Future company car tax trends
This section summaries changes to company car taxation after 2015 and discusses the possible future developments to UK company car tax in the longer term.
All tax rates shown reflect changes announced in Budget 2014.
Company car BIK rates from 2015
Beyond confirming future BIK rates for the next four financial years, Budget 2014 confirmed major changes to company car tax from 2015.
For cars with official CO2 emissions of up to 75 g/km, the five-year BIK rate exemption will end in April 2015 as originally legislated in Finance Act 2010. From April 2015, two new company car tax bands will be introduced at 0-50 gCO2/km and 51-75 g/km CO2.
The appropriate percentage of the P11D price subject to tax for the 0-50 g/km CO2 band will be 5% in 2015-16, and 7% in 2016-17. The appropriate percentage subject to tax for the 51-75 gCO2/km band will be 9% in 2015-16 and 11% in 2016-17.
Beyond 2017: In 2017-18 there will be a 4% differential between the 0-50 and 51-75 gCO2/km bands and between the 51-75 and 76-94 gCO2/km bands. In 2018-19 this differential will reduce to 3%. The differential will reduce further to 2% in 2019-20 in line with the Budget 2013 announcement.
The Government will review these incentives for Ultra Low Carbon Vehicles in light of market developments at Budget 2016, to inform decisions on Company Car Tax from 2020-21 onwards. The announcements taken together (detailed above) is likely to have a moderately negative impact on businesses using electric cars and ultra-low emission vehicles as company cars.
Second, from April 2016, the government will remove the 3% diesel supplement differential so that diesel cars will be subject to the same level of tax as petrol car. This is likely to greatly advantage company diesel car users, and will further boost the UK market share of diesel vehicles. However, this could lead to an increase in overall NOx and particulate emissions, which are higher for diesel cars as compared to petrol.
Third, over the period 2015-17, BIK rates are due to increase by 2% per annum (not 1% as previously planned). This will significantly increase company car revenues to HMRC at the expense of company car users. If nothing else, the planned increase in BIK rates is yet another good reason why companies should urgently review their vehicle policy and allow only low carbon models for company and/or employee use.
Longer term developments
The removal of the 3% diesel supplement and the BIK rate benefits for electric cars, together with the planned 2% year-on-year increase in BIK rates (from 2014), give a good indication of government plans for company car taxation.
The changes certainly indicate a desire for future company car tax to be 'technology neutral', with BIK rates being based purely on tailpipe emissions of CO2. Fleet managers and company cars users will therefore need to be ever more aware of official CO2 emission data and less concerned with engine or power-train type.
While this will make for a simpler scheme, its appears that local pollutants (such as NOx and particulates) will not be fully reflected in future BIK rates. It could be argued that this unfairly benefits diesel over petrol cars; particularly in the light of recent research showing that current Euro V exhaust control systems are not functioning as expected.
Organisations wanting to procure electric and ultra-low emission vehicles will also have to plan well ahead given the planned BIK rate increases for cars with CO2 emissions up to 75 g/km. The emerging strategy is that, the Treasury is likely to increase rates for these technologies to compensate for falling (P11D) prices of plug-in vehicles. Next Green Car (and others) would argue that this is not the strong incentive required to ensure that EVs gain significant UK market share. However, as least potential EV owners will be able to calculate their future tax payments ahead of time and plan accordingly.
In summary, while the UK's well established system of company car taxation is here to stay, the future tends indicate a move to simplification and technology neutrality, an escalation of all BIK rates to increase the incentive to procure lower carbon cars, and the removal of the current benefits for plug-in vehicles as they gain in popularity.
The key tax lesson for companies is to plan well ahead by taking into account BIK rates over a three to five year period, limit the CO2 emissions on all company cars to a maximum of 110 g/km (95 g/km where at all possible), and watch out for unforeseen changes that may adversely affect the company tax payable on electric and other plug-in vehicles.