Sticks and carrots

Alison Chapman examines the main attempts at influencing driver
behaviour through taxation and whether they have worked
 
 
 

Tax does two things; it collects money and it influences
behaviour. One of the best examples of the latter is the tax
changes introduced by the government to reduce CO2 emissions across
company fleets.

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Successful – Reducing private mileage

Not that many years ago most companies paid for all
their employees’ fuel. This was called free fuel for private use
and was perceived by the drivers to be free, notwithstanding the
fact that they paid tax on it. Not surprisingly people drove loads
of unnecessary miles, polluting the country at a fairly small, and
fixed cost (the tax charge) to themselves. It always surprised me
how few companies worked out how much this was costing them. Once
the government hit the green agenda and started focussing on cars,
this was an easy target.

The 1998 Budget was the start of a few years of significant
increases to the tax charge for free fuel for private use, aimed
specifically at getting companies to stop providing the benefit.
The average driver ended up paying more in tax on the benefit than
the actual cost of the fuel. However it took a few years for both
the companies and the drivers to realise how expensive free fuel
had become. Today you will find few companies that provide free
fuel, and those that do would probably save themselves, and their
employees, money by buying them out of the benefit.

Unsuccessful – Vehicle Excise Duty
(VED)

VED was the first form of car taxation to move to a CO2 emission
basis as this came in from 2001. I am not convinced that this has
had much effect on people’s choice of car because the amounts, as a
percentage of the upfront cost of a car, are not enough to dissuade
people from buying the car they want.

The 2007 Budget saw a change in approach with the
much-publicised assault on cars with emissions of 226g/km and
above. I still do not think that this will change an individual’s
behaviour. However, the effect on fleets is likely to be different
as companies with high emission cars face losing a significant
amount from their resale value.

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Buyers of these cars in the second-hand market will be much less
willing, and perhaps less able, to pay the higher road tax. When
multiplied across an entire fleet, tens of thousands of pounds
could be wiped from their resale values. It could result in
companies being less likely to offer these types of vehicles to
their employees.
 
Successful but backfired? – Changing the driver’s choice of
car

Before 2002 there was an incentive for drivers to get over the
hurdles of 2,500 or 18,000 business miles to reduce their tax
charge. I never found anyone who drove 2,400 business miles in a
year, but plenty who drove 2,501 miles. Not only did the old system
encourage unnecessary driving, but there was no significant
downside in driving polluting vehicles.

The government’s plan was to improve emissions to company cars
since they are driven more miles on average than private cars and
feed into the second hand car market. The expectation was that
emission improvements to company cars would therefore have a
disproportionately beneficial effect on the environment. The change
to a CO2 emission basis hit drivers directly in their
pockets.  By doing so, the government encouraged them to pick
low emission cars and effectively forced the manufacturers to
produce those cars.

The government, via HM Revenue & Customs (HMRC), stated that
the aim of the new system was to reduce CO2 emissions and not to
raise money. Two HMRC reports produced since then have demonstrated
that CO2 emissions from company cars have fallen, but that the new
system has cost the government a great deal more than it expected.
This wasn’t the plan.

Alison Chapman is head of Automotive Tax at Deloitte &
Touche LLP. Next month she looks at national insurance and
congestion charging