Achieving the green dream

The 2002 company car tax rules created a step change in
people’s thinking as some drivers were hit very hard. As a new UK
Budget looms on the horizon, Alison Chapman examines the
significance of the changes
 
 
 

Following the 2002 changes to the way that company cars were
taxed, instead of rushing into small, low-emission or
alternative-fuel cars people looked for ways around the system.
Since diesels have generally lower CO2 emissions, the take up of
them as company cars has not been surprising – but the extent has
been.

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The majority of company cars are now diesel, which has
substituted nitrous oxide and particulates for CO2. HM
Revenue & Customs’ (HMRC) 2006 report stated “the shift to
diesel means that there has been an associated adverse impact on
local air quality”.

Another major change is that many companies have gone into
structured cash alternative schemes, sometimes without
understanding the full consequences and ramifications, and often
with a misunderstanding of the true cost savings. This may have
been a short term blip as we are now seeing companies moving back
into traditional company car schemes which are where I believe the
government wants them.

It is likely that HMRC will change the tax-free allowances. They
are the cornerstone of these schemes but they encourage employees
to drive more business miles, flying in the face of the
government’s green agenda. Any changes are likely to accelerate
people moving out of these schemes.

Unsuccessful – employer’s national
insurance

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To date companies have generally paid little attention to the
CO2 emissions of cars because they view this as a matter for
drivers, not the company. Given that employers’ national insurance
is based on the driver’s benefit in kind charge, which in turn is
based on the CO2 emissions of the car, it follows that the higher
the car’s CO2 emissions the higher the national insurance cost to
the company.

For example, one employee chooses a £25,000 (list price) luxury
diesel saloon with CO2 emissions of 155g/km while his colleague
chooses a petrol 4×4 with the same list price but emissions of
220g/km. The national insurance bill for the company will be £672
for the saloon and £992 for the 4×4 – a difference of £320. Across
a fleet of vehicles the costs of ignoring this can be huge.
 
Successful – congestion charging

Since the aim was to reduce congestion in the centre of London
during normal working hours, there is no doubt in my mind that
congestion charging has been successful. Both living and working in
the charging zone I see it.

As a result, I expect to see the introduction of other charging
zones and road tolls, although, because of the political
ramifications, it will take some time.
 
Success yet to come – forcing companies to the
party

The effect of CO2 on a company’s profits isn’t going to stop at
the vehicle excise duty and national insurance points referred to
above. I expect tax relief on company cars to move to an emission
basis from April 2008, with 120g/km and 165g/km becoming key
benchmarks. The manufacturers are likely to respond to this if they
find that high emission vehicles become difficult to sell into this
market. Also anomalies will arise as, for example, a 170g/km car
may become unattractive as a company car if it has a similar
upfront cost to a 165g/km car but with a tax disadvantage.

Most companies place too much emphasis on the upfront cost (or
rental) of a car. Since tax is an integral cost of running a car,
companies which do not factor tax into the whole life cost of the
cars on their fleet will be making very expensive mistakes. Over
time, as companies realise that the green fleet will become the
cheaper fleet, the government will have finally achieved its CO2
objective.

The author is head of Automotive Tax at Deloitte
& Touche LLP.