Budget 2008: Employers could feel the pinch as gas-guzzlers targeted

Employers could feel the pinch financially as a result of increases in fuel duties,and changes to vehicle excise duty and capital allowances for business cars that penalise gas guzzlers, outlined in Alistair Darling’s Budget report.

Business cars will now be subject to emission-based capital allowances. Cars will be placed in one of two capital allowance pools according to their CO2 emissions, with high-polluting cars (releasing more than 160g per km) attracting a 10% writing down allowance and expenditure on cars with CO2 emissions of 160g/km or below will a attract 20% allowance. Vehicles will with CO2 emissions lower than 110g/km will continue to receive a full first-year allowance.

Company car tax rates will be increased on all but the cleanest of cars, which are those that emit less than 135g of CO2/km or less in 2010 – 2011. In addition, there will be no tax during the first year of ownership for all new low-polluting cars meeting the 130g/km European Union standard from 2010.

But Alastair Kendrick, partner of Bourne Business Consultancy, said he was not sure whether these environmentally-friendly measures will get the corporate sector will embrace the changes in the short to medium-term.

He explained that these low emission cars are often produced in smaller sizes, which are not be ‘fit-for-purpose’ for business use and added that where large low-emission cars do exist, they would be very expensive for companies to purchase.

“What needs to happen is continuing pressure on motoring manufacturers to develop better engines to keep more cars coming through to keep the price down,” he added.

Kendrick also highlighted that if companies want to take maximum advantage of capital allowances, they may have to limit the choice of cars they offer employees. However, he believes senior management figures might be reluctant to swap the “luxury” cars for less glamorous models.

“The typical company car is going to cost corporate businesses more money,” he added.

Darling also unveiled new vehicle excise duty (VED) rates and bandings that penalises those with gas-guzzlers. Six new VED bands will be introduced from 2009, including a top new band for the most polluting cars.

Patrick King, tax principal at the accountancy firm MacIntyre Hudson, criticised these measures as being an “obvious money spinner”.

“The Chancellor has piled on the cost of the gas-guzzler in the showroom, arguing that raising vehicle excise duty to £950 in the first year will influence consumers’ purchasing decisions.” ††

Employers will also have to find room in their fleet budgets for an increase in fuel duty to 2 pence per litre. Although initially planned for April, its introduction has been postponed until 1 October. Main road fuel duty rates will rise by 1.84 pence per litre on 1 April 2009, and will increase by 0.5 pence per litre on 1 April 2010.

The government has decided to maintain the current rates and thresholds of tax-free mileage allowances (AMAPs) for now. However, it has indicated that these will be looked at as part of HM Revenue & Custom’s consultation on collecting tax on benefits in kind and expense payments.

“This is good news for company car ownership schemes,” said Kendrick.