The Chancellor announced in his Budget speech a targeted package of measures for road transport which is equivalent to a 4p per litre cut in fuel duty.

The main measures affecting cars outlined in the 2001 Budget, are:

• a reduction in the duty on ultra low sulphur petrol of 2p per litre

• a 3p reduction in the duty on ultra low sulphur diesel to maintain the existing balance between the most commonly available diesel and petrol

• a temporary reduction in the duty on unleaded petrol of 2p per litre until 14 June 2001 by which time ultra low sulphur petrol should be freely available

• an extension of the small car threshold for vehicle excise duty for cars registered before 1 March 2001 from 1,200cc to 1,549cc from 1 July 2001, backdated to November 2000.

• a reform of Authorised Mileage rates

• an increase in fuel scale charges of approximately 14%

Vehicle Excise Duty

The changes for all new cars registered for the first time from 1 March 2001 are:

• A four band system will be introduced based on emissions of carbon dioxide (CO₂).

• Within each band there will also be a discount rate for cars using cleaner fuels and technology and a higher rate for diesel cars.

Authorised Mileage Rates

The Government has announced a restructuring of AM rates. This will be a two stage reform starting from 6 April 2001.

Current rules up to 5 April 2001

From 6 April 2001 to 5 April 2002

From 6 April 2002

Tax Relief for Business Use of a Private Car

Currently, a driver can claim tax relief in one of two ways:

• a proportion of the actual expenses plus capital allowances, or

• using the Authorised Mileage rates.

Regardless of which method is used, the driver can also make a separate claim for interest relief on a loan to purchase a car used for business purposes.

From 6 April 2002 the rules will change. From that date it will only be possible to receive tax-free amounts (or claim tax relief) using the Authorised Mileage rates. It will no longer be possible to make a claim for the proportion of actual expenses incurred plus capital allowances, and it will also not be possible to make an additional claim for tax relief on interest on a loan to purchase a car for business purposes.

Mileage allowances received in excess of the AM rates will be taxable. However, the extent to which the AM rates exceed the amount received from the employer can be claimed as a tax deduction against the driver's taxable income.

Fuel Scale Charge

The fuel scale charges for 2001/2002 are as follows:
 

The fuel scale charge will continue to increase at 20% over and above the price of fuel including duty to the end of 2002/2003. The increase announced in the 2001 Budget was only 14% , which is due to the fall in the price of fuel. Although the cost of fuel may increase in the future, any increase will still be proportionately lower than the increases to the fuel scale charge over the next couple of years. Therefore the need for companies to evaluate the cost of getting their staff out of free fuel is critical. Even if an employee has a marginal saving by taking free fuel this tax year, that is unlikely to be the case next tax year, and, in any case, the company is still paying the total cost of the fuel. Fuel Adviser on www.cartax.co.uk can help you assess the true value of free fuel to both the driver and the employer.

Cash or Car

From 6 April 2002 the drivers who are likely to be the biggest losers are those who currently drive 18,000 business miles or more in a year. They are currently paying a tax charge based on 15% of their car's list price and so they cannot be better off under the new 2002 regime and will have to drive one of the very cleanest cars just to stay neutral.

The winners are likely to be the 'perk' car drivers, whose tax charges are currently based on 35% of the list price of the car. They cannot be worse off under the new system even if they drive the most polluting vehicles.

The band of drivers covering between 2,500 and 18,000 business miles will contain both winners and losers under the new system, depending on the level of emissions of their new cars.

The 2001 Budget and other recent announcements have a significant effect on those making the cash or car decision because many of the uncertainties have now been removed:

• the 3% diesel supplement is here to stay unless the car achieves Euro 4 emission standards;

• the Authorised Mileage rates for the future have now been announced,

• some announcements have been made about electric, gas and hybrid vehicles.

As a result, drivers and their employers can now make reasoned judgements about the cash or car decision. Our Driver Choice application on www.cartax.co.uk has been updated for the new changes. Encourage your drivers to make the right decision.

A Reminder of the 2002 Company Car Tax Rules

From 6 April 2002 there will be no discounts for business mileage driven. The new system will be based on a percentage of the car's list price graduated according to its carbon dioxide (CO₂) emissions. It will apply to most cars from 2002 (but see exceptions below), which means that most drivers provided with new cars now will be taxed under both the old (i.e. current) system and the new system.

Since CO₂ is the major greenhouse gas, the Government proposes to base the new regime on the number of grams of CO₂ emitted per kilometre, since this is a simple system. By 2002, it is expected that this information will be readily available for most company cars.

The tax charge will be based on a percentage of the car's list price (as it is now), and the highest charge will be a 35% rate and the lowest charge will be a 15% rate (as they are now).

Scale Charge Calculator

For 2002/2003 the 15% charge will only apply to cars emitting less than 165 grams of CO₂ per kilometre, increasing at a rate of 1% for each five grams per kilometre up to a maximum of 35% for emissions in excess of 265 g/km.

Note that the given CO₂ emissions figure for a car should be rounded down to the nearest 5 grams per kilometre. For example: (i) an emissions rating of 169 g/km when first registered will be charged on 15% in 2002/2003, 17% in 2003/2004 and 19% in 2004/2005 and (ii) an emissions rating of 209 g/km will be charged on 23% in 2002/2003, 25% in 2003/2004 and 27% in 2004/2005.

Diesel Supplements
*	add 3 per cent if car runs solely on diesel
**	add 2 per cent if car runs solely on diesel
***	add 1 per cent if car runs solely on diesel
****	maximum charge so no diesel supplement

Example

Lyndsay has a company car. She drives 12,000 business miles in each tax year. Her car emits 202 grams of CO₂ per kilometre driven, and has a list price of £23,450. She is a 40% taxpayer.

	2001/2002		2002/2003
	£		£
List price	23,450		23,450
Percentage charge for business mileage between 2,500 and 17,999	25%
Percentage charge for 202 g/km			22%
Benefit in kind	5,862		5,159
Tax payable at 40%	£2,345		£2,064

Diesel Cars

This system clearly benefits diesel cars since they have generally lower CO₂ emissions than petrol cars. However, the particulates from diesel engines have contributed to an increase in respiratory illnesses such as asthma. The new rules deal with this anomaly but aim to keep the new regime simple and straightforward, by adding a flat rate increase of 3% to the figure used to calculate a car's benefit in kind charge. For example, a diesel car that would give rise to a tax charge based on 25% of its list price by reference to its CO₂ emissions, will actually give rise to a tax charge based on 28% of its list price. Because this is a flat increase of 3%, it has a disproportionate effect on the more CO₂ efficient diesels; for example it has a 20% effect on the 15% rate but only a 10% effect on the 30% rate. The 3% flat increase will not increase the maximum rate beyond 35%.

If a car meets the Euro 4 standard for diesel emissions then the 3% supplement will be removed. The Euro 4 standard will be mandatory for all new cars from 2005.

Example

Jack has a diesel engine company car. He drives 20,000 business miles in each tax year. His car emits 206 grams of CO₂ per kilometre driven, and has a list price of £26,400. He is a 40% taxpayer.

	2001/2002		2002/2003
	£		£
List price	26,400		26,400
Percentage charge for business mileage over 18,000	15%
Percentage charge for 206 g/km plus flat rate increase of 3% (23%+3%)			26%
Benefit in kind	3,960		6,864
Tax payable at 40%	£1,584		£2,746

Alternative Fuel and Technologies

The Government intends to provide further incentives to encourage drivers to choose more environmentally friendly company cars, as follows:

• tax on electric cars will be based on 9% of the car's price

• there will be a 2% discount for hybrid petrol/electric cars to compensate for the higher cost of the technology, and a further discount of 1% for every 20 g/km their CO₂ emissions are below the qualifying level for the minimum charge for the year (i.e. 165 g/km for 2002/2003).

• a 1% discount for all cars running on gas, and a further discount of 1% for every 20 g/km their CO₂ emissions are below the qualifying level for the minimum charge for the year.

Exceptions

The new CO₂ emissions system will not apply to vehicles with no CO₂ emissions rating (for example they have been imported from outside the EC) or older vehicles for which the CO₂ emissions rating is not known. The taxable benefit in such cases will be based on engine size as follows: