RSS feedsThe Budget finally saw an end to the ongoing discussion that has occurred over a number of years about the future of capital allowances on the company car and approved mileage allowance payments (AMAP) for those employees who use their own car on business travel.
While the changes on capital allowances are in line with those predicted, there had been considerable speculation that the AMAP rates would be reduced or linked to the CO2 emission of the vehicle concerned.
The proposals are significant for capital allowances although they do not come in to force until April 2009. It will be important for employers to carefully consider these in light of their car policy and decide whether that policy needs to be revised.
The proposals see an end to the expensive car leasing disallowance and, for owned vehicles, the need to not ‘pool’ any cars that have a value in excess of £12,000. The changes mean that there will be two pools going forward a pool for vehicles that have a CO2 emission below 160g/km and a second for cars with higher emissions.
Car pool
The amount of capital allowance relief will depend on the pool in which the vehicle is situated. For the sub-160g/km vehicles, employers will be able to claim a 20% writing-down allowance, while vehicles in the other pool will face a rate of writing-down allowance limited to 10%. There are special rules for cars with a CO2 emission of below 110g/km that permit a full 100% first-year allowance to be claimed.
The impact of these changes is that cars with high CO2 emissions will be taxed more heavily than they are under the current tax rules, and clearly that tax cost will make providing these cars more expensive.
There are also changes to the expensive car leasing disallowance, which means that tax relief given to employees who lease cars will find their relief will increase for some vehicles. In view of these changes, employers may need to consider whether they should revise the types of cars they permit employees to take within their car policy.
It is, however, difficult to imagine that there will be any significant success when it comes to encouraging senior management to opt for vehicles below the 160g/km point.
It is possible that many employees will vote with their feet and opt for the cash alternative. So it is important for employers to decide whether they are comfortable with this approach and to take time to ensure the cash alternative is set at a rate that does not increase costs to the business. Many employers have incorrectly calculated the level of the cash alternative and end up incurring expenses far higher than providing a company car.
The 100% first-year allowance is only available for low emission vehicles and it is likely that these will not be considered ‘fit for purpose’ for business travel, so it would be wrong to conclude that the answer would be to move all employees currently in a company car to one of these vehicles.
Miles better
The news on the approved mileage allowance payment, paid to those employees who use their own cars on business is to be welcomed. It ends the uncertainty and will please many employees who have no choice, but to use their own car on business travel.
It will also be welcomed by employers who had concerns that some of the proposals would have created significant additional administration.
Further suggestions that the alignment of the income tax and national
insurance treatment of these payments is to be the subject of consultation is
also welcome.
The Budget set out significant policy changes, which need careful consideration
by employers they decide how to react.
Tax road map
• From April 2008 the level of taxable benefit on cars with a CO2 emission below 120g/km is to be reduced to 10%. At present, few cars fall in to this category and the list price of these is also not always competitive, making the tax heavier than a similar car with a higher CO2 emission.
• Company car tax rates will be adjusted so that the 15% benefit charge will only be available to cars with lower CO2 emissions. At present if a car omits less than 140g/km of CO2, then the 15% charge applies. From 2010/11 the 15% charge will apply to vehicles below 135g/km.
• From April 2008 the level of fuel benefit charge will be increased with the multiplier increased from £14,400 to £16,900.
Alastair Kendrick is a partner at Bourne Business Consulting LLP
