Company car tax is increasingly based on green credentials, so hybrid vehicles can lighten an organisation’s tax load, says Jenny Keefe
While Leonardo DiCaprio is frequently snapped driving around LA in his eco-friendly Toyota Prius, hybrid cars are still a rare sight in UK car parks. Yet picking a hybrid can be a shrewd choice in Britain and a keen source of tax concessions for organisations.
Since 2002, the government has charged company car tax as a percentage of list price based on the vehicle’s CO2 emissions (see box). The bands range from 15% to 35% so that the more polluting a car the higher the rate charged. This year’s Budget raised the rate for the most polluting cars, while reducing that for low carbon-emitting vehicles. David Russell, deputy head of postgraduate studies at Leicester Business School, says: “Basically, the higher the emissions the greater the percentage of list price which is included as a benefit-in-kind. Therefore, there is a positive incentive for the employee to choose a car with lower emissions to minimise their own personal taxation position.”
Hybrid cars, which run on a combination of petrol and electricity, are eligible for an additional discount of 2% of the price of the car, plus an additional 1% discount for each full 20g/km that the CO2 emission figure is below the qualifying level of 140g/km.
However, hybrid and low-emission cars such as liquified petroleum gas (LPG) models have still to make an impression on employers. “Ultra-low emission cars are not widely offered by employers; partly because of fears over the reliability of technology – which is by and large unfounded – and uncertainty over the residual value [of the car at the end of its life]. Also, these cars are still quite expensive,” says Russell.
Hotel and leisure group Whitbread is encouraging staff to hand back the keys to their gas guzzlers. Nigel Trotman, business relationship manager, says: “Drivers have a choice of up to 10 models, based on salary. In 2004, we added the Honda Civic IMA [hybrid] to the list. There’s a lower benefit-in-kind tax for drivers and [lower] Class 1A national insurance contributions for the employer.”
As an example, this car puts out less than 120 grams of CO2 per kilometre. Green-fuelled cars are also exempt from the London congestion charge, saving over £1,200 a year per car compared with a normal car.
At the lower end of the tax bands, where most company cars fall, diesel engines incur less tax than petrol cars, because they emit less CO2. However, diesels attract a 3% supplementary charge because the government considers them to be more polluting than petrol cars overall. Richard Schooling, commercial manager at fleet company Alphabet, says: “Diesel cars’ list price is often higher too. But they still tend to work out cheaper than petrol cars on tax and fuel costs, especially at larger engine sizes. Fleet sales of diesels have risen dramatically in recent years.”
With CO2 tax thresholds rising year-on-year, car allowances are an option winning approval from employees. Here, staff own the car, bypassing benefit-in-kind tax altogether. Company car UK 2006 by Monks, the reward benchmarking arm of consulting firm PricewaterhouseCoopers, found that 86% of employers now offer a cash allowance to staff, compared with just 57% in 1996.
However, the downside to cash allowances is that they leave staff to their own, potentially dangerous, devices as employers have less control over the make and model of car they choose. While company car lists often take into account the European New Car Assessment Programme (EuroNcap), which awards safety stars to new cars, employees might take less interest in this rating.
Maintenance is also down to workers, which could be a health and safety minefield for organisations. Under current legislation, employers are responsible for the safety and condition of all vehicles used for work.
Employee car ownership plans (Ecops) are seen as one answer to this problem. A halfway-house between a conventional cash allowance and a company car scheme, employees buy cars through a fleet management company, which helps them run the vehicle. Yet because the worker owns the car, it still isn’t taxed as a benefit in kind. “The employer knows the make, model and history of vehicles, and maintenance and insurance may be included in rentals,” says Schooling.
Drivers can trade up or down by adding in their own cash and cars are usually replaced every three or four years. Schooling calculates Ecop cars cost £2,000 less in tax per car per year than company cars.
Ecops are typically run alongside authorised mileage allowance payments (Amaps) for essential users, although they were initially intended as a standalone scheme. Amaps allow employers to reimburse staff tax free for business travel using their own cars, based on a set rate per mile, which currently stands at 40p per mile for the first 10,000 miles, and 25p thereafter.
“Tax-free mileage allowance payments reduce tax and NI by minimising the portion of the car funded from taxed salary. Even if the actual running cost is less than the full Amap amount, the threshold is regarded as an allowable profit that the driver can make without paying tax. The system sets clear limits and makes it easier for employers and drivers to account for business mileage payments,” adds Schooling.
But background documentation to this year’s Budget stated that the Treasury is to look at changing the structure of Amaps so rates and thresholds are set at a level that promotes environmentally-friendly travel. Any changes are due to be announced in this year’s pre-Budget report.
Alistair Kendrick, a partner at accountancy firm Wilder Coe, says: “This is a problem for government in that the answer for them would be to gear the rate of Amap to the level of how green the car is. The difficulty is this could leave staff out of pocket when travelling on business, leaving employers left to face paying more salary to compensate. It would also add to complexity for employers if the rate was linked to the CO2 emission of the vehicle. The industry needs to help the government find something that will work.”
Car tax in a nutshell
- Company car tax is based on a percentage of the car’s list price (P11D value) which is set according to the vehicle’s CO2 emissions. The bands stating the percentage of P11 D price to be taxed range from15% for ultra clean, usually electric cars, through to 35% for the worst gas guzzlers. Employers should bear in mind that extras, such as satellite navigation systems, push up the list price and thus the tax.
- Hybrids attract a discount. So, if an employee is given an £18,000 Toyota Prius – an eco-friendly hybrid emitting 104 grams of CO2 per kilometer – for example, the tax will be worked out at 12% of the car’s cost. Depending on the employee’s tax bracket they will either pay 22% or 40% on this sum – in this instance £470 or £850.
- Gas guzzlers often fall in to the top band. The company car tax on a BMW X5 costing £37,000 when new would be £5,110 for a higher rate taxpayer or £2,810 for lower rate taxpayers. This is because the car emits a massive 302 grams of CO2 per kilometer driven – putting it in the top 35% band.
- Employers can get their estimations done automatically with an online car tax calculator, such as www.businesscar.co.uk. To check how much CO2 different vehicles emit visit the Vehicle Certification Agency’s website at www.vca.gov.uk.
CASE STUDY: Get mileage from allowances
Business and technology consultancy Conchango ditched its company car scheme, after it became too costly and complex.
The Egham-based company, which employs 300 people in the UK, now offers authorised mileage allowances for staff (Amaps). Mike Altendorf, CEO at Conchango UK, says: “We moved to this current model from the fleet scheme because of employee tax benefits and also due to the large administration cost involved in running such a large fleet. We have an allowance system whereby each member of staff can claim their business mileage at a set rate that the company stipulates.”
Its consultants frequently rack up the miles driving to visit clients – some of the company’s recent projects include designing HMV’s new music download system and revamping the FT’s website – so are eligible for the scheme.
Altendorf adds that the new approach is far less of an administrative burden. “Employees claim mileage through the monthly expense claims system,” he explains.