Company cars seem to be regarded as a soft target in the game of increasing taxes. The current tax year (ending on 5 April 2002) is the last year for which the existing tax regime will apply. (As a reminder, the regime is that there are two scale charges; one for the use of the car and a second if fuel is provided for private motoring.)

The car scale charge is based on the list price of the car when new plus the cost of accessories subsequently added. The maximum taxable benefit is 35% of the total cost, but this can
be reduced depending on business mileage and the age of the car. The charge for business mileage between 2,501 and 18,000 miles is 25% of the cost, reducing to 15% for business
mileage in excess of 18,000. (If the car will be over four years old by 5 April 2002, these percentages are reduced by one quarter.) Thus, under current rules, the normal situation is a
benefit of 25% of the cost.

Changes from April 2002
It’s going to get much worse and the rules will be changed completely. The maximum benefit will still be 35% of the cost of the car, but there will be no discounts based on mileage or age, instead the percentage will be based on the car’s CO2 emissions. This cannot be less than 15% for petrol cars or 18% for diesels. Research shows that the benefit for most normal cars will be near 35% eg a BMW 523i will have a percentage of 33%. (The existing rules for private fuel will continue after 5 April 2002 although it’s likely that the scale charges will continue to increase.)

A further subtle change relates to the tax-free mileage allowances that employees can claim if they use their own cars. Currently, the owner of an over 2 litre car can claim 63p per mile for the first 4,000 business miles and 36p per mile thereafter. From 6 April 2002, the rates will be 40p per mile for the first 10,000 business miles and 25p per mile thereafter. Whilst the company car landscape deteriorates, no changes are being made to the company van
rules. Under these, the maximum scale charge is £500 (ie you pay £200 at top rate) and there is no scale charge for private fuel. Additionally, input VAT incurred in connection with the purchase of a van is recoverable, whereas input VAT incurred in connection with the purchase of a car can only be recovered in exceptional circumstances.

Barnes Roffe Topical Tips

• Is private fuel costing you money? Consider very carefully whether it is worth having private fuel. Frequently the tax payable is greater than the cost of the fuel provided. (Remember that to avoid the fuel scale charge, the employer must provide no private fuel whatsoever.)
• Do you really want a company car? Consider whether you should cease to have a company car and instead run the car privately and claim tax-free mileage allowances for business mileage.
• Would a lifestyle vehicle like the Mitsubishi above meet your needs? Consider whether you could use a van rather than a car. Vehicles like the Mitsubishi are luxurious but are technically vans for tax purposes. The savings can be substantial.