One of the best examples of the Government using tax to influence people’s behaviour is the relatively new emissions based system of company car taxation. The legally binding climate change targets agreed in Kyoto in 1997 required a challenging cut in greenhouse gases by the UK. At the time, carbon dioxide (CO2) amounted to 75% of all greenhouse gases emitted. This was therefore the Government’s main focus.

In 1998 the Chancellor stated “the transport sector is the fastest growing source of carbon dioxide emissions”. Later the Economic Secretary to the Treasurer stated “half of all new cars are bought by companies. They are driven more miles on average than private cars and in time most of them feed into the second hand car market. Emission improvements to company cars can therefore have a disproportionately beneficial effect on the environment”. She also went on to say that “the tax system can play a key role in influencing people’s behaviour and the choices they make”. It was therefore not surprising that the Government focused on the taxation of company cars and petrol to seek changes to people’s behaviour.

The new regime came in on 6 April 2002 and was intended to be revenue neutral from the Exchequer’s point of view. From the drivers’ point of view there were winners and losers.

Since diesels have generally lower CO2 emissions the take up of them as company cars has not been surprising, but the extent has been. Diesel now accounts for over half of new company cars and that percentage is continuing to rise. Manufacturers have clearly been responding to this. However these cars are now coming on to the second hand market. The big question is whether the retail market finds them as attractive as company car drivers do, and leasing companies and large fleets are now concerned that second hand values may nosedive.

Following the recent publication of the Stern report it is obvious that the Government is more serious than ever about the effects of climate change on the environment, and so CO2 will remain their centre of focus.

Alison Chapman, tax partner, said “To date companies have generally paid little attention to the CO2 emissions of cars because they view this as a driver and not a corporate matter.

But the benefit-in-kind calculation (which is based on the CO2 emissions of the car) is very much a corporate matter because a company’s Class 1A National Insurance charge is 12.8% of the employee’s benefit-in-kind charge. Finance directors that fail to take NIC into account when compiling car choice lists can find their company on the receiving end of unexpectedly large NIC bills despite believing that employees of a similar grade were choosing a similar value of vehicle.”

For example, one employee chooses a £25,000 (list price) luxury diesel saloon with CO2 emissions of 155 g/km while his colleague chooses a petrol 4x4 with the same list price but emissions of 220 g/km. The NIC bill for the company will be £672 for the saloon and £992 for the 4x4 - a difference of £320. Across a fleet of vehicles the cost of ignoring NIC can be huge.

The effect of CO2 on a company’s profits isn’t going to stop at NIC. The Government have announced their intention to shortly introduce a new system of capital allowances designed to encourage companies to run greener cars. We can assume this means it will penalise the most polluting vehicles to discourage companies from allowing 4x4’s and people carriers in their car parks.

Also given the right technology the Government could easily start charging road user tolls and other levies based on the size of the emissions.

NIC is not the only way green companies currently save. Green cars are usually more fuel efficient, they attract lower road fund licence bills (although not enough yet to tempt the chairman away from his Jaguar) and cars with CO2 emissions that do not exceed 120g/km qualify for first year capital allowances of 100%, don’t have an expensive car leasing disallowance and avoid the congestion charge in London.

Car manufacturers responded to the clear message that to get company drivers choosing the cars they build, they must attract low tax bills. If manufacturers find that employers have a direct interest in vehicle emissions as well, the race to build greener cars can only accelerate.

Alison Chapman says “In time the green fleet may well end up being the cheaper fleet. To get there, companies must stop making decisions based on purchase price or rental, and consider a vehicle’s true whole-life cost including all running costs, tax and National Insurance. We often find two cars will have the same rental but whole-life costs may be thousands of pounds apart.”

To help companies work this out Deloitte have just launched a very graphical software package called Car Selector which creates and analyses complete whole-life costs using industry data. David Rawlings, Senior Manager in charge of Car Selector’s development, says, “Companies tell us they want to have a green fleet, but really mean they want to save money. Car Selector shows the two are inextricably linked. The beauty of the program comes from the way it allows very direct comparison between cars of apparently similar values. As a result of using the software our clients are rethinking the way they build their fleet policies and are finding their drivers greener cars which are still desirable and save money.”