Treasury plans one-year tax break for zero-emission company cars

The government plans to remove company car tax for newly registered zero emission models for one year from 2020 to offset the impact of the Worldwide harmonised Light vehicles Test Procedure (WLTP)

The move is part of measures to ensure that company car tax rates are not hiked as a result of the introduction of WLTP, which will come into force in April 2020, and introduces a new CO2 emissions calculator.

Cars registered from April 2020 will be taxed based on WLTP figures, a measure which is more representative of real-world driving conditions, compared to the previous test known as the New European Driving Cycle (NEDC). The new measure is intended to reduce carbon dioxide (CO2) emissions by encouraging a move towards lower emission vehicles.

However, the WLTP measure will hit company car users under taxable benefit rules and the Treasury has acknowledged that ‘the impact of WLTP is – on average – greatest for company cars. In part, this is due to the structure of the bands which are more sensitive to changes in CO2 emissions, and are therefore more effective in driving the decision to choose models with lower CO2 emissions.

‘Whilst the government’s view is that vehicle tax rates should more closely reflect the environmental impacts of driving, it is important that the transition to WLTP is managed’.

Following consultation, the government has announced that for cars first registered from 6 April 2020, most company car tax rates will be reduced by 2% in 2020-21 before returning to planned rates over the following two years – increasing by 1% in 2021-22 and 1% in 2022-23.

All new zero emission models will pay no company car tax in 2020-21, 1% in 2021-22 and then will revert to the planned 2% rate in 2022-23.

A small number of company cars with the greatest CO2 emissions (170g/km and over) will continue to attract the maximum appropriate percentage of 37% during 2020-21, 2021-22 and 2022-23.

‘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 small number of models could pay less,’ the Treasury added.

The government has also said that going forward it will set company car tax rates in advance, recognising criticism of the slowness to confirm future rates for company fleet managers, stating that it ‘aims to announce appropriate percentages at least two years ahead of implementation to provide certainty for employers, employees and fleet operators’.

The government will continue to use the current NEDC-based measure for road tax for 2020/21, and is planning a public consultation later this year on the best approach to changing the wider road tax system, to avoid hikes in VED for the majority of car users.

Nigel Morris, employment tax director at MHA MacIntyre Hudson said: ‘The proposals in the draft Finance Bill will not help as many drivers as we’d like, the 0% for full electric cars being applicable for 2020/21 only. It also does not address the confusion and additional costs from the move to WLTP in the “transition” period from September 2018 to April 2020, where fiscal neutrality was meant to apply. 

‘The move from NEDC to full WLTP was meant to have no impact on benefit in kind and VED taxation, but this is not what the market has seen. This has been raised with HMRC and the Treasury by the sector and trade bodies, but sadly nothing has happened to address this. 

It is estimated that a car with CO2 emissions of 145g/km would have seen an increase in VED under WLTP of £645, with lower emission cars at 97g/km facing a £40 rise.

Impact on first year VED of 20% increase in CO2 values due to WLTP

NEDC: CO2 emissions (g/km) First year VED  WLTP: CO2 emissions (g/km) First year VED  Difference
97 £130 116 £170 £40
121 £170 145 £210 £40
145 £210 174 £855 £645

Source: HMT

Morris added: ‘These new proposals [do] show a positive direction of travel that supports the use of zero emissions and ultra-low emission vehicles and by the commitment to provide advance notice of tax changes of at least two years. This is good for fleet decision makers and company car drivers, though I recall we were meant to have this much advance notice before, instead of the current nine months.

‘For those drivers lucky enough to be able to afford and source a new full electric vehicle this is fantastic news. For those others who are more likely to be able to source an ultra-low emission hybrid the news is better than it was. For the rest it will depend on when you can charge your car, with most legacy vehicles ending up with a 1% or 2% higher charge until they all “catch up” in 2022/23. So, it looks like you will need a bigger spreadsheet for your P11D returns between 2020/21 and 2022/23.’

The legislation will be introduced in Finance Bill 2019-20 to amend the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to reflect the changes to company car tax percentages. WLTP will be used as the applicable CO2 figure from 1 April 2020 for VED and 6 April 2020 for company car tax.

Standard VED rates for private car users will not change on introduction of WLTP from April 2020, but the government will consult later this year on changes to general road tax rates, which would aim to move towards a more dynamic road tax system which recognises smaller differences in carbon dioxide (CO2) emissions.

Office for Budget Responsibility (OBR) forecasts show that VED receipts are set to increase by around £200m a year on average from 2020-21 onwards. Company car tax receipts will increase by £100m in 2020-21, rising to £400m in 2023-24.

Treasury policy paper, Review of WLTP and vehicle taxes – summary of responses and 2020/21 company car tax rates

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