The current rules for taxing company cars will be replaced from 6 April 2002. As a result, there may be significant changes in the amount of tax payable by an employee.

The extent of the change will depend upon:

the type of car provided to an employee and

the number of business miles travelled.

We set out below the main areas of importance. Please do not hesitate to contact us if you require further information and whether changes should be made the type of car provided to an employee.

THE CURRENT RULES

The tax charge for an employee provided with a company car is currently based on a percentage of the list price of the car. The percentage is dependent upon the level of business mileage and the age of the car. The lowest percentage charge arises for someone doing high business mileage in an older car. The highest percentage charge applies to someone driving very few business miles in a newer car, the so-called 'perk' car.

The complete list of charges for the current tax year (2001/02) is set out below.

THE NEW REGIME

The new regime will continue to tax company cars by reference to the list price of the car but graduated according to the level of its carbon dioxide (CO2) emissions. The new regime is intended:

to encourage manufacturers to produce cars which are more environmentally friendly; and
 

to give company car drivers and their employers a tax incentive to choose more fuel-efficient vehicles.

The existing business mileage and age related discounts will be abolished. This is at least in part because the government believes that up to 300 million business miles may be driven unnecessarily each year in order to reach the mileage discount thresholds.

Percentage charges
As under the current regime, the percentage charge for the majority of cars will be between 15% and 35%. The new emissions table is set out below.

Examples
Jane was provided with a new company car, a Mercedes CLK 430, on 6 April 2000. The list price is £50,000. The CO₂ emissions are 281 grams per kilometre. Jane regularly drives 20,000 business miles each year.

Jane's benefit in kind in 2000/01 and 2001/02 will be £50,000 x 15% = £7,500

In 2002/03, the taxable benefit will be £50,000 x 35% = £17,500

Her taxable benefit has increased by 133%.

Phil, on the other hand, has a company car, a BMW 318i, which had a list price of £21,000 when it was provided new on 6 April 2000. Phil does fewer than 1,000 business miles each year. The CO₂ emissions are 188 grams per kilometre.

Phil's benefit in kind in 2000/01 and 2001/02 will be £21,000 x 35% = £7,350

In 2002/03, the taxable benefit will be: £21,000 x 19%* = £3,990
* rising to 21% in 2003/04 and 23% in 2004/05.

Note: The CO₂ emissions are rounded down to the nearest 5 grams per kilometre - in this case 185

Diesels
Diesel cars emit less CO2 than petrol cars and so would be taxed on a lower percentage of the list price than an equivalent petrol car. However, diesel cars emit greater quantities of air pollutants than petrol cars and therefore a supplement of 3% of the list price applies to diesel cars. For example, a diesel car that would give rise to a 22% charge on the basis of its CO2 emissions will instead be charged at 25%. The maximum charge for diesel is capped at 35%.

The 3% supplement will be waived if the car achieves the clean level of Euro IV standard emissions.

Obtaining emissions data
The Vehicle Certification Agency produces a free guide to the fuel consumption and emissions figures of all new cars. It is available on the internet at These figures are not however necessarily the definitive figures for a particular car:

For all cars first registered from 1 March 2001 onwards, the definitive CO2 emissions figure is recorded on the Vehicle Registration Document (V5).
 

For cars first registered between 1 January 1998 and 28 February 2001, the definitive figure is found by going to . This is a service provided by the Society of Motor Manufacturers and Traders (SMMT).

Factors that won't change

The list price of a car will still be the price when it was first registered including delivery, VAT and any accessories provided with the car or subsequently made available (unless they have a list price of less than £100).


The list price will continue to be restricted to an upper limit of £80,000.


Employee capital contributions up to £5,000 reduce the list price.


The benefit will continue to be proportionately reduced if the car is unavailable for part of the year.

THE EXCEPTIONS

 As with all changes to tax rules there are exceptions to the general rules.

Cars first registered before 1 January 1998
There is no reliable source of CO2 emissions data for cars registered before 1 January 1998. Such cars will be taxed from 6 April 2002 according to their engine size.

Imports
Some cars registered after 1 January 1998 may have no approved CO2 emissions figure, perhaps if they were imported from outside the EC. They too will be taxed according to engine size.

EMPLOYEES USE OF OWN CAR

A new statutory system of tax and NIC free mileage rates for business journeys in employees' own vehicles will be introduced from 6 April 2002. The current system of authorised mileage rates geared to the car's engine size is being replaced by a single rate for all cars and vans.

The statutory rates for 2002/03 will be:

Employers can pay up to the statutory amount without generating a tax or NIC charge.

Payments made by employers under the new regime are referred to as 'mileage allowance payments'.

Where employers pay less than the statutory rate (or make no payment at all) employees can claim tax relief on the difference between any payment received and the statutory rate.

HOW CAN WE HELP

There will be winners and losers under the new regime. In general, the winners will be those with relatively modest cars driving few business miles, while the losers will be those driving at least 18,000 business miles a year in high specification models.

For individuals in this latter category, it may be time to revisit the issue of the tax-efficiency of continuing with the company car beyond 5 April 2002.

Please contact us for more detailed advice on the effects of the new regime.

For information of users: 
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.