Government seeking opinions on possible changes to Vehicle Excise Duty and company car tax
The government has opened a consultation on the tax ramifications of the Worldwide harmonised Light vehicle Test Procedure (WLTP)Tags: Automotive ECOS Taxation
HMRC Consults on impact of WLTP on taxation
The government has opened a consultation on the ramifications of the Worldwide harmonised Light vehicle Test Procedure (WLTP) on vehicle taxes which are linked to CO2 emissions such as Vehicle Excise Duty (VED) and company car tax, and what systematic alterations may be required.
WLTP aims to be more representative of real world driving conditions and the CO2 emitted by introducing a longer driving cycle, more speeds and different temperatures, compared to NEDC.
Due to these changes, based on a preliminary sample of data provided by manufacturers, the government estimates that over 50% of cars will see an increase in CO2 figures from NEDC to WLTP of between 10% and 20%. The European Commission’s Joint Research Centre found an average increase of around 22% when comparing WLTP to NEDC with a greater increase for smaller models and those fuelled by petrol. Other studies have noted figures ranging from 9% to 30%, dependent upon the model.
Although the magnitude of the WLTP impact remains uncertain, for employees choosing a new company car from April 2020, this could result in further increased tax liabilities if the vehicle tax banding remains the same. The impact of WLTP is greatest for company car tax as of the one million company cars on the road, around 25% are newly registered each year, compared to around 8% of all vehicles. Therefore, by 2023-24, over 90% of company cars are forecast to be WLTP tested.
From 2020, through income tax and National Insurance contributions, company car tax is forecast by the Office for Budget Responsibility to raise an extra £100 million in 2020-21, rising to £400 million in 2023-24.
The government must strike a fine balance between raising revenue, reducing transportation costs for drivers and meeting climate change commitments by making higher emission vehicles less attractive.
The impact on the motor trade has already been significant. Since the introduction of NEDC-correlated figures on new models from September 2018, fleets have seen increased costs already. Company car drivers in the motor trade have felt this more keenly, as company cars tend to be on 3-6 month contracts, meaning that almost all those paying company car tax will now be paying on average 3 percentage points more on the same vehicle. In what may come as unwelcome news to many, HMRC says that the review will not consider the implications of equivalent NEDC figures, but instead focus primarily on the differences between equivalent NEDC figures and the switch to full WLTP values from 2020.
As well as the impact on company car drivers, the economic impact upon the automotive industry must be taken into consideration. Supply issues created by the introduction of WLTP testing from September 2018 meant that UK new car registrations were down 20.5% in September 2018 when compared to September 2017. Maintaining CO2 tax brackets at their current level could create further distortions in the short term if consumers decide to purchase vehicles before the switch to WLTP in 2020, or instead choose to hold onto to older cars to maintain their current taxation for longer. If the cost implication of the VED tax bands remains unaltered, new car registrations may continue to suffer.
After gathering evidence from the automotive industry, employers and other relevant stakeholders, the government must consider if changes are required to the current VED and company car tax systems. If they are, these would be introduced into the Finance Bill 2019-20, meaning there is little time for comprehensive modifications. The consultation document clearly lays out the Government’s aim to deliver any changes within the existing framework, stating that;
“the fundamental structure of VED and company car tax is appropriate, including the diesel supplement and time-frame for introduction of future company car tax rates.”
The consultation will be closed to responses on Sunday 17 February. Click here to view the consultation document