The emergence of diesel hybrids from Peugeot, Citroën and Volvo are calling into question the validity of the 3% benefit-in-kind supplement.

The pollution-related penalty looks out of touch when applied to new models, such as the Peugeot 3008 Hybrid4, and a leading tax expert believes it should not be applied.
Jeff Whitcombe, director at BCF Wessex, said: “According to HMRC the 3% supplement must be applied to all diesel cars, subject to the overall cap of 35%. However, is HMRC’s interpretation correct?”

Whitcombe points to primary legislation, which says the appropriate percentage is derived from Section 139 Income Tax (Earnings & Pensions) Act (ITEPA) 2003. However, this is subject to the provisions of Section 141 ITEPA – diesel cars – and regulations set down by the Treasury under Section 170 (4) ITEPA – power to reduce the appropriate percentage.

“In accordance with Section 141 (5) ITEPA, diesel cars are subject to the 3% supplement, but this section applies only to a car which is ‘propelled solely by diesel’,” explained Whitcombe.

Meanwhile, secondary legislation set down by Statutory Instrument (SI) 2001/1123, Income Tax (Car Benefits) (Reduction of value of appropriate percentage) Regulations 2001, was issued by the Treasury in accordance with Section 170 (4) ITEPA.

Whitcombe said: “Discounts were applied by SI 2001/1123 because this is the legislation via which the appropriate percentage for alternatively-powered cars has been historically reduced.

“For example, until April 5, 2011, the appropriate percentage for a hybrid car was reduced by 3% and, to aid annual reporting, eight codes were issued for use when notifying HMRC of the type of fuel used to power a car.”

This secondary legislation effectively described a hybrid car as ‘capable of being propelled by electricity and petrol’.

“Notwithstanding the exemption set out at Section 141 (5) ITEPA, HMRC clearly stated in the Employment Income Manual (EIM) that when determining whether a discount should be applied, a diesel hybrid should not qualify as a type H car ‘because it is not capable of being propelled by petrol and electricity’,” explained Whitcombe.

“However, SI 2001/1123 was revoked with effect from April 6, 2011, and for reporting purposes for 2011/12 onwards the eight types of car were reduced to three.

“Type E continued unchanged; new type D includes former types D and L; and new type A includes former types P, H, B, C and G.

“So for 2011/12 onwards, how should we treat a diesel hybrid car?”

The EIM states that, for 2011/12 onwards, all diesels should be merged into type D and the appropriate percentage should be supplemented by 3%, subject to the cap of 35%. It adds type H cars – petrol/electric cars – should be merged into new type A, with no reduction in the appropriate percentage.

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