Tax Issues - FAQ's
 Major
reform of taxation of Company cars
Questions:
- Is there going to be a change in the way in which taxable
car benefits are worked out?
- Why is the car benefits system being changed?
- Are there also changes to road tax?
- How will the new car benefits system work?
- How will the benefit charge be linked to the CO2 emissions?
- Can you describe in detail how the car benefit charge
will be worked out from the CO2 emissions?
- Will the Inland Revenue provide any help in working
out the percentage as the calculation sounds complicated, especially
the bit about 1 percent steps?
- Will employees carry on being taxed on the same percentage
of the car 's price for as long as they have the same car?
- Will diesel cars be treated the same as petrol cars?
What is the diesel supplement?
- Does that mean that diesel cars are being penalised?
- I 've heard that diesel cars are getting much cleaner.
How will you take that into account?
- Will there be any special breaks for cars that use
environmentally friendly fuels?
- Some cars run on gas and petrol. Will the car benefit
be worked out on how the car runs on petrol or how it runs on gas?
- Are there any other special rules about cars that run
on petrol and gas?
- How will I find out the new benefit charge for a particular
company car?
- I have read the form P523 but would like more help
in working out the benefit for my car.
Other Adjustments
- Under the current car benefits system the basic car
benefit charge can be adjusted, for example for high business mileage
and private use payments. Will this still be the case?
- What if an employee has two company cars? There are
special rules for second cars now. How will a second car be taxed under
the new system?
- Will there be any changes in the way in which a classic
car is taxed?
CO2 Figures
- Will these changes affect company vans?
- How do I find out the approved CO2 emissions figure?
- How can I find out the CO2 emissions of a particular
car?
- What if a car registered 1998 or later has no approved
figure of CO2 emissions
- What if the car is imported?
Older Cars (First Registered pre- 1998)
- How will the new system work for older cars?
- Will there still be a discount for older cars?
- Will the diesel supplement apply to cars first registered
before 1 January 1998?
- What if a car registered before 1 January 1998 doesn
't have an engine that is measured in cc?
- Are there any special rules for disabled drivers?
National Insurance
- Will the new car benefit rules make any difference to
the National Insurance contributions (NICs) paid by employees?
- Will the extension of Class 1A NICs to all taxable benefits
make any difference to the National Insurance contributions (NICs) paid
by employees?
- Will the new car benefit rules make any difference to
the National Insurance liability of employers?
- Will the extension of Class 1A NICs to taxable benefit
make any difference to the National Insurance liability of employers.
Examples
- Are there any examples that show how the proposed rules
will work in practice?
Answers:
1. Is there going to be a change in the way in which
taxable car benefits are worked out?
Yes - but not until the 2002-03 tax year that begins on 6 April 2002.
The existing rules still apply for the 2000-01 and 2001-02 tax years.
2. Why is the car benefits system being changed?
The aim of the reform is to encourage the use of cleaner and more fuel
efficient company cars by linking the tax charge to the exhaust emissions.
This will help tackle global warming and improve local air quality.
3. Are there also changes to road tax?
The Government has also announced changes to road tax (vehicle excise
duty). Further details can be found on the Internet at www.dvl
gov.uk/newved or by phoning the DVLA Customer Enquiry Unit on 0870
240 0010.
4. How will the new car benefits system work?
- From 6 April 2002 the charge on the benefit of a company car is to
be linked to carbon dioxide (CO2) emissions of that car, measured in
grams per kilometre (g/km). The reductions for business mileage and
older cars will no longer apply. The starting point for calculating
the benefit charge will continue to be the list price of the car (plus
accessories) but the percentage of price actually charged to tax will
depend on the car 's CO2 emissions.
- The normal minimum charge will be on 15% of the car 's price and the
maximum charge will be on 35% of the car 's price.
- There will be a system of discounts for cars that use fuels that are
particularly environmentally friendly, and these can reduce the minimum
charge to less than 15%.
- There will also be a supplement of 3% for diesel cars, but this will
not increase the level of the maximum charge above 35%.
5. How will the benefit charge be linked to the CO2
emissions?
The lower the CO2 emissions, the lower the percentage of the price of
the car that will be used to calculate the car benefit charge - subject
to a normal minimum charge of 15% . And the higher the CO2 emissions,
the higher the percentage that will be used - subject to an absolute maximum
of 35%.
Details
6. Can you describe in detail how the car benefit
charge will be worked out from the CO2 emissions?
The normal minimum charge on 15% of the car 's price will apply to cars
that emit CO2 at or below a specified level. The percentage will be increased
in 1 percent steps for every additional 5g/km over the specified level
- up to a maximum of 35%. The figures calculated in this way will then
be increased by 3% for diesel cars (subject to the maximum charge always
being 35%) or discounted for certain cars that are particularly environmentally
friendly.
7. Will the Inland Revenue provide any help in working
out the percentage as the calculation sounds complicated, especially the
bit about 1 percent steps?
There is a leaflet P523 which includes a ready reckoner showing the
percentage of the car 's price that is taxed for each level of CO2 emissions,
so you don 't have to work out the percentage for yourself. A copy of
this leaflet can be downloaded from this website.
8. Will employees carry on being taxed on the same
percentage of the car 's price for as long as they have the same car?
No. The level of CO2 emissions that qualifies for the minimum charge
will gradually be reduced to take account of the fact that new cars are
getting more efficient. Reductions for the first three years of the new
system have been announced and are shown in our leaflet P523. The charge
will only stay the same if the car is taxed at the maximum 35% or if it
is a very fuel efficient one with CO2 emissions well below the level that
qualifies for the normal minimum charge.
Diesel Cars
9. Will diesel cars be treated the same as petrol
cars? What is the diesel supplement?
For diesel cars the percentage based on the CO2 figure will be increased
by 3%. So if the percentage based on CO2 is 18%, the percentage used to
calculate the car benefit charge will be 21%. But the supplement can 't
take the percentage above 35%
10. Does that mean that diesel cars are being penalised?
No. Diesel cars emit less CO2 than petrol cars and so would be taxed
on a lower percentage of the car 's price if the charge was based purely
on CO2 emissions. So without any adjustment they would have a tax advantage
over petrol cars. But this tax advantage wouldn 't be justified as diesel
cars emit more local air pollutants than petrol cars. So the aim of the
supplement is simply to ensure that the new system doesn 't end up damaging
local air quality because there is an in-built advantage for diesel cars.
11. I 've heard that diesel cars are getting much
cleaner. How will you take that into account?
Most diesel cars are expected to continue to emit more local air pollutants
than petrol cars even with the introduction of tighter vehicle emission
standards. But there are recent developments in diesel car technology
that have the potential to offer big reductions in the local air pollutants
emitted. After further consultation on the technical details rules will
be put in place to waive the diesel supplement for certain very low emission
diesel cars.
Alternative Fuels
12. Will there be any special breaks for cars that
use environmentally friendly fuels?Yes - there will be discounts for
these cars.
- The cars that qualify will be cars that run solely on electricity,
hybrid electric cars and bi-fuel gas powered cars.
- The amounts of the discounts and the exact definitions of the cars
that will qualify for them have not yet been finalised and will be announced
later.
13. Some cars run on gas and petrol. Will the car
benefit be worked out on how the car runs on petrol or how it runs on
gas?
There will be special rules for "bi-fuel" cars that run on petrol and
a road fuel gas such as liquid petroleum gas or compressed natural gas.
- If the car has an approved CO2 emissions figure for gas, that is the
figure that will be used to work out the car benefit - even if there
is also an approved figure for petrol.
- Cars first registered before 1 January 2000, and cars converted to
gas post-production will only have a petrol emissions figure, so that
is the figure that will be used to work out the car benefit.
- Details of special discounts that will apply for bi-fuel cars will
be announced later.
14. Are there any other special rules about cars
that run on petrol and gas?
Yes.
- For those cars assessed on their petrol CO2 emissions figure, the
element of the car 's price solely attributable to the equipment necessary
to allow the car to run on gas, or the costs of the conversion, will
be ignored for tax purposes.
- For bi-fuel cars assessed on their gas CO2 emissions figure, the full
price of the car will be used.
Working out the Tax charge
15. How will I find out the new benefit charge for
a particular company car?
This is only worth doing for a car that will still be used as a company
car when the new system starts in April 2002.
16. I have read the form P523 but would like more
help in working out the benefit for my car.
First, find out the price of the car for tax purposes. The rules for
doing this remain unchanged. But for more detailed information see leaflet
IR172 or booklet 480.
Second you must find out if the car has an approved figure of CO2 emissions.
- Most company cars that were first registered on or after 1 January
1998 will have an approved figure of CO2 emissions. (see Q 21 and 22)
- A few company cars first registered after 1 January 1998 will have
no approved figure of CO2 emissions, perhaps because they are one-off
models or privately imported from outside the EC. But these will be
unusual cases. (See 1 23 and 24 )
- Company cars that were first registered before 1 January 1998 will
not have an approved figure, so the percentage used is based on engine
size. (See 1 25 onwards)
Third, for a car with an approved figure of CO2 emissions, use the ready
reckoner in the P523 to read off the percentage that applies to your car.
- Note - if the exact CO2 figure doesn 't end in 5 or 0, round down
to the nearest 5 g/kmFourth, add 3% to the ready reckoner figure if
the car runs on diesel (but remember the maximum charge cannot go above
35%)
Finally, multiply the price of the car by the resulting percentage, to
get the basic car benefit charge.
Other Adjustments
17. Under the current car benefits system the basic
car benefit charge can be adjusted, for example for high business mileage
and private use payments. Will this still be the case?
The existing adjustments for business mileage and for older cars will
no longer apply.
But the existing rules on reductions for periods of unavailability and
payments for private use remain unchanged. The basic car benefit charge
will continue to be adjusted where these reductions apply. See leaflet
IR172 for more details.
18. What if an employee has two company cars? There
are special rules for second cars now. How will a second car be taxed
under the new system?
Just like the first one. There will be no special rules for second cars.
19. Will there be any changes in the way in which
a classic car is taxed?
Yes. The existing rules for working out its price will stay the same
but the new rules will apply to the percentage of its price that is charged
to tax. (see Q25 onwards for older cars)
20. Will these changes affect company vans?
No
CO2 Figures
21. How do I find out the approved CO2 emissions
figure?
Car first registered 1 November 2000 or later.
- The figure will almost always be shown on the new Vehicle Registration
Document (V5).
Car first registered 1 January 1998 to 31 October 2000.
- Under an agreement with the Revenue, the Society of Motor Manufacturers
and Traders (SMMT) will be providing a CO2 enquiry service on the Internet
at www.smmt.co.uk for cars first registered from January 1998 to December
2000.
Car first registered before 1 January 1998.
- Company cars that were first registered before 1 January 1998 will
not have an approved CO2 figure, so the percentage used is based on
engine size. (See 1 25 onwards)
A minority of car first registered 1 January 1998 or later will not have
approved CO2 emissions figures - see Q23 and 24.
22. How can I find out the CO2 emissions of a particular
car?
There are various ways in which you can find out the CO2 emissions of
a 1998 or later car right now.
- The SMMT CO2 emissions enquiry service, available on the Internet,
will let you find out the CO2 emissions for particular cars provided
they are first registered between January 1998 and December 2000. The
website address is www.smmt.co.uk
- The Vehicle Certification Agency publishes
a booklet that tells you about performance of new cars.
The figures in this booklet give a very good indication
of the approved CO2 emissions figures, although there may
be some small variations. You can get this booklet free
from Vehicle Certification Agency, 1 The Eastgate Office
Centre, Eastgate Road, Bristol BS5 6XX. A version of this
booklet is also available on the web at
http://www.roads.detr.gov.uk/vehicle/fuelcon/index.htm
- Brand new cars in showrooms will often have a sticker on them showing
the approved CO2 figure
- Many car publications are now including CO2 figures in the new car
dat Again, these figures should only be treated as indicative, but will
generally give you a pretty good ide
- Ask the car manufacturer - but you may have to pay a small fee for
this.
23. What if a car registered 1998 or later has no
approved figure of CO2 emissions?
- Cars without an approved figure of CO2 emissions will be taxed according
to engine size as shown on leaflet P523.
- If there is no engine size measured in cc, then the car will be taxed
on 35% of its price.
- But if it runs solely on electricity it will be charged on 15% of
its price.
24. What if the car is imported?
The same rules apply. Cars imported from other EC countries will normally
have approved CO2 emissions figures. But if the car does not have an approved
CO2 emissions figure, it will be taxed according to engine size.
Older Cars (First Registered pre- 1998)
25. How will the new system work for older cars?
Car first registered before 1 January 1998 will be taxed according to
engine size and the percentages that will apply are shown on the leaflet
P523.
26. Will there still be a discount for older cars.
No, this will be abolished from 6 April 2002.
27. Will the diesel supplement apply to cars first
registered before 1 January 1998?
No.
28. What if a car registered before 1 January 1998
doesn 't have an engine that is measured in cc?
A car registered before 1 January 1998 with no cylinder capacity will
be taxed on 32% of the car 's price. But if such a car runs solely on
electricity it will be taxed on 15% of the car 's price.
29. Are there any special rules for disabled drivers?
Yes. If an employee is obliged to drive a car with automatic transmission
because of his or her disability, the CO2 emissions figure for the closest
manual transmission variant of the same make and model of car will be
used - if it is lower - to calculate the percentage of the car 's price
charged to tax.
National Insurance
30. Will the new car benefit rules make any difference
to the National Insurance contributions (NICs) paid by employees?
No - employees do not pay National Insurance contributions on company
cars provided to them for private use.
Class 1A NICs on company cars and car fuel are payable by employers only.
31. Will the extension of Class 1A NICs to all taxable
benefits make any difference to the National Insurance contributions (NICs)
paid by employees?
No - just as now, employees will not pay Class 1A NICs once they are
extended to all taxable benefits.
32. Will the new car benefit rules make any difference
to the National Insurance liability of employers?
Yes - whenever there is a change to the tax rules on company cars the
rules for calculating Class 1A contributions automatically follow. Class
1A contributions on company cars are currently assessed by reference to
the amount of the car benefit charge. This link will remain when the new
method of calculating the taxable car benefit charge is introduced and
therefore, the new rules are equally applicable to the calculation of
Class 1A NICs.
33. Will the extension of Class 1A NICs to taxable
benefit make any difference to the National Insurance liability of employers.
Yes - the Chancellor announced in his March 1999 Budget that Class 1A
contributions will be extended to taxable benefits not already subject
to NICs with effect from 6 April 2000. Details of the extension are available
in leaflet CWG5, Class 1A National Insurance contributions on Benefit
in Kind - a preliminary guide for employers to proposed changes for 2000-2001.
Examples
34. Are there any examples that show how the proposed
rules will work in practice ?
Yes - see examples below.
The following examples show how to calculate the car benefit charge under
the proposed new rules.
The figure described as the basic car benefit charge in each example
may be reduced if the employee has to pay for private use of the car,
or if the car is unavailable for part of the tax year - see leaflet IR172
for more details.
A. Petrol car with approved CO2 emissions figure - benefit charge
for 2002-03
Price of the car for tax purposes is £15,000.
Approved figure of CO2 emissions is 183g/km.
- Round 183 down to 180.
- Look up percentage of car`s price in ready reckoner in P523
- Percentage for 2002-03 is 18%.
- Basic car benefit charge is £15,000 x 18% = £2,700.
B. Same car as in example A - benefit charge for 2003-04 and 2004-05
Price of the car for tax purposes is £15,000.
Approved figure of CO2 emissions is 183g/km.
- Round 183 down to 180.
- Look up percentage of car`s price in ready reckoner in P523
- Percentage for 2003-04 is 20%.
- Basic car benefit charge is £15,000 x 20% = £3,000.
- Percentage for 2004-05 is 22%.
- Basic car benefit charge is £3,300.
C. Petrol car with low CO2 emissions - benefit charge for 2002-03
Price of the car for tax purposes is £15,000.
Approved figure of CO2 emissions is 158g/km.
- Round 158 down to 155.
- Look up percentage of car`s price in ready reckoner in P523
- Percentage for 2002-03 is 15% as 155 is below the qualifying level
for the minimum charge of 165g/km.
- Basic car benefit charge is £15,000 x 15% = £2,250.
D. Petrol car with low CO2 emissions - benefit charge for 2003-04
and 2004-05
Price of the car for tax purposes is £15,000.
Approved figure of CO2 emissions is 158g/km.
- Round 158 down to 155.
- Look up percentage of car`s price in ready reckoner in P523
- Percentage for 2003-04 is 15% as 155 is now the qualifying level
for the minimum charge.
- Basic car benefit charge is £15,000 x 15% = £2,250.
- Percentage for 2004-05 is 17%.
- Basic car benefit charge is £2,550.
E. Diesel car with approved CO2 emissions figure
Price of the car for tax purposes is £15,000.
Approved figure of CO2 emissions is 158g/km.
- Round 158 down to 155.
- Look up percentage of car`s price in ready reckoner in P523
- Percentage for 2002-03 is 15% as 155 is below the qualifying level
for the minimum charge of 165g/km.
- Add 3% diesel supplement, so percentage becomes 18%.
- Basic car benefit charge is £15,000 x 18% = £2,700.
F. Diesel car with approved CO2 emissions figure - high emissions
(for example for large four- wheel drive vehicle)
Price of car for tax purposes is £20,000.
Approved figure of CO2 emissions is 242g/km.
- Round 242 down to 240
- Look up percentage of car`s price in ready reckoner in P523
- Percentage for 2002-03 is 30%.
- Add 3% diesel supplement, so percentage becomes 33%.
- Basic car benefit charge is £20,000 x 33% = £6,600
- Percentage for 2003-04 is 32%.
- Add 3% diesel supplement, so percentage becomes 35%.
- Basic car benefit charge is £20,000 x 35% = £7,000
- Percentage for 2004-05 is 34%
- Diesel supplement restricted to 1%, so percentage becomes 35%.
- Basic car benefit charge is £20,000 x 35% = £7,000
G. Petrol or diesel car first registered before 1 January 1998
Car first registered 1 December 1997.
Percentage for cars first registered before 1 January 1998 is based on
engine size.
- Price of car for tax purposes is £15,000.
- Engine size of this car is 1,800cc/ 1.8 litre
- Percentage from table in P523 for older cars is 22%
- Basic car benefit charge is £15,000 x 22% = £3,300
H. Petrol car first registered 1 January 1998 or later - no approved
CO2 emissions figure
This sort of case will be unusual.
Percentage for cars first registered 1 January 1998 and with no approved
CO2 emissions figure is based on engine size
- Price of car for tax purposes is £15,000.
- Engine size of this car is 1,800cc/ 1.8 litre
- Percentage from table in P523 for 1998 or later cars with no CO2
emissions figure is 25%
- Basic car benefit charge is £15,000 x 25% = £3,750
I. Diesel car first registered 1 January 1998 or later - no approved
CO2 emissions figure
This sort of case will be unusual.
Percentage for cars first registered 1 January 1998 and with no approved
CO2 emissions figure is based on engine size
- Price of car for tax purposes is £15,000.
- Engine size of this car is 1,800cc/ 1.8 litre
- Percentage from table in P523 for 1998 or later cars with no CO2
emissions figure is 25%
- Add 3% diesel supplement, so percentage becomes 28%.
- Basic car benefit charge is £15,000 x 28% = £4,200
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