The government has concluded that the number of company cars on Britain’s roads has fallen by 500,000 over the past nine years.

HMRC stated in its long-awaited review of the taxation of employee car ownership (ECO) schemes and the interaction between such schemes, company car tax and approved mileage allowance payments (AMAP) that the number of company cars has fallen from 1.6 million in 1999 to approximately 1.1 million now.

“Company cars are no longer seen as the main option for employers to meet their business transport needs as other alternatives are available, such as ECO schemes and cash allowances,” said HMRC.

Its report also concludes that there are now up to four million private cars used for business – known as grey fleet – about half of which are used by public sector employees.

However, HMRC admits that it has no idea how many employees receive a cash allowance instead of a company car.

“There are no figures available on the number of employees who are given cash alternatives because they are treated in the same way as cash salary and subject to income tax and National Insurance under the PAYE system,” concludes the report, which adds: “Most employees who receive a cash allowance can spend it in any way they wish.”

Earlier research had found that there has been a reduction of 400,000 company cars in the UK, from a high of 1.6 million in 1999, to 1.2 million in 2005.

Contributing to this fall in company car numbers are the 150,000 employees who are currently in ECO schemes.

HMRC concedes that much of the attraction of ECO schemes is that they are a “more tax-efficient alternative to company cars for higher rate taxpayers who cover high business mileage in the most polluting cars”.

It has also agreed that the flat rate approved mileage allowance payments (AMAPs) for owner drivers can be generous for those with older cars driving high business mileage but that AMAPs are less generous for drivers with newer cars who cover low business mileage.

The report suggests that the more structured ECO schemes make extensive use of AMAPs to reduce their tax and National Insurance contribution liabilities, which may “provide a potential incentive to drive a greater number of business miles”. 

Conclusion - in verbatim from the HMRC report

The findings in this report clearly demonstrate the interaction between company cars, ECOS and mileage payments made to employees who use their own cars for business use.

The introduction of the emission based company car tax rules in 2002 led to an increase in popularity for employee car ownership schemes particularly at the top end of the company car market.

Employers are able to choose a number of alternatives for business travel and the decision is based on a number of different factors. The move in recent years to more flexible benefit packages reflects the increased choice for motorists that is now required to retain and recruit talented staff.

Taxation issues and the administrative burden of running and maintaining company fleets are also important factors, but the introduction
of the Manslaughter and Corporate Homicide Act 2007 has also had an impact.

The duty of care of an employer to his employees has highlighted many issues with the grey fleet – i.e. drivers who use their own cars for business journeys - but this has not yet diminished the popularity of cash allowances or led to a significant move back into
company cars.

ECOS

ECOS can be a more tax and NICs efficient alternative to company cars for higher rate taxpayers undertaking high business mileage in the most polluting cars.

It is also fair to say however that many ECOS cars have similar CO2 emissions to the equivalent cars available as company cars.

The ECOS market, however, is ultimately limited by the tax efficiency of these schemes in comparison to the more traditional company car. If they are not tax efficient there is less incentive for employers to provide the option.

Many ECOS are designed to maximise the tax and NIC free AMAPs regime.

As a result there can be a built-in incentive for employees to drive more business miles than may be strictly necessary, to the detriment of the environment.

This is the very behaviour that the removal of the mileage thresholds in the CCT reforms in April 2002 sought to address.

AMAPs

The flat rate mileage payments (AMAPs) for owner drivers can be generous for those with older cars driving high business mileage but less so for drivers with newer cars with low business mileage.

The system is simple to operate and easy for employers and employees to understand, so the deregulatory nature has outweighed the
disadvantages.

The extent of this impact will clearly be influenced by the AMAP rates that are set.

The Government believes there is undoubtedly an advantage for some employees in joining an ECOS but putting a value on this is difficult because of the variation.

Given the interaction between CCT/AMAPs and ECOS it is difficult to assess whether the ECOS market is shrinking, growing or static.
An announcement was therefore made in the Pre-Budget Report 2007 not to impose a new tax specifically on ECOS, but the Government will monitor growth in this sector and how it impacts on other changes in the taxation of business cars.

The overwhelming response from correspondents to the review into AMAPs was that the current system is simple to understand and easy to administer.

Many thought that the threshold was too high, but few comments were received on the rates themselves although there was an
understanding that the rates have to cater for a wide variety of drivers. 

There is a mismatch between the tax and NICs treatment of AMAPs as NIC does not have a threshold at 10,000 miles.

This is exploited by some to maximise the use of AMAPs paid to drivers of ECOS or those funded by cash allowances.

There is also a discrepancy in the treatment of private fuel for company car drivers and owner-drivers.

Legislation provides for a company car fuel benefit charge based on the CO2 emissions of the car and a fuel “multiplier”.

The provision of private fuel for those driving their own cars however reverts back to the general rule that tax and NICs are due on an amount
equivalent to the cost to the employer of providing the fuel.

The increasing price of fuel however makes the provision of free fuel an expensive option for the employer and therefore we would expect this benefit to decrease in future years.

In light of the findings of this review, the Government decided at Pre-Budget Report 2007:
• that a new tax on ECOS would not introduced at this time, but that HMRC keep a watching brief on how the market develops;
• that the structure of AMAPs should not at this time be revised to reflect CO2 emissions as employers are happy with the current system and like its simplicity. In Budget 2008 the Government announced that the current rates and threshold
would be maintained, but the mismatch in the treatment of tax and National Insurance will continue to be monitored, in light of the outcome of the payrolling consultation12; and
• for the future the Government will consider ways of simplifying CCT to ease the
burden of administration for employers.

To read the full report click here.