Green Tax - How Much Can You Save?
A Green Tax Special Report
By Richard Teather
‘Green’ measures have been heavily promoted in recent Budget statements and Finance Acts. In some cases, this has resulted in tax increases — for example, the muchcriticised doubling of Air Passenger Duty this year.
It’s not all bad news, however, as some green measures offer opportunities to save tax. In this article, we shall look at how much tax can be saved if a business chooses to buy a company car with a low CO2 emission rating, instead of a comparable highemission car.
We must emphasise at the outset that we are not looking at whether to purchase a company car rather than, for example, helping an employee to run his or her own car, which is a different question. (The result of our comparison is, however, an increasingly important factor in answering that question.) Here, we simply assume that it has been decided to purchase (or hire) a company car, make it available for an employee’s private use, and also to provide fuel for private use. The article does not, therefore, consider the position where a sole trader or partnership buys a car for the proprietor’s or a partner’s use.
We will compare two almost identically-priced mid-range hatchbacks:
- the Audi A3 Sport 1.6 102 PS Tiptronic (list price £18,727)
and - the BMW 1 Series 118d (list price £18,820).
The petrol-engined Audi’s CO2 emission rating is 183g/km, but the diesel BMW has a very low rating, 119g/km.
We will look at the following taxation aspects:
- capital allowances
- relief for hire charges
- benefit in kind charges
- VAT fuel scale charges, and
- Vehicle Excise Duty (VED, or road tax)
Green tax: Capital allowances
The first tax consequence of buying (or hiring) a company car is that tax relief is available on the cost. Where a car is purchased, this relief is given by way of capital allowances. As most readers will be aware, an annual 25% writing down allowance (WDA) is currently given, and for cars this is normally on a maximum cost of £12,000. The WDA for our Audi in the first tax year is therefore £3,000 (£12,000 x 25%). (From April 2008, the WDA rate will be reduced from 25% to 20%.)
Our low-emission BMW, however, enjoys two significant advantages:
- a 100% first year allowance (FYA) is available, and
- the FYA is available on the full cost (£18,820)
The FYA of £18,820 that is available to the business for the BMW is therefore over six times greater than the £3,000 WDA for the Audi.
Of course, this is just (to use a motoring term!) an acceleration of the tax relief that would ultimately be due in either case, as a balancing allowance based on the full cost would become due on the eventual disposal of the Audi. Nonetheless, the additional relief of £15,820 in year 1 is very substantial, and over a typical three-year ownership period, the business would enjoy the benefit for some considerable time.
Let’s calculate the potential actual benefit of the additional £15,820 relief in year 1:
Where the car is provided to an employee by:
| Type of business | Sole trader/partnership | Company | ||
| Tax rate (07/8) | 22% | 40% | 20% | 30% |
| Class 4 NIC rate | 8% | 1% | - | - |
| £ | £ | £ | £ | |
| Tax saving | 3,480 | 6,328 | 3,164 | 4,746 |
| NIC saving | 1,266 | 158 | ||
| Total saving | £4,746 | £6,486 | £3,164 | £4,746 |
Having considered this one-off benefit, we will now look at the outright annual tax savings which can be made.
Green tax: Relief for hire charges
When a business hires a car, a revenue deduction is available, but this is normally restricted for cars with a retail price of over £12,000 when new. There is, however, no restriction for low-emission cars. In addition, if the car is available for an employee’s private use, only 50% of the VAT input tax is recoverable.
Based on current contract hire quotes, the calculations are as follows:
| Audi | BMW | |
| £ | £ | |
| Initial payment (including 50% of VAT) | 811 | 921 |
| 36 monthly payments (including 50% of VAT) | 9,742 | 11,060 |
| Total cost over three years | £10,553 | £11,981 |
We can now calculate how much tax relief is available over three years in each case:
Audi
| Type of business | Sole trader/partnership | Company | ||
| Tax rate (07/8) | 22%/20% | 40% | 20%-22% | 30%/28% |
| Class 4 NIC rate | 8% | 1% | - | - |
| £ | £ | £ | £ | |
| Tax saving - initial payment | 146 | 266 | 133 | 200 |
| Tax saving - monthly payment | 1,771* | 3,197 | 1,704** | 2,265*** |
| NIC saving | 844 | 106 | ||
| Total saving | £2,761 | £3,569 | £1,837 | £2,465 |
BMW
| Type of business | Sole trader/partnership | Company | ||
| Tax rate (07/8) | 22%/20% | 40% | 20%-22% | 30%/28% |
| Class 4 NIC rate | 8% | 1% | - | - |
| £ | £ | £ | £ | |
| Tax saving - initial payment | 203 | 368 | 184 | 276 |
| Tax saving - monthly payment | 2,249* | 4,424 | 2,360** | 3,134*** |
| NIC saving | 958 | 120 | ||
| Total saving | £3,410 | £4,912 | £2,544 | £3,410 |
Note that tax rates are proposed to change from April 2008:
*Six months at 22% and 30 months at 20%.
**Six months at 20%, 12 months at 21% and 18 months at 22%.
***Six months at 30% and 30 months at 28%.
The unrestricted tax relief for the BMW ranges from £2,544 to £4,912, depending on the type of business, as compared with £1,837 to £3,569 for the Audi, a difference of up to £1,343 in favour of the BMW.
Green tax: Benefit in kind charges
Benefit in kind charges involve both income tax and employer’s NIC, and therefore affect both employers and employees. The car benefit in kind scale charge is a relatively early ‘green tax’, having been based on CO2 emission ratings since 2002. The annual benefit is found by applying an emissions-based percentage to the list price. Benefit in kind charges for our cars over a typical three year ownership period are calculated as follows:
| Audi | BMW | |
| £ | £ | |
| 2007/08 - Six months (Audi 23%; BMW 18%) | 2,154 | 1,694 |
| 2008/09 (Audi 24%; BMW 13%) | 4,494 | 2,447 |
| 2009/10 (Assumed: Audi 24%; BMW 13%) | 4,494 | 2,447 |
| 2010/11 - Six months (Assumed: Audi 24%; BMW 13%) | 2,247 | 1,223 |
| Total charged over three years | £13,389 | £7,811 |
So, for a car bought now, the total difference in the car scale charge over this period would be £5,578.
The second annual benefit in kind charge is that in respect of fuel provided for private use. Since 2003/04, this has also been based on CO2 emission ratings, with the same emissions-related percentage as for the car benefit being applied to a fixed amount (£14,400 for 2007/08; £16,900 for 2008/09 onwards).
The charges over three years are calculated as follows:
| Audi | BMW | |
| £ | £ | |
| 2007/08 - Six months (Audi 23%; BMW 18%) | 1,656 | 1,296 |
| 2008/09 (Audi 24%; BMW 13%) | 4,056 | 2,197 |
| 2009/10 (Assumed: Audi 24%; BMW 13%) | 4,056 | 2,197 |
| 2010/11 - Six months (Assumed: Audi 24%; BMW 13%) | 2,028 | 1,098 |
| Total charged over three years | £11,796 | £6,788 |
The difference over the period would therefore be £5,008.
So the combined three-year difference for the car and fuel benefit charges amounts to £10,586 (£5,578 + £5,008). This translates into the following potential tax and national insurance savings:
Employee
| Tax band | 22%/20% | 40% |
| £ | £ | |
| Tax saving - Six months @ 22% | 180 | |
| Tax saving - 30 months @ 20% | 1,953 | |
| 4,234 | ||
| Total saving | £2,133 | £4,234 |
Employer
| Type of business | Sole trader/partnership | Company | ||
| Tax rate (07/8) | 22%/20% | 40% | 20%-22% | 30%/28% |
| Class 4 NIC rate | 12.8% | 12.8% | 12.8% | 12.8% |
| £ | £ | £ | £ | |
| NIC saving | 1,355 | 1,355 | 1,355 | 1,355 |
| Less tax relief | (276)* | (542) | (289)** | (384)*** |
| Net saving | £1,079 | £813 | £1,066 | £971 |
Note that tax rates are proposed to change from April 2008:
*Six months at 22% and 30 months at 20%
**Six months at 20%, 12 months at 21% and 18 months at 22%
***Six months at 30% and 30 months at 28%
VAT fuel scale charge
Where fuel is provided for private use, the business must account for VAT on the value of the private fuel supplied, by way of a scale charge.
On 1 May 2007 this charge followed the benefit in kind charges and became CO2 emission-based. The charge varies slightly, depending on whether the business chooses to account for the VAT monthly, quarterly or annually. As most businesses use quarterly accounting, we will use the quarterly scale figures.
| Audi | BMW | |
| £ | £ | |
| Quarterly charge | £41.70 | £27.11 |
| Total charged over three years | £500 | £325 |
Over three years, there is therefore a modest saving of £175 for the BMW.
Vehicle excise duty costs
The road tax, or VED, has been based on CO2 emission ratings since 2001. Once again, this is a straightforward calculation: the Audi falls into Band E, giving an annual charge of £165, whilst the BMW falls into Band B, resulting in a very small annual charge of £35. At the current level, there is therefore an annual saving of £130 for the BMW — a total saving of £390 over three years.
It should be noted, however, that it is proposed to increase the charge for high-emission cars in the near future.
The net saving, taking tax relief into account, is as follows:
| Type of business | Sole trader/partnership | Company | ||
| Tax rate (07/8) | 22%/20% | 40% | 20%-22% | 30%/28% |
| Class 4 NIC rate | 8% | 1% | - | - |
| £ | £ | £ | £ | |
| VED saving | 390 | 390 | 390 | 390 |
| Less tax relief | (79)* | (156) | (83)** | (110)*** |
| Net saving | £311 | £234 | £307 | £280 |
Note that tax rates are proposed to change from April 2008:
*Six months at 22% and 30 months at 20%
**Six months at 20%, 12 months at 21% and 18 months at 22%
***Six months at 30% and 30 months at 28%
Summary
It can be seen that significant savings can be achieved simply by keeping an eye on CO2 emission ratings when choosing a car. The savings can be summarised as follows:
Using our examples, a one-off acceleration of capital allowances is available for the employer (if the car is purchased), resulting in an initial tax saving of between £3,164 and £6,486, depending on the type of business. Alternatively, if the car is hired, a tax saving of between £707 and £1,343 would result over three years.
The other outright savings over three years, once again depending on the type of business, are as follows:
| Employee | Employer | Total | ||||
| Min | Max | Min | Max | Min | Max | |
| £ | £ | £ | £ | £ | £ | |
| Benefit in kind | 2,133 | 4,234 | 813 | 1,079 | 2,946 | 5,313 |
| VAT fuel scale charge | 175 | 175 | 175 | 175 | ||
| VED | 234 | 311 | 234 | 311 | ||
| Total | £2,133 | £4,234 | £1,222 | £1,565 | £3,355 | £5,799 |
Conclusion
Our comparison was of two mid-priced cars, but savings can also be obtained for lower and higherpriced cars. Even greater savings can be achieved with hybrid, bi-fuel, electric or LPG-powered cars, which we have not considered in this article.
The number of company cars dropped significantly between 2001 and 2005, from about 1.6 million to about 1.2 million, owing to steep rises in benefit in kind charges. Many businesses chose to assist employees to buy and run their own cars, often through formal Employee Car Ownership Schemes (ECOS). These schemes have attracted government attention, and new rules may soon be introduced which would reduce or eliminate their tax advantages.
This would provide another incentive to choose low-emission cars in order to minimise tax costs. Initially there were only a few, small low-emission cars, but manufacturers have responded to the changed environmental and tax climate by providing a much wider choice. A low-emission company car may now be an attractive option for employees who do little or no business travelling, who were heavily penalised under the former scale charge that was based on annual business mileage.
This is a fast-moving area of tax, with various proposals at the forefront of all political party agendas. Things will get better (and worse) at the respective ends of the emissions rating scale, as current indications are that ‘gas guzzlers’ will be increasingly punished and low-emission cars increasingly rewarded. In particular, a one-off charge of up to £2,000 for high-emission cars has been mooted, perhaps by way of a special first year VED charge.
The current unrestricted 100% first year allowance for the cost of low-emission cars expires on 31 March 2008. A consultation exercise is underway in relation to the taxation of company cars generally, and the Government has stated that its preferred option is to preserve this allowance. Other proposals include a reduced rate of WDA for high-emission cars, and the abolition of the restriction of the revenue deduction for hired cars, except for high-emission cars.
For drivers who venture into central London, the congestion charge will also become CO2 emissionbased in 2009. Current proposals would result in a tripling of the charge (to £25 per day) for cars in the highest emission category with, once again, a reduction for those in the lowest. The proposed increases would be exacerbated by the abolition for cars with the highest emissions of the 90% discount which is currently enjoyed by those who live in the charge zone. From 2009 onwards, this will be a very significant additional factor for those affected. In time, other cities may impose congestion charges.
Road pricing is another hot topic, and if this is introduced, it would not be surprising if the trend towards emission-based charges was followed. Businesses should therefore choose company cars very carefully — and where employees are given a choice of car, they should be made aware that their tax bill will be directly related to the CO2 emission rating.
Richard Teather is the Editor of Finance Confidential
First published on November 3rd 2007
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