Special: The impact of changes to BiK tax on fleets

If there was any doubt that the government sees CO2 emissions as a major environmental issue, a quick look at how the tax regime surrounding company cars has changed since 2002 is testimony to the fact.

In April 2001, the government announced changes to Benefit in Kind (BiK) tax for the employee and Class 1A National Insurance Contributions (NIC) for the employer and from 2002. BiK was calculated on the basis of each car’s CO2 emissions, rated at a percentage given on a ready reckoner. This is applied to the list price of the car and the tax on the resulting figure is calculated at the level the driver pays.

So a £30,000 car emitting 150g/km of CO2 is calculated at 18 percent of £30,000 – £5,400, which is taxed at 40 percent for a higher band taxpayer. Meanwhile, the company’s National Insurance Contributions are calculated in the same way and taxed at 12.8 percent.

The writing down allowance (WDA) was next to see changes – again, related to CO2. For vehicles emitting 110g/km of CO2 or less, companies are entitled to a capital allowance of 100 percent in year one. “This is a massive cash advantage,” says Chris Chandler, associate director of Lex Autolease. For vehicles emitting between 111g/km and 160g/km, the capital allowance has been reduced from 25 percent to 20 percent per year.

“Organisations carry on writing down the allowance on a depreciating basis over three years, typically, but at that rate it could take more than 10 years to write down the cost of the vehicle altogether. From a cashflow perspective, this is not a great place to be,” says Clive Buhagiar, relationship manager for the public sector at ING Car Leasing.

However, there are nearly 100 cars that emit 100g/km of CO2 or less so FDs wanting to cash in are not short of options. “Manufacturers are beating the government at its own game,” says Harvey Perkins, associate partner at KPMG. “Financially, companies and employees get the best possible treatment and the government loses.”

Nothing but the rent
The rental allowance also changed last year. A vehicle’s monthly rental used to be allowed against taxable profit and as the vehicle got more expensive, the amount allowable reduced. Now, any vehicle emitting 160g/km of CO2 or less qualifies for 100 percent rental allowance against taxable profit. In excess of 160g/km, the allowance goes down to 85 percent. Since there are BMW 5 Series and Mercedes E Class models that qualify, FDs should not be too worried about this.

From April 2010, electric vehicles are exempt from BIK for five years. “However, there are very few fully electric vehicles in the marketplace – the range is not good and there is some debate surrounding electric emissions,” says Nick Sutton, group business development director of Zenith Provecta. In addition, there’s the small matter of disposing of the lithium battery.

An increased scale charge on company-provided private fuel, from £16,900 to £18,000 during the 2010-11 tax year, means that this ‘benefit’ is increasingly costly to provide. “Organisations should evaluate the cost and relative benefit, if any, that this provides,” says Adam Wigginton, head of LeasePlan Consultancy Services.

Another emissions-related change for FDs to look out for this year is in Vehicle Excise Duty (VED). For vehicles emitting 186g/km to 210g/km of CO2, VED rises from £215 to £425 in the first year, reducing to £235 thereafter; for more than 255g/km, the penalty is £950 in year one, reducing to £435. The good news is that VED goes down for cars emitting less than 140g/km. Looking further ahead, NIC will increse by 1 percent to 13.8 percent in April 2011.

The result of these changes is largely to the FD’s advantage in that the message throughout is “watch your emissions” – and there are financial rewards for doing so.