In his budget statement for 2008 the Chancellor of the Exchequer (the Finance Minister) set out his strategy for taxation of company cars, with most of the changes announced coming into effect in April 2009. Not surprisingly, the changes are directed towards and emissions-based approach. The tax charge on company car and private fuel benefit for individuals and the VAT fuel scale charge, which are already based on Co2 emissions, will from April 2009 be joined by the treatment of capital allowances (tax depreciation) and certain changes to leasing arrangements for more expensive cars.

The changes are summarised below, but each situation is potentially different and readers should consult their own advisers before taking any decisions.

Tax depreciation - the amount of depreciation allowed for tax in the UK is known as capital allowances. Different rates of depreciation can be used for the financial accounts.

Tax depreciation is usually granted through the concept known as writing down allowances (WDA's) on a reducing balance basis, or in very limited cases 100% first year allowances, that is the full cost of the car can be set against tax in the year the car is purchased.

Tax depreciation on cars is set for a radical change. Already the WDA has been reduced from 25% to 20% with effect from April 2008. Further, from April 2009, the availability of tax depreciation will depend upon the emissions of the car, and cars will be divided into three groups as follows:-

• Low emission cars - currently these qualify for 100% tax depreciation in the first year. This scheme has been extended to run until March 2013, but the emissions needed to qualify has been reduced from 120g/km to 110g/km
• Cars with emissions between 110 - 160 g/km will qualify for a 20% reducing balance rate of tax depreciation and
• Cars with emissions over 160g/klm will have their tax depreciation rates reduced to 10% reducing balance

The current rules on tax depreciation for cars whose cost exceeded GBP 12,000, where the allowance is restricted to a maximum of GBP 3,000 per year will no longer apply.

Leased cars
There is currently an arrangement for restricting the company tax relief on leases for expensive cars. From April 2009, if a vehicles emissions are over 160g/km, 15% of the lease payment will not be allowed for calculating the company's taxes.

Vehicle excise duty
Vehicle excise duty is a circulation tax, and is usually paid annually on the anniversary of the first registration of the car. It is signified by a small round coloured sticker in the front windscreen. The rates of circulation tax are again targeted at higher emission vehicles. The rates are being changed again in 2009/10, and this time they will change retrospectively, and that means that the changes will apply to all cars that have been registered after 1st March 2001. In addition, from 2010/11, new cars with emissions greater than 160g/km will attract a further penalty, a new first year rate of circulation tax up to a top charge proposed of GBP 950. This compares with a current annual maximum circulation tax charge of GBP 400.

Company car tax and benefit to employee
When an employer provides an employee with a company car the value of the benefit for income tax for that year is based as a percentage of the new list price of the car, varying between 15% and 35% depending upon the emissions level of the car. That figure is then included in the employees taxable income.

Currently the lower threshold, which attracts the 15% minimum charge, is applied to cars with emission levels of 135g/km and below, but this will be reduced to 130g/km from 2010/11.

If a cars emissions figure (as stated in its registration document and published by the manufacturer) exceeds the lower emission threshold, the percentage of the cost taken is 15% plus one percentage point for each 5g/km by which the emissions exceed the lower threshold.This is subject to a maximum charge of 35%.

There is a slight variation for diesel powered cars which have a 3% supplement, but the maximum cannot exceed 35%.

Private fuel benefit
Where an employer also provides an employee with private fuel, the income tax benefit of the private fuel is also taxed.

The same percentage as has been used to calculate the company car benefit described above (that is a value between 15% and 35% depending on the cars emissions) is applied to a number calculated each year. For 2007/08 this number, known as the multiplier, was GBP 14,400, but for 2008/09 it is GBP 16,900.

It is worth noting that the actual cost of the fuel purchase for private use is irrelevant. The charge can only be avoided if the employee reimburses the employer for the full cost of all private fuel used.

Effect on employees tax
For example, a 2.0l Ford Mondeo Zetec has a list price of GBP 17,605 and has emissions of 189g/km, which is 54g/km above the lower threshold.

This means that 10% points is added to the 15% minimum charges, making the fuel benefit 25% of GBP 16,900. This means that GBP 4,225 is added to the employees income for tax purposes for the fuel benefit alone.

The company car tax benefit is 25% of GBP 17,605, that is GBP 4,401.

Summary
The situation can be quite complicated, and therefore I must emphasise that individual advice should be taken from a company's own professional advisers before making any decisions.

Copyright UK Business Club 2008
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