New tax era for company car drivers

Featuring Scott Bentley | 5th September, 2018
  • The income tax paid by company car drivers is partly dependent on the emissions of the vehicle they are provided with
  • The tests which establish vehicle emissions are changing and vehicle emissions are expected to increase
  • Without any concessions company car drivers are likely to see their tax liabilities increase in the future.

Background

If you’re lucky enough to be offered a company car as part of your remuneration package, you’ll also be unlucky enough to be subject to benefit-in-kind (BIK) tax.

Tax is levied on perks such as company cars received by employees in addition to their salary as part of their remuneration package. If you have a company car which is made available for private use (i.e. you take it home in the evenings and at weekends), you will pay tax on the benefit.

Looking specifically at cars, the value upon which an employee is taxed is based on the list price of the car provided multiplied by a percentage which is linked to its CO2 emissions. So the higher the cost of the car and the higher the CO2 emissions the higher the tax charge. The current system has been in place for many years and replaced one where there were concessions made to those with high business mileage where the car really was an essential part of the job rather than more of a “perk”.

Since the introduction of the system and other environmental measures, car manufacturers have been very keen to reduce CO2 emissions of vehicles and know that for those vehicles popular amongst company fleet buyers they need to get vehicle CO2 emissions into certain limits for them to be attractive and hence maintain sales volumes. However, the testing procedure to which manufacturers have to submit new vehicles in order to determine a vehicle’s CO2 emissions is changing.

In September the new emissions test the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) comes into force. The WLTP will replace the outgoing New European Driving Cycle test, which is lab-based. The new approach is designed to reflect the performance of cars out on the road rather than in the laboratory using ‘real-world’ testing to provide more accurate emissions figures.

It is generally considered to be stricter – estimates state it’ll make each model’s CO2 figure rise by an average of 15% and is already forcing many manufacturers to make engineering changes to their cars. So, if under the new testing rules all cars are expected to have their emissions increased then without any change to thresholds, company car drivers will see their tax liabilities increase when they replace their current vehicle for a similar car under the new regime. It also seems unlikely the government will be reducing thresholds down to compensate.

So what are the new tax implications?

From April 6, 2020, the government is proposing switching over to the WLPT measure for CO2 for the purposes of calculating both Vehicle Excise Duty (VED) and company car BIK tax.

During the transitional period to April 2020, cars will have both an NEDC and a WLTP figure for CO2 (the NEDC figure will be calculated by converting the WLTP test result back to a NEDC equivalent). During this time, VED and BIK company car tax rates will still be based on CO2 ratings measured by the NEDC test and so hopefully there should not be too much of an impact during this period.

However, from April 2020, only the WLTP figure will be used for calculating VED and BIK company car tax. Cars registered before September 2017, however, will continue to be taxed based on the CO2 figures measured by NEDC testing.

How will the change affect you?

It is fair to assume that the CO2 figure relating to your vehicle will be higher under the new testing scheme. This has been acknowledged by the European Automobile Manufacturers Association (ACEA).

As a result, if you’re choosing a new vehicle between now and April 2020, you should consider both the NEDC and WLTP CO2 figures. The former will determine your current tax liability, the latter your future liabilities.

It currently remains unclear whether tax thresholds will be adjusted from April 6, 2020 to take account of higher CO2 figures.

Key dates to remember:

September 2018: All new cars must be certified according to the WLTP test procedure, All new cars must be certified according to the WLTP test procedure, All new cars must be certified according to the WLTP test procedure All new cars must be certified according to WTLP test procedure

January 1, 2019:  The government proposes that vehicle manufacturers will change to the new WLTP figures for fuel consumption in advertising and other promotional materials.

April 2020: The government proposes that manufacturers will have to change their published information on CO2 emissions from NEDC to WLTP. As of this date, only the new CO2 figures will be used for VED and company car taxation purposes.

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