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2 June 2004

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Government blitz on company cars puts directors in a spin


Government proposals to impose a ‘pollution tax’ on company car drivers will increase the red tape burden on business and lead to increased operating costs, say company directors in Cambridgeshire.

Starting from next April, company cars will be taxed on a sliding scale of between 15 per cent and 35 per cent of their list price, based on the level of each car’s carbon dioxide (CO2) emissions. Unlike the present system, there will be no discount for high mileage drivers or for older cars.

Research carried out by the Institute of Directors and accountancy firm HLB Kidsons reveals that companies are now reviewing their company car policies, with one in five expecting to reduce the size of their fleets - often with employees being offered cash or other alternatives.

Stephanie Smye, chairman of the Eastern Branch of the IoD, commented: “For many small and medium size companies the new tax regime will mean extra red tape by imposing a further administrative burden when it comes to calculating benefit in kind contributions.

“In addition, a company with 20 fleet cars could be faced with an extra bill of £20,000, placing a penalty on the people who rely on cars for their business operations.

“These proposals may curtail the use of perk cars, reduce the size of company car fleets and encourage people to consider cars with smaller engines. However, this research reveals that 70 per cent of company cars are considered essential for business use and not just perks.

“Companies that wish to leave their key people in a breakeven situation or better will have to compensate high mileage drivers either with extra pay or benefits. Another option will be to allocate extra funding to maintain their current car fleet.”

Currently, 66 per cent of company cars fall into the middle range between 1.4 and 2.0 litre engine capacity with 29 per cent over 2.0 litre. On average 28 per cent are described as perk cars and one in ten are used for fewer than 2,500 business miles annually. Just over a third travel more than 18,000 business miles in a year, so the abolition of the tax discount on business mileage could have a significant impact on tax charges.

Changes in the car ‘benefit in kind’ tax will have a big impact, according to 56 per cent of respondents, while 60 per cent said their policy on providing fuel for personal uses would change or be reviewed.

Among companies expecting to make changes, 62 per cent said they would consider changes to the composition of their fleets over the next five years and 50 per cent said they would consider offering cash alternatives to cars. The proportion of companies that offer a company car is expected to fall from 93 per cent to 79 per cent over the next three years and the average number of employees with a company car, currently at 30 per cent, is expected to fall to 22 per cent over the same period.

Correspondingly, the proportion of firms offering employees a car allowance is expected to rise from 27 per cent to 43 per cent. Alternative methods of providing compensation for the loss of a company car include pensions and share options.

Half of the respondents said they have no intention of introducing environmentally-friendly cars that run on electricity or a combination of petrol and gas or electricity, primarily because of the cost or impractability for high mileage business users.

When asked for suggestions on cutting CO2 pollution, respondents suggested improving public transport, developing new sources of fuel and restricting unnecessary trips such as school runs.

August 2001

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