Spring Statement 2018: Changes to vehicle-related taxes
By Mark Salisbury
Tuesday, March 13, 2018 - 17:11
Chancellor of the Exchequer Philip Hammond’s first Spring Statement today (Tuesday, March 13) was an update on the health of the UK economy and the state of the government’s finances, rather than laying out any major new tax or spending announcements.
However, Mr Hammond did mention towards the end of the Statement that he would “help the great British white van driver go green” by holding a consultation on reduced Vehicle Excise Duty rates for the “cleanest vans”. However, the consultation document was not among those published immediately by HM Treasury at the conclusion of the Statement.
Mr Hammond, in a 26-minute statement to MPs in the House of Commons gave an update on the overall health of the economy and the Office for Budget Responsibility (OBR) forecasts; an update on progress since last November’s Budget; and invited businesses and the public to give their views on a wide range of measures the government was considering.
Mr Hammond said:
- The economy had grown for five consecutive years, and exceeded expectations in 2017 with the OBR forecasting growth of 1.5% in 2018 – 0.1% higher than forecast – following by 1.3% in both 2019 and 2020
- The unemployment rate was at a 40-year low
- Borrowing had fallen by three-quarters since 2010 and debt would start falling as a share of GDP next year.
The Statement means that new policy announcements and tax and spending measures will be held back to the Budget in the autumn.
However, a number of previously announced key tax-related measures will be introduced next month (April) that impact on fleets and company car drivers. They are highlighted below.
Company car benefit-in-kind tax and diesel supplement increases
April 6, the start of the 2018/19 tax year, signals a two percentage point rise in company car benefit-in-kind tax for models with carbon dioxide (CO2) emissions above 75g/km – rates for cars with emissions of 0-50g/km increase by four percentage points and those with emissions of 51-75g/km by three percentage points (see table below). It means, for example, that an employee driving a 120g/km petrol engined model will see their tax bill increase from 23% of the P11D value in 2017/18 to 25% in 2018/19.
What’s more, the current company car benefit-in-kind tax diesel supplement will increase from 3% to 4% at the same. As a result, employees driving diesel cars will experience a three percentage point tax hike. The supplement increase is estimated by the government to impact on 800,000 employees and is being applied to all diesel cars that are not certified to the Real Driving Emissions 2 standard; there are none currently available.
When HM Treasury announced the supplement increase in last November’s Budget it forecast that drivers of a BMW 3 Series (CO2 emissions 111-130g/km) would see tax bills rise in 2018/19 by £60 (basic rate taxpayer) and £120 (higher rate taxpayer), drivers of a BMW 6 Series (CO2 emissions 131-150g/km) by £125/250 and drivers of a Ford Focus (CO2 emissions 91-100g/km) by £43/£86.
Company car tax 2017/18 to 2020/21
|% of P11D||2017/18||2018/19||2019/20||2020/21|
|Price||CO2 (g/km)||CO2 (g/km)||CO2 (g/km)||CO2 (g/km)/electric mileage range|
|2||N/A||N/A||N/A||0-50 (zero emission or 130 miles+)|
|5||N/A||N/A||N/A||1-50 (70-129 miles)|
|8||N/A||N/A||N/A||1-50 (40-69 miles)|
|12||N/A||N/A||N/A||1-50 (30-39 miles)|
|14||N/A||N/A||N/A||1-50 (under 30 miles)|
- From April 6, 2018 for each tax year add 4% for diesel cars up to a maximum of 37%. Cars that meet the Real Driving Emissions Step 2 (RDE2) standard are exempt.
Scottish company car drivers hit by higher increase as new income tax rates bite
Company car drivers resident in Scotland face larger increases in benefit-in-kind tax rates than those in the rest of the UK from April 6 as they are also hit by a rise in income tax.
The new income tax rates for Scotland compared with the rest of the UK add a further layer of administrations for businesses.
The Scottish Parliament is introducing significant changes to the structure of income tax. There will be a five-band regime, which contrasts with the three-band structure applicable in England, Northern Ireland and Wales.
In Scotland, the basic rate band is effectively being split into three – starter, basic and intermediate – to which is added the higher rate band and the top rate band. Applicable income tax rates are: 19%, 20%, 21%, 41% and 46%. It means that middle income – those earning £24,001 and above – and top earners face a 1% rise in income tax versus employees in the rest of the UK. Income tax rates for the remainder of the UK are: 20%, 40% and 45% depending on earnings.
As a result of the income tax increase, a majority of company car tax drivers’ resident in Scotland will face larger increases in benefit-in-kind tax than their counterparts in the rest of the UK as an employee’s tax rate is used in the calculation. Consequently, only a small number of company car driving employees on lower salaries are expected to escape the double hit of a benefit-in-kind tax rise and an income tax hike.
Employees to face demands in 2018/19 for unpaid tax as Optional Remuneration Arrangements (OpRA) impact
Thousands of employees with a company car or cash allowance option are expected to face a demand for unpaid tax in 2018/19 as Optional Remuneration Arrangements (OpRA) begin to bite.
The new rules came into effect on April 6, 2017 and apply to car salary sacrifice schemes and car or cash allowance programmes. Essentially the new rules mean employees opting for a salary sacrifice arrangement or taking a company car in lieu of a cash alternative will pay tax on the “greater of” the existing company car benefit value and the salary sacrificed or cash allowance given up.
When the government published details of the new rules following the initial announcement in the 2016 Autumn Statement it said that car arrangements in place before April 6, 2017 would be protected until the earlier of April 2021 or “a variation, renewal, modification of the arrangements” was introduced. Additionally, ultra-low emission vehicles (ULEVs) – currently those with CO2 emissions of 75g/km or less – are exempt from the regulation.
However, due to the rapid introduction of the new rules, HM Revenue and Customs (HMRC) had no official mechanism in place to report a higher salary sacrifice/cash allowance in 2017/18. Additionally, many company payroll departments were not set up to handle the impact of OpRA rules on tax. As a result, detailed information will not be reported until P11D submissions are made by employers in July.
Consequently, it is widely believed that in many cases only employees who entered into a company car arrangement for the first time or exited a scheme for the final time in 2017/18 will have had their tax arrangements correctly reconciled.
Therefore, many tax experts believe employees can expect to have their tax codes changed in August, following submission of their P11D, to take account of any unpaid tax under OpRA rules.
Employment tax expert Alastair Kendrick, of Ak Employment Tax Services, said: “Employees have, I believe, been left in the dark. It is a terrible piece of communication because many employees have been unaware of the “greater of” rule where they had a cash or car option. Many employees will have chosen a tax efficient car, but they will actually pay tax on the value of the higher optional cash allowance. They have been paying tax on a company car, but the wrong amount and will get a shock when they are told what the correct amount should be.
“As a result, when employees realise the impact of OpRA rules they have been asking for their contracts to be changed to remove the cash option, but they will potentially face a bill in 2018/19 for unpaid tax relating to 2017/18.”
He added: “Most employees will not have a contract of employment that is ring-fenced until 2021 so the exemption rules may not apply and protection against OpRA could be removed at that point. Contracts of employment are generally reviewed annually, so OpRA could bite and that is what many employers and employees have failed to appreciate.”
Furthermore, there is an anticipation that depending how HMRC interprets “a variation, renewal, modification of the arrangements” could result in employment lawyers contesting demands on employees for underpaid tax.
- See HMRC 480 (2018) ‘Expenses and benefits: A tax guide’ at https://www.gov.uk/government/
Vehicle Excise Duty rates increases
The government is from April 1 introducing a new Vehicle Excise Duty supplement on all new diesel cars first registered from that date.
It means that the First Year Rate of Vehicle Excise Duty will be calculated as if cars were in the band above. For example, a Ford Focus diesel (CO2 emissions 91-100g/km) will be subject to an additional £20 in the First Year, a Volkswagen Golf (CO2 emissions 111-130g/km) an additional £40, a Vauxhall Mokka (CO2 emissions 131-150g/km) £310 and a Land Rover Discovery (CO2 emissions 171-190g/km) £410, according to government figures.
As with the company car benefit-in-kind tax diesel supplement, the change will not apply to the next-generation of clean diesel engines – those with Real Driving Emissions Step 2 standard certification.
From April 1, Vehicle Excise Duty rates for cars, vans and motorcycles registered before April 2017 and the First Year Rates for cars registered after April 2017 increase in line with the Retail Price Index.
VED for cars first registered on or after April 1, 2018
|Emissions (g/km) of CO2||First year rate||Standard rate*||First Year rate diesel cars|
*Cars with a list price above £40,000 pay a £310 supplement for five years. After the five-year period the vehicle will be taxed at the applicable standard rate.
NB: Alternative fuel discount 2018/19 £10 for all cars, applicable to first year rate and standard rate.
Car and van fuel benefit charges and van benefit charge
The annual increase in car and van fuel benefit charges and the van benefit tax charge means that in 2018/19 the rates are:
- Car fuel benefit charge: £23,400 (2017/18: £22,600)
- Van benefit-in-kind tax charge: £3,350 (2017/18: £3,230)
- Van fuel benefit charge: £633 (£610)
The tax charge for zero-emission vans increases to 40% from 20% of the main rate in 2018/19.
Capital allowances and the lease rental restriction
CO2 emission thresholds for capital allowances on cars bought outright by companies will tighten from April 1. The new rates are:
- Vehicles up to 50g/km (reduced from 75g/km): Companies can write down the full cost against their taxable profits
- Vehicles emitting 51-110g/km (reduced from 130g/km): Companies can write down 18% of the cost of the car against their taxable profits each year, on a reducing balance basis
- Vehicle above 110g/km: Companies can write down 8% of the cost of the car against their taxable profits each year, on a reducing balance basis
The 100% First Year Allowance threshold is reduced to 50g/km from 75g/km.
It follow that leasing companies, which are ineligible to claim 100% first year writing down allowances on cars, will be restricted to 18% (0-110g/km) and 8% (from 111g/km) on a reducing balance basis.
The CO2 threshold for the 15% lease rental restriction is linked to the threshold for capital allowances for business cars, so the rate will be reduced from 130g/km to 110g/km from April 2018. It means that companies that lease can only deduct 85% of any rental payments against their taxable profits on cars with emissions above the threshold.
Key fleet-related tax issues the Chancellor did not resolve in the Spring Statement
The fleet industry has been anxiously waiting for clarity on a number of issues and hoping that the Chancellor would change existing policy on other matters. However, the Spring Statement did not answer those questions.
As a result, fleet decision-makers and company car drivers:
- Remain perplexed as to why company car benefit-in-kind tax on cars with emissions of 0-50g/km of CO2 will rise from 9% in 2017/18 to 13% in 2018/19 and 16% in 2019/20, before reducing to 2% (depending on electric mileage range) in 2020/21. As the government continues to call on businesses to include plug-in vehicles on their fleets, businesses have called for the tax hikes to be reversed immediately and not delayed until April 2020 to encourage demand. The British Vehicle Rental and Leasing Association (BVRLA) said in a letter to Mr Hammond ahead of the Spring Statement that the “current tax rate was putting the brakes on new electric vehicle registrations from company car drivers, who are postponing the jump to electric until the tax regime offers an incentive”.
- Are still in the dark about company car benefit-in-kind tax thresholds beyond 2020/21. Many fleets operate on four-year vehicle replacement cycles and the government has previously published tax rates for five years to enable future acquisition decisions to be made in the full knowledge of the taxation framework. However, fleet decision-makers and company are drivers are currently having to make decisions in the dark as tax rates post 2020/21 are unknown. The picture is further complicated by the fact that the government announced in the November 2017 Budget that from April 2020, company car benefit-in-kind tax – and Vehicle Excise Duty – would be derived from CO2 figures produced under the newly introduced Worldwide harmonised Light vehicle Test Procedure (WLTP). Industry experts have suggested that on a car-by car basis CO2 emissions could increase by 20% when compared with those obtained under the previous New European Driving Cycle (NEDC) regime. However, whether or not tax rates will be recalibrated as a result to avoid potentially significant benefit-in-kind increases is unknown. The BVRLA called for company car benefit-in-kind tax beyond 2020/21 and said in its letter: “Many people are abandoning their company car and making their own arrangements due to uncertainty over what their tax bill will be in the future.”
- Continue to wait to see if the taxation of benefits-in-kind and employee expenses, including mileage reimbursement payments, will change as a result of a government investigation. A year ago (March 2017), the government called for evidence as to how the tax system could be made fairer and more coherent as it currently treated different forms of benefits-in-kind and employee expenses inconsistently. However, it has yet to publish its findings or recommendations.