The Government is raising record revenues from the company car market by imposing higher taxes on drivers – at the same time as the number of drivers actually falls.
Provisional figures from HMRC for 2016/17, the latest year available, show that the amount the Treasury collected in company car tax and National Insurance Contributions (NICs) increased by more than 24% year-on-year – up by £360 million. Yet the number of employees with a company car fell by 20,000 over the same period.
The figures indicate that individual drivers are paying record levels of tax due to increases in Benefit-in-Kind (BIK) tax rates, while their employers contribute the highest ever levels of NICs as a result.
How many drivers are involved?
There were 940,000 employees paying BIK tax on a company car in 2016/17 – a 2% fall on the 960,000 recorded the previous financial year. They paid a total of 1.85bn in company car tax.
At the same time, the amount of NICs paid by employers on company cars increased by 5% from £600m in 2015/16 to £630m in 2016/17.
Together, BIK tax and NICs were worth £2.48 billion to the Treasury, compared to £2.09bn in 2015/16 – an increase of 19% or £390m.
Compare that to three years previously in 2012/13, when BIK and NICs were worth £1.75bn to the Treasury – some £730m less – but when the number of employees with a company car was exactly the same at 940,000.
What was the tax take per company car?
The average annual tax yield on a company car in 2016/17 was £2,638 – compared to £2,166 in 2015/16, an increase of 22% in just 12 months.
At the start of the decade (2009/10), a company car was worth just £1,680 in BIK and NICs revenues to the Treasury, giving a total of £1.63bn in total or £850m less than the latest figures.
Why are taxes higher?
Two main reasons. A 2% increase in BIK rates between 2015/16 and 2016/17, which has accounted for most of the increase and, as a result, has contributed to a rise in the taxable value of the company car benefit, up from £4.32bn in 2015/16 to £4.57bn in 2016/17.
And even the fact that company car drivers are generally choosing cars with lower CO2 values has failed to stem the increase in tax revenues.
In 2015/16, the last year for which emissions figures are available from HMRC, 83% of company cars emitted 134g/km of CO2 or less, up from 77% of cars in 2014-15.
And 13 years ago in 2002-03, 58% of company cars had emission values in excess of 165g/km; in 2015-16 this had reduced to just 3%.
What does the future hold?
The Government has already signalled its intentions to add further to the tax burden on company cars.
In 2017/18, company car tax again went up by 2%, while in the current 2018/19 tax year it rises a further 2% and by 3% in 2019/20.
At the same time, the current 3% surcharge for all diesel cars increases to 4% from 2018/19 for diesel cars not certified to the Real Driving Emissions 2 (RDE2) standard – in reality most of them.
However, another potential tax-inflationary factor is the introduction of the new World Harmonized Light vehicle Test Procedure (WLTP) emissions regime.
All new type-approved cars have been subject to the test since last September, while all newly registered cars must be re-homologated by this coming September, under the new regime.
The WLTP replaces the old NEDC (New European Driving Cycle) test which was deemed unrepresentative of real-world fuel consumption and emissions of CO2 and NOx.
However, early tests are suggesting that figures derived from the more demanding, real world tests produce CO2 emissions of up to 30% more than under the previous regime.
The new figures will not apply to first-year vehicle excise duty nor to BIK rates until April 2020, while the Government has announced it will reveal how it intends to help fleet operators mitigate the expected increase in this November’s Budget Statement.
However, as an interim measure, for vehicles that have already undergone the new test, a new ‘NEDC-correlated‘ value for tax purposes has been arrived at, which is typically 10% higher than previously, putting some vehicles into higher tax bands and further increasing the tax burden on their drivers.
What’s the alternative to rising taxes?
Once taxes reach a tipping point, it would not be unusual for employees to begin asking their employers for other means of remuneration instead of a company car.
The falling numbers of drivers in the HMRC figures already suggests this process is taking place with cash-for-car allowances likely to be one option – although the Government has already signposted that it intends to tax the allowance at the higher of the BIK rate or the relevant rate of income tax.
Another option may be the introduction of employee car ownership schemes (ECOs) where the employee, rather than the employer, is the owner of the vehicle.
This switch in focus from the company to the driver means two further differences: the car is the driver’s choice; and, because the employee owns it, there is no BIK company car tax liability.
An ECO scheme is fundamentally different to offering employees a cash allowance instead of a company car as it places control around how the allowance is spent and supports the employer’s duty of care.
This differentiates ECO scheme drivers from the ‘grey fleet’ of employees who use their private car for business – which is another consequence of rising BIK tax rates, but which can cause other issues, not least environmental concerns around running typically older cars.
ECO schemes have become less attractive recently because of the growth of salary sacrifice car schemes. But is the wheel about to turn full circle again following Government moves to make salary sacrifice schemes less attractive to employees and employers?
Only time will tell on that one. But one thing is abundantly clear – the Government risks killing the goose that lays the golden eggs by taxing company cars too harshly, as falling numbers of company cars drivers will ultimately and inevitably mean falling tax revenues.
If you need any further information on the tax implications of operating company cars and the schemes available, please don’t hesitate to get in touch.