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Green motoring: How much can you save?

publication date: Oct 5, 2008
author/source: Paul Howard
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howard'Green' measures have been heavily promoted in recent Budget statements and Finance Acts. In some cases, this has resulted in tax increases, but it’s not all bad news, as some green measures offer opportunities to save tax. 

Here we look at how much a company and its employees can save by choosing a company car with a low CO2 emission rating, instead of an otherwise comparable higheremission car. 

We will compare two almost identicallypriced 5-door hatchbacks: the Renault Megane 1.4 16v 100 Tech Run (list price £13,495) and the Volkswagen Polo 1.4TDi BlueMotion 2 (list price £13,565). The petrol-engined Renault’s CO2 emission rating is 165g/km, but the diesel Volkswagen has a very low rating of 99g/km. 

For the sake of space, and to simplify matters, we’re concentrating here on companies only. Sole traders and partnerships can make similar, if not greater, savings, under Income Tax and the national insurance rates appropriate to them. Adjustments would also be required for cars used privately by sole traders or partners. 

Capital allowances 
The first tax consequence of buying a company car is that tax relief is available on the cost. This relief is given through capital allowances. For cars purchased on or after 1 April 2008, an annual 20 per cent writing down allowance (WDA) is available, normally on a maximum cost of £12,000. The WDA for our Renault in the first tax year is £2,400 (£12,000 x 20 per cent.) 

  • Our Volkswagen, however, enjoys two significant advantages due to the fact that Di - a DPS please, with car pic large and man pic v small. Green motoring: how much can you its CO2 emission rating does not exceed 110g/km:
  •  a 100 per cent first year allowance (FYA) is available, and the FYA is available on the full cost (£13,565). 

The FYA of £13,565 that is available for the Volkswagen is therefore almost 6 times higher than the £2,400 WDA for the Renault. Of course, this is just (excuse the pun) an acceleration of the tax relief that is ultimately due in either case, as a balancing allowance would be available on the eventual disposal of the Renault. 

Nonetheless, the cash flow benefit in year 1 is very substantial – an extra tax saving of £3,126 for a company paying corporation tax at the 28 per cent main rate, or £2,344 for a small company paying corporation tax at 21 per cent. 

Hire costs 
Many companies hire, rather than buy, cars. Here, there is a tax deduction for the hire charges, 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 either case, if the car is available for an employee’s private use, only 50 per cent of the VAT input tax is recoverable. 

For comparison purposes we will assume a similar contract hire cost of £9,678 over 3 years (including an initial payment and 50% of the VAT), and large/small company corporation tax rates of 28/21 per cent The total tax relief amounts to £2,560/£1,920 for the Renault, but £2,710/£2,032 for the Volkswagen – a modest saving of £150/£112 for one car, but potentially more significant for even a small fleet. 

National insurance 
National insurance Companies pay national insurance on employees’ car and fuel benefit in kind charges which are based on CO2 emission ratings. For 2008/09 and 2009/10 the car benefit in kind charge for the Renault is 21 per cent of list price, increasing to 22 per cent in 2010/11, giving a total charge of £8,634 for those 3 years. 

The same percentages are applied to a fixed amount of £16,900 to arrive at the fuel benefit in kind charge. The total fuel charge for the Renault for the 3 years would be £10,816. The combined car and fuel benefit charge for the Renault is therefore £19,450. 

The applicable emissions-based percentage for the Volkswagen is just 13 per cent, giving a total car benefit charge of £5,289 and a total fuel benefit charge of £6,591 for the 3 years – an overall amount of £11,880. 

Employers’ national insurance is payable at 12.8 per cent so the saving on the difference between the two cars of £7,570 would be £968, worth £697/£765 to a large/small company after tax relief. 

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 CO2 emission based scale charge. 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. 

For the Renault, the quarterly charge is £43.19 per quarter (£518 over 3 years at the current rate), but for the Volkswagen it’s much lower: £20.55 per quarter (£247 over 3 years at the current rate), a saving of £271. 

Vehicle excise duty costs 
The road tax, or VED, is also now based on CO2 emission ratings. Once again, this is a straightforward calculation: the Renault falls into Band D, with an annual charge of £145, whilst the Volkswagen falls into Band A, for which there is no charge! At current levels, there is therefore a total saving of £435 over 3 years for the Volkswagen. The net saving after tax relief is £313/£343 for a large/small company. 

Savings for employees 
Benefit in kind charges 
Employees pay both income tax and national insurance on car and fuel benefits in kind. We will base our comparison on an employee with a marginal income tax rate of 40 per cent and a marginal national insurance rate of 1 per cent. 

As we’ve seen earlier, the difference in the combined car and fuel benefit charge for the 3-year period from 6 April 2008 is £7,570. For the Volkswagen there would be a very substantial income tax saving of £3,028 and a national insurance saving of £76. 

It can be seen that significant savings can be achieved simply by keeping an eye on CO2 emission ratings when choosing a car. 

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. 

One thing to watch is that the emissions limit for 100 per cent capital allowances purposes is 110g/km, but the limit to qualify for the lowest benefit in kind charges is 120g/km, so a car within the lower limit should be chosen to maximise the benefits for both the company and the employee. 

Additional savings may be possible in future. It is currently proposed that from 2009/10 the capital allowances rules will become entirely emission-based. The £12,000 cost limit will no longer apply, and all cars will be pooled. The annual writing down allowance for cars with emissions of over 160g/km will be halved, from 20 per cent to 10 per cent. This will increase the cash flow disadvantage of purchasing higher-emission cars. 

It is also proposed that the restriction on tax relief for leased cars with a list price of over £12,000 will be replaced by a 15 per cent disallowance for cars with emissions of over 160g/km. 

It is likely that the 160g/km limit will be progressively reduced in future years. 

The proposal to make the London congestion charge emission-based has been dropped, but road pricing is another hot topic, and if introduced, it would not be surprising if the trend towards emissionbased charges were followed. 

Paul Howard is Associate Director of Chiltern Tax Support for Professionals –