A One Year Tax Break for Zero Emission Company Cars
The UK government recently announced its intention to exempt newly registered zero-emission company cars from a benefit in kind tax charge for one year from April 2020. This exemption underlines the key role that the company car has to play in helping the government achieve its zero emissions ambitions.
The move is also intended to ensure that company car tax rates are not hiked as a result of the introduction of the Worldwide Harmonised Light Vehicles Test Procedure (WLTP).
WLTP – What’s It All About?
Effective April 2020, WLTP will introduce a new CO2 emission-linked benefit in kind calculator to be applied to all new cars. It has been developed using real driving data gathered from around the world.
The aim is to introduce a universal global test cycle across different world regions. In this way, pollutants, CO2 emissions and fuel consumption values can be compared. This ensuring a level playing field.
WLTP is divided into four different average speeds: low, medium, high and extra high. Each speed has a variety of driving phases. As a result, it is considered more representative of everyday driving.
Intentionally, the new bands have been made more sensitive to changes in CO2 emissions as a way to nudge companies and their employees to opt for lower emission vehicles in the future.
Why the Change?
The new measure is intended to reduce carbon dioxide (CO2) emissions by encouraging a move towards lower emission vehicles. Whilst this ambition is to be welcomed, the Treasury has acknowledged that the WLTP measure will have significant impact on company car users.
This was also acknowledged in a recent Treasury document which stated:
“Whilst the government’s view is that vehicle tax rates should more closely reflect the environmental impacts of driving, it is important that the transition to WLTP is managed.”
Carefully Managed
In response to this, and following a period of consultation, the government announced that appropriate percentages of new zero emission models will be as follows:
- Nil in 2020-21;
- 1% in 2021-22;
- 2% rate in 2022-23.
By comparison, the appropriate percentage for most other cars registered from 6 April 2020 will be reduced by the following appropriate percentages:
- 2% in 2020-21;
- I% in 2021-22;
- 1% in 2021-22;
- 1% in 2022-23.
A small number of company cars with the greatest CO2 emissions (170g/km and over) will
continue to attract the maximum appropriate percentage of 37%.
The Treasury has acknowledged:
“Due to the range of WLTP impacts on CO2 emissions, this approach means some [new] conventionally fuelled cars will be liable to pay an equal amount of company car tax as of today, whilst others will pay more, and a small number of models could pay less.”
The government has promised that it will set company car tax rates in advance of the tax year affected by the proposed change. This has normally been the position in recent years.
In addition, it will continue to use the current NEDC-based measure for road tax (graduated vehicle excise duty, VED) for 2020/21. However, a public consultation is planned for later this year to establish the best approach to changing the wider road tax system, but avoid hikes in VED for the majority of car users.
Legislation
Legislation is to be introduced in the next Finance Bill to amend the Income Tax (Earnings and
Pensions) Act 2003 (ITEPA) in order to reflect the changes to the appropriate percentage(s) that will be applied to the list price of the car.
In Summary
- A zero rate of BIK tax for ‘zero emission vehicles’ from next April for tax year 2020-21, rising to 1% in 2021-22 and 2% in 2022-23;
- A 2% reduction in scale charge from next April for cars registered after April 6 2020, with a 1% discount in 2021-22;
- A freeze on existing 2020-21 BIK rates for the following two years.