and (4) define "diesel" and provide that the percentage for cars that run solely on diesel may be reduced in accordance with any discounts laid down in regulations.

28. New paragraph 5E enables regulations to be made reducing the appropriate percentage for cars first registered from 1 January 1998. This will allow lower percentages to apply to cars that use fuels or technologies that have the potential to offer significant environmental benefits, such as those that run on electricity or a combination of petrol and gas or electricity. These discounts could reduce the charge below the usual minimum of 15 per cent of the car’s price. It will also allow the supplement on very low emission diesel cars to be reduced or removed.

29. New paragraph 5F (1) prescribes the percentages that will be used for cars first registered before 1 January 1998. This is because these cars will not have applicable CO₂ emissions figures.

30. New paragraph 5F (2) sets the percentages that will be used if these cars if the car has an internal combustion engine; at 15, 22 or 32 per cent depending on engine size.

31. New paragraph 5F(3) sets the appropriate percentage if the car does not have an internal combustion engine: 15 per cent if the car is electrically propelled, otherwise 32 per cent (that is for rotary engined cars).

32. New paragraph 5G defines when a car is "electrically propelled".

33. Paragraph 1 subparagraph (3) amends paragraph 6 of Schedule 6 ICTA 1988. It changes the formula for reducing the amount of the car benefit when the car has been unavailable for part of a tax year, so that the time apportionment calculation is based on the actual number of days in the year rather than on a fixed 365 days. In practice, this will only alter the calculation in a leap year.

34. Paragraph 1 subparagraph (4) makes a minor consequential change to paragraph 10 of Schedule 6 ICTA 1988.

35. Paragraph 2 amends section 168AB ICTA 1988. It disapplies the whole of that section for bi-fuel cars that are taxed by reference to the CO₂ emissions figure of the fuel with lower emissions (invariably the gas figure). This means there is no adjustment to the price of these cars. The rules for reducing the price of cars manufactured to run on road fuel gases, or for disregarding the cost of conversion to road fuel gases remain in place for bi-fuel cars if, in the absence of an applicable CO₂ emissions figure for the car’s performance when using road fuel gas, the tax charge is based on the higher (generally the petrol) CO₂ emissions figure.

36. 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 and which are not made 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.

37. The benefit of a company cars is currently established primarily by reference to the price of the car and the number of business miles driven. Where a company car driver drives less than 2,500 business miles in the car in the tax year, the full tax charge is on 35 per cent of the price of the car. For 2,500 to 17,999 business miles, the tax charge is on 25 per cent of the price of the car and for 18,000 or more business miles, the tax charge is on 15 per cent of the price of the car.

38. The tax charge is further reduced by one quarter if the car is four or more years old at the end of the tax year. Second cars are taxed on the full 35 per cent unless, exceptionally, they are driven for at least 18,000 business miles, in which case the charge is reduced to 25 per cent of the car’s price.

39. 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 for 2000-01).

40. 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, 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 liquefied petroleum gas (LPG).

41. The price of a car, for the purposes of the tax charge, is subject to an upper limit of £80,000 (including accessories) so that where the price of the cars exceeds this figure, its price is taken as £80,000.

42. In Budget 1999, the Government announced proposals to reform the taxation of company cars to help protect the environment. The existing incentives to drive more miles in older cars in order to get bigger discounts would be abolished and instead the use of fuel efficient company cars would be rewarded. This would take effect from 6 April 2002.

43. The existing business mileage discounts had been widely criticised for sending perverse environmental signals. They provided a tax incentive to drive extra, unnecessary miles, thereby adding to pollution and congestion. The tax incentives also encouraged the misdeclaration of private miles as business miles, leading to tax leakage. It was estimated that these extra miles could add up to 300 million a year.

44. The older car discount was also perverse. It was generally recognised that a car’s performance, in terms of emissions, deteriorated with age so there was no case for retaining this discount if the company car tax regime was to be reformed to help the environment.

45. To pave the way for the reform, the existing discounts for business mileage and older cars were, therefore, reduced from 6 April 1999. This helped, in a modest way, to ease congestion and pollution.

46. These discounts are completely abolished from 6 April 2002, when all company cars will fall to be taxed under the new scheme.

47. The simple message of the new scheme is "the more you pollute, the more you pay", in line with the Government’s stated principle that the burden of tax should shift from "good" things like labour, to "bad" things like pollution. In achieving this, the new charge does not, however, move away from the general principles of taxing benefits in kind. The existing discounts provided a crude proxy for valuing the benefit but as the tax charge arises on the benefit of a car being made available for private use, theoretically the charge should have always been the same whatever the business use or age of the car. By using the car’s price as the starting point, and by varying the charge between the same minimum (15 per cent) and maximum (35 per cent) charge as the existing regime, company cars will continue to be charged in broadly the same way as other benefits in kind.

48. The full and fair measure of the benefit of a company car (taking into account the cost of running a car) was, and still is, estimated to be the equivalent of 35 per cent of the car’s price. For this reason, the over-riding maximum charge under the new proposals will continue to be on 35 per cent of the car’s price. However, the minimum charge of 15 per cent could, potentially, be reduced for cars that use fuels and technologies that offer significant environmental benefits.

49. The level of CO₂ emissions qualifying for the minimum charge is being reduced over the first 3 years of the reform as new cars are expected to get progressively cleaner, in line with voluntary targets for reducing CO₂ emissions agreed between European car manufacturers and the European Union. Reducing the qualifying level ensures there is a continuing incentive to choose cleaner cars each time a company car is replaced or newly provided.

50. CO₂ emissions data will be easy to obtain. From November 2000, the CO₂ emissions figure will be recorded on the Vehicle Registration document, the V5. For cars registered from January 1998 up to end of 2000, an online CO₂ emissions enquiry service has been set up by the Society of Motor Manufacturers and Traders (the car manufacturers’ trade body), under an agreement with the Inland Revenue. As there is no reliable and complete set of CO₂ data for cars registered before 1998, the new charge will depend instead on the cars’ engine size which gives a reasonable, albeit not perfect, proxy for emissions.

51. Diesel cars emit less CO₂ than petrol cars and so would be taxed on a lower percentage if the charge was based purely on CO₂ emissions. This tax advantage is unwarranted, however, as although lower CO₂ emissions are good for global warming, diesel cars emit greater quantities than petrol cars of the two local air pollutants of most concern (particulates and oxides of nitrogen). And they are expected to continue to do so even with the introduction of tighter vehicle emissions standards. The diesel supplement therefore ensures that the new system does not have any adverse air quality implications.

52. Recent developments in diesel after-treatment technologies have the potential to offer significant reductions in emissions of local air pollutants, to the extent that some diesel cars could eventually have comparable emissions performance to the cleanest petrol cars. For this reason, regulation making powers have been included in Schedule 11 so that, following consultation and proper evaluation of these emerging technologies, the diesel supplement can be waived for these very low-emission diesel cars. Consideration will also be given to the case for granting a discount, expressed as a percentage of the car’s price, to these cars.

53. Cars that are propelled by alternative fuels and vehicle technologies also have the potential to offer significant environmental benefits. These cars tend to be more expensive than similar conventional vehicles so employees could potentially face a higher tax liability. Once again, the regulation making powers included in Schedule 11 will enable discounts to be introduced to mitigate the impact of that higher price. The types of fuels and technologies that will be covered by these regulations are expected to include electric cars and cars that run on a combination of petrol and gas or electricity.

54. There are no changes to the existing rules for employee contributions. Payments that employees have to make for the private use of a car will continue to reduce the value of the benefit pound for pound. Contributions of up to £5,000 made by employees towards the cost of the car and/or accessories will continue to reduce its price for tax purposes.

55. The rules for classic cars also remain unchanged. If the car is 15 or more years old at the end of the tax year, and has a market value of £15,000 or more (which is higher than its list price when the car was first registered), the price of the car for tax purposes is its open market value on the last day of the tax year.

56. The following table provides a ready reckoner of charges in the first three years of the reform. The exact CO₂ emissions figure of the car should be rounded down to the nearest 5 grams per kilometre to use this table.

Diesel Supplements

* add 3 per cent if car runs solely on diesel

** add 2 per cent if car runs solely on diesel

*** add 1 per cent if car runs solely on diesel

**** maximum charge so no diesel supplement

57. A basic rate taxpayer driving a petrol car with a CO₂ emissions figure of 183g/km and a price of £15,000 will be taxed as follows:

 

• 183g/km taken as 180g/km

• 180g/km = 18% of car’s price using the ready reckoner

• £15,000 x 18% = £2,700

• tax at basic rate £2,700 x 22% = £594.00

 

• 180g/km is now 20% of car’s price using the ready reckoner

• £15,000 x 20% = £3,000

• tax at basic rate £3,000 x 22% = £660.00

 

• 180g/km is now 22% of car’s price using the ready reckoner

• £15,000 x 22% = £3,300

• tax at basic rate £3,300 x 22% = £726.00

58. A basic rate taxpayer driving a diesel car with a CO₂ emissions figure of 158g/km and a price of £15,000 will be taxed as follows:

 

• 158g/km is less than the lower threshold of 165g/km for the minimum charge

• 165g/km or lower = 15% of the car’s price using the ready reckoner

• car runs solely on diesel so add 3%

• £15,000 x (15% + 3%) = £2,700

• tax at basic rate £2,700 x 22% = £594.00

 

• 158g/km rounded down to 155g/km

• 155g/km or lower = 15% of the car’s price using the ready reckoner

• add 3% diesel car supplement

• £15,000 x (15% + 3%) = £2,700

• tax at basic rate £2,700 x 22% = £594.00

 

• 155g/km is now 17% of car’s price using the ready reckoner

• add 3% diesel car supplement

• £15,000 x (17% + 3%) = £3,000

• tax at basic rate £3,000 x 22% = £660.00

59. A higher rate taxpayer driving a diesel car with a CO₂ emissions figure of 247g/km and a price of £20,000 will be taxed as follows:

 

• 247g/km taken as 245g/km

• 245g/km = 31% of car’s price using the ready reckoner

• car runs solely on diesel so add 3%

• £20,000 x (31% + 3%) = £6,800

• tax at higher rate £6,800 x 40% = £2,720.00

 

• 245g/km is now 33% of car’s price using the ready reckoner

• add 3% diesel car supplement = 36%

• over-riding maximum charge is 35%, so restrict charge to 35%

• £20,000 x 35% = £7,000

• tax at higher rate £7,000 x 40% = £2,800.00

 

• 245g/km is now 35% of car’s price using the ready reckoner

• 35% is maximum charge so no diesel supplement

• charge and tax unchanged from 2003-04

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