Government new company car tax regime set to drive vehicle replacement complexity as drivers seek to ease tax burden

Fleet chiefs could look to defer company car replacement until after April 6. 2020 to help drivers reduce their benefit-in-kind tax bills.

That could be one of the unintended consequences as a result of the Government’s new company car benefit-in-kind tax strategy now it has published rates for the three years 2020/21 to 2022/23 (see tables below).

New car sales in the first six months of 2018 are down 3.4% with fleet demand down 1%, according to figures from the Society of Motor Manufacturers and Traders. The ongoing decline follows a 6.8% decline last year – fleet volume was down 7.3% – reflecting 12 months of turbulence and a drop of 5.7% in 2017 with fleet registrations down 4.5%.

The motor industry has blamed the Government’s confusing fiscal strategy for much of the sale decline and the decision to take a twin-track approach to company car benefit-in-kind taxation for 2020/21 and 2021/22 – based on whether company cars are first registered before or after April 6, 2020 – could further undermine demand.

That’s because company car benefit-in-kind tax rates for all cars with carbon dioxide (CO2) emissions of 90g/km and above first registered before April 6, 2020 will rise by one percentage point in 2020/21 as previously announced before being frozen for the following two financial years.

However, for cars first registered from April 6, 2020, most company car tax rates will be reduced by two percentage points in 2020/21 compared to those registered before April 6, 2020 before returning to planned rates over the following two years – increasing by one percentage point in 2021/22 and a further one percentage point in 2022/23 thereby realigning rates with those for cars first registered before April 6, 2020.

Therefore, company car drivers could benefit from an initial two percentage point benefit-in-kind tax saving by the delaying of vehicle replacement until after April 6, 2020 and a one percentage point saving in 2021/22 before rates equalise out in 2022/23

For cars first registered prior to April 6, 2020 with CO2 emissions of 1-89g/m a more granular system is being introduced as planned in 2020/21 that will see tax rates on those cars fall or remain unchanged and then frozen at those levels for the next two tax years.

As a result, the new regime adds some complexity for both fleet operators and company car drivers, who will need to understand the benefit-in-kind tax and operational impact with regards to vehicle replacement scheduling crucial particularly over the remainder of 2019/20.

Businesses also need to remember that the realignment of company car benefit-in-kind tax rates also impacts on employer Class 1A National Insurance contributions as well as the Car Fuel Benefit charge.

To accelerate the shift to zero emission cars, all zero emission models will be 0% rated in 2020/21 and not 2% as previously announced, 1% in 2021/22 before returning to the planned 2% rate in 2022/23.

Furthermore, the four percentage point supplement on non-RDE2-compliant diesel cars remains in place. There is a dearth of RDE2 models available so by delaying any company car replacement until beyond April 6, 2020 means more diesel vehicles that meet RDE2 emission standards are likely to be available.

Company car benefit-in-kind tax figures for 2023/24 and beyond have not been published and, said the Government, “remained under review”. It said it would “aim to announce appropriate percentages at least two years ahead of implementation to provide certainty for employers, employees and fleet operators”. Therefore, it can be anticipated that 2023/24 company car benefit-in-kind tax rates will most likely be announced in the Budget in November 2020.

In announcing the new rates, the Government said it “recognised the value of the company car market in supporting the transition to zero emission technology. This is reflected in a higher proportion of company cars with zero emissions – compared to private registrations – and the high proportion of these that are subsequently supplied to the second-hand market after three-four years”.

The Government added: “By providing clarity of future appropriate percentages, businesses

will have the ability to make more informed decisions about how they make the transition to zero emission fleets.”

The announcement follows a Government review of both company car benefit-in-kind tax and Vehicle Excise Duty in the wake of last year’s introduction of the Worldwide harmonised Light vehicles Test Procedure (WLTP). The new vehicle emissions and fuel economy testing regime replaced the long-established New European Driving Cycle (NEDC) test.

In the 2017 autumn Budget, the Government announced that cars registered from April 2020 would be taxed according to WLTP carbon dioxide (CO2) emission figures.

Previously published motor manufacturer emission figures highlighted that WLTP values would be higher than NEDC values. As a result the review was ordered by ministers.

Review respondents provided data showing increases in CO2 values ranging from 7% to 40% as a consequence of testing under WLTP rules. On average, WLTP results were about 20%-25% higher than NEDC figures with cars with smaller engines, and lower emissions, impacted the most and diesel cars slightly more than petrol models.

The Government said that “significant evidence was not provided” during its review to “suggest that WLTP would cause individuals to opt-out of company cars”.

Industry organisations had lobbied for the recalibration of company car benefit-in-kind tax rates to be neutral. However, pre-review the independent Office for Budget Responsibility calculated that company car tax receipts would increase by £100 million in 2020-21, rising to £400 million in 2023/24 indicating that the changes made are likely to see the Government’s company car cash take continuing to increase in the comping years.

In announcing the changes the Government said it “recognised that WLTP represented a significant change to the vehicle tax system and was aiming to support the automotive tax sector – and protect consumers – during the transition”.

The Government response continued: “Due to the range of WLTP impacts on CO2 emissions, this approach means some conventionally fuelled cars will be liable to pay an equal amount of company car tax as today, whilst others will pay more, and a smaller number of models could pay less.”

Legislation to implement the new company car benefit-in-kind tax regime is included in the 2019/2020 Draft Finance Bill, which has been introduced for debate in Parliament.

Company car benefit-in-kind tax rates for cars first registered before April 6, 2020

For each tax year add 4% for diesel cars up to a maximum of 37%. Cars that meet the Real Driving Emissions Step 2 (RDE2) standard are exempt.

Company car benefit-in-kind tax rates for cars first registered from April 6, 2020

For each tax year add 4% for diesel cars up to a maximum of 37%. Cars that meet the Real Driving Emissions Step 2 (RDE2) standard are exempt.

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