The road to company car tax changes

Earlier last month, the government set out their decisions and next steps in response to the Review of Worldwide harmonised Light vehicles Test Procedure (WLTP) and Vehicle Taxes.

The background to the review began at the Autumn Budget in 2017, where the government ‘announced that cars registered from April 2020 will be taxed based on WLTP figures’ (1). WLTP aims to ‘be more representative of real world driving conditions, compared to the previous test known as the New European Driving Cycle (NEDC)’ – and as a result, ‘reported emissions are expected to increase which could impact VED and company car tax’(1).

In the 2018 Budget, the government ‘announced the review into the impact of WLTP on CO2 emissions’ and sought views on whether ‘changes are therefore required to Vehicle Excise Duty (VED) and company car tax’ (1).

The response

In their response, the government highlights that the link between the vehicle tax system and the true environmental impact of purchasing a car, should be strengthened in order for consumers to make more informed decisions (1). In doing so, they feel that this should be reflected in the amount of tax paid (1).

They cite their ambition ‘for all new cars sold to be effectively zero emissions by 2040’ – part of their ‘legally-binding climate objectives’ as a reason for the changes (1).

This means:

  • the existing VED rates will be maintained on introduction of WLTP from April 2020 (1)
  • for cars first registered from 6 April 2020, most company car tax rates will be reduced by 2ppt in 2020-21 before returning to planned rates over the following two years – increasing by 1ppt in 2021-22 and 1ppt in 2022-23 (2)
  • to accelerate the shift to zero emission cars, all zero emission models will pay no company car tax in 2020-21, 1% in 2021-22 before returning to the planned 2% rate in 2022-23 (2)
  • on Vehicle Excise Duty, a call for evidence will be published later this year seeking views on moving towards a more dynamic system which recognises smaller differences in carbon dioxide (CO2) emissions (2)

Vehicle Excise Duty

Whilst WLTP could affect VED liability for new cars from April 2020, the government indicates that ‘tax changes will represent only a small proportion of a car’s total cost of ownership’ and ‘motorists could choose models with lower, or zero emissions’ (1). The issue here however, is the cost of zero emissions options and their sustainability, such as the limited charging points etc, when selecting a new vehicle.

It’s important to note that WLTP has been linked to ‘many more unique CO2 values, mainly due to ‘model specific’ testing’ (1). The report summarises that the ‘current VED band structure will likely result in these differences between models not being fully recognised in the VED rates paid’, which ‘could exacerbate the current ‘cliff-edges’ between VED bands’ (1).

Company car tax rates

Due to the current ‘structure of the bands which are more sensitive to changes in CO2 emissions’, WLTP is likely to have the greatest impact on company cars. I agree with the government’s acknowledgement that it’s ‘important the transition to WLTP is managed closely’ – only this way can it protect both consumers and the climate (1).

Implementation

Employers and agents should note that legislation has been introduced in the current Finance Bill to amend the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) – this will include changes to the 13 company car tax appropriate percentages for 2020-21, 2021-22 and 2022-23 (1). ITEPA 2003 and the Vehicle Excise and Registration Act 1994 and will also be amended to confirm that VED and company car tax bands will be based on WLTP figures (1). WLTP will be used as the applicable CO2 figure from 1 April 2020 for VED and 6 April 2020 for company car tax (1).

Here are the values:

Actual CO2 emissions
Electric range (miles)
Registration pre 6.4.20 % petrol & RDE2 Diesel
Registration pre 6.4.20 % diesel
Registration from 6.4.20
Actual CO2 emissions
Registration pre 6.4.20 % petrol & RDE2 Diesel
Registration pre 6.4.20 % diesel
Registration from 6.4.20
0
0
N/A
0
95-99
24
28
22
1-50
>130
2
6
0
100-104
25
29
23
1-50
70-129
5
9
3
105-109
26
30
24
1-50
40-69
8
12
6
110-114
27
31
25
1-50
30-39
12
16
10
115-119
28
32
26
1-50
<30
14
18
12
120-124
29
32
27
51-54
15
19
13
125-129
30
34
28
55-59
16
20
14
130-134
31
35
29
60-64
17
21
15
135-139
32
36
30
65-69
18
22
16
140-144
33
37
31
70-74
19
23
17
145-149
34
37
32
75-79
20
24
18
150-154
35
37
33
80-84
21
25
19
155-159
36
37
34
85-89
22
26
20
160 and above
37
37
160-164 35
90-94
23
27
21
165-169 36
170 and above 37

For P11D purposes it’s important to understand how the transition to the new vales is being managed.

  • Cars that were registered after September 2017 will have on their official vehicle documents (the Certificate of Conformity) will have CO2 emission values from both the WLTP test and the NEDC test
  • Cars registered from September 2018 must have just WLTP CO2 values
  • Until 6 April 2020 the CO2 value used for the taxable benefit calculation is the NEDC test, for the 2020/21 tax year – July 2021 P11Ds – the new WLTP values are used.
  • The original consultation on the changes indicates that as WLTP values can be impacted by the choice of accessories e.g a sunroof, 50% of company car users will see a tax increase of between 10% and 20% – time to start communicating this now?

Sources
(1) Review of WLTP and vehicle taxes: summary of responses, HM Treasury
(2) https://www.gov.uk/government/publications/review-of-wltp-and-vehicle-taxes