Call for overhaul of company car tax bands

New company car tax bands, based on how many miles a vehicle can be driven in pure electric mode, alongside its CO2 rating, could be introduced for the cleanest vehicles from 2020.

The changes would mean pure electric vehicles (EVs) such as the Nissan Leaf and Tesla Model S would be taxed less than plug-in hybrids such as the Toyota Prius and Mitsubishi Outlander. 

HM Revenue and Customs (HMRC) says it wants to continue incentivising ultra-low emission vehicles (ULEVs) through the company car tax regime. However it has admitted in a consultation report, launched last week, that the current rules aren’t fit for purpose. 

It said the development of new ultra-low emission technologies was “starting to place pressure on the current banding structure”, and some conventionally powered engines were also achieving emissions below 75g/km – the current ULEV threshold. 

In an effort to make sure only the cleanest cars remain attractive, HMRC is proposing new company car tax bands, with 50g/km the new threshold for ULEVs.

Alastair Kendrick, tax director at MacIntyre Hudson, acknowledged the need to revise company car tax to reflect the changes which have occurred in the company car parc, but he told Fleet News: “We have no assurances that HMRC is not seeing this as a fund raising exercise. 

“Given the growing popularity of ultra-low emission
vehicles with fleets, it is lowering the tax take on the company car population. It must not use these changes to increase the taxable benefit on these vehicles.”

Company car tax currently divides ULEVs into two emission categories: 0-50g/km (predominantly battery electric and plug-in range extender hybrid vehicles); and 51-75g/km (such as heavier hybrid vehicles). 

The overall CO2 emissions value issued for ULEVs takes into consideration both their capacity for zero emission miles and the level of CO2 produced when the car is running solely on a conventional combustion engine. 

However, with vehicles having vastly different zero emission miles capabilities, HMRC says this may not be reflected fully in the CO2 value alone. “The UK’s top six selling ULEVs in 2015 had zero emission ranges varying from 15 to 340 miles, but were classified into only two ULEV company car tax bands, with cars capable of 340 and 32 zero emission miles currently in the same band,” says the report. “An alternative approach to differentiate between ULEVs for the purposes of company car tax would be to base ULEV bands on how many zero emission miles a vehicle can offer as well as CO2 emissions.”

It suggests the 0-50g/km band could be further divided into five bands: less than 20 zero emission miles; 20-39; 40-69; 70-129; and 130-plus zero emission miles.

The Vehicle Certification Agency, the UK regulator, has a database of the zero emission miles capability of all vehicles, which would make it readily available for comparative purposes. And, it would make HMRC’s approach to company car tax consistent with the framework for the Government’s plug-in car grant scheme.

The tax office said it would also provide “a clear incentive for manufacturers to move beyond vehicles with reduced CO2 emissions but limited electric mile range, which risk being driven in combustion engine mode most of the time”.

Gerry Keaney, chief executive of the British Vehicle Rental and Leasing Association (BVRLA), said: “The Government is right to explore whether zero-emission range could be used alongside CO2 emissions to produce a more effective set of company car tax bands, but it needs to ensure that any new system does not become too complicated.” 

The consultation says it could be structured by creating a large number of narrow bands, which taper gently between 0-75g/km, or by employing a smaller number of wider emission bands, similar to the current ULEV bands, thereby creating “cliff edges”.

However, wider bands give no fiscal incentive to choose a car at the cleanest end of the band and less of an incentive for manufacturers of cars, which are not close to a band boundary, to improve environmental performance.

In addition, two types of car falling on either side of a 12-band boundary might be close in environmental performance but attract very different company car tax rates, which “could be perceived to be unfair”, according to HMRC.

The details were included in the consultation on company car tax, which was launched alongside two other consultations proposing changes to fleet-related taxes. 

HMRC is reviewing tax rules for plant and machinery, including cars and vans, to accommodate new lease accounting standards and limiting the tax benefits of some salary sacrifice arrangements, including cars.

The Government announced in Budget 2016 that it would consult on refining the bands for ULEVs, but it would continue to use CO2 emissions to determine company car tax rates (fleetnews.co.uk: March 16).

Colin Tourick, professor of automotive management at the University of Buckingham business school, said: “The review gives the Government a golden opportunity to straighten out one of the giant failings of the current company car tax regime; the fact that it encourages company car drivers to focus on carbon dioxide emissions, but totally ignores the damage caused by nitrogen emissions. 

“While saving the planet is a noble aspiration, you would have thought that saving the lives of the thousands of people killed every year in the UK by NOx emissions should be a priority too.”

Tourick wants to see a hybrid system of taxation that encourages drivers to choose cars that are low in both CO2 and NOx emissions. “This would see a move away from diesels, which can only be a good thing,” he said.

The Government says it will consider all responses to the consultation, which runs until October, before publishing new bands in the autumn, ahead of setting new company car tax rates from 2020-21 onwards in Budget 2017.