The Budget 2011 announced further changes which will affect businesses and their employees who use a car for business. There are changes for both employees provided with a company car, and for those using their own car for business journeys. Clearly, changes to fuel duty will affect all motorists so those are not dealt with here.

Use of a privately owned car for business
The amount per mile that an employee can be reimbursed tax free for business journeys is governed by the Authorised Mileage Allowance payments regime (AMAPs).

The rates for travel by car have been unchanged for a decade now, but the Budget announcements include a welcome increase in the main rate as follows:

Rates per mile from April 6 2011:

• Cars & vans first 10,000 miles per annum: 45p
• Subsequent miles: 25p
• Motorcycles: 24p
• Bicycles: 20p
• Passenger rate: 5p

The passenger rate has now been extended to include volunteer drivers, who can claim using AMAP’s or can claim a proportion of their motoring costs. The passenger rate will only apply if the volunteer claims using the AMAP rate.

Taxation of company cars
Employees provided with a car for business travel, for whom the car is also available for private use pay tax based on the list price of the car and the CO2 emissions of the vehicle. Various changes are due to commence in April 2011 and April 2012 which have been previously announced, but these are included here for completeness, and so that businesses and employees can consider their plans for business motoring. The changes are best illustrated by example, so an illustration follows.

Changes already announced : April 2011

• The upper list price limit of £80,000 will be abolished. Clearly this will represent a significant tax increase for some drivers, but the average company car driver will be unaffected by the change.
• The “Table” rates will all increase by 1% for those drivers in the range 15% to 35%, but retaining the maximum rate of 35%. So a driver presently taxed at 18% of list price will be taxed on 19% of list price from 2011/12
• The alternative fuel discounts, available to drivers of hybrid and some other alternative fuel vehicles will be abolished. This will further increase the tax charge by up to 2% of list price for many drivers, unless their car’s emissions are less than 120g/km (which are taxed at the special rate of 10%).
• The effect of these changes will be most noticed by those drivers who drive relatively fuel efficient cars, as they will see the largest relative rise in their tax liability.

Changes already announced – April 2012

• The table on which the benefit is calculated will be reformed and will commence at 10% of list price rather than 15%. Cars emitting no more than 99g/km will attract 10% tax charge, with the table progressing up in steps of 5g/km for 1%, starting at 100g/km = 11%. Drivers of cars emitting at 120g/km exactly will be worst hit as they are currently taxed at 10% of list price but this will increase to 15% of list price in 2012 – a 50% increase in their tax bill! Drivers of many of the current “super mini” cars will see their tax rise from 10% to 12%.

Changes announced on 23 March 2011

• The table will be further revised downwards to bring the rate of 10% available to cars emitting less than 95g/km, increasing the tax charge still further for car drivers.

Example – Bill’s car
Bill replaced his company car in 2009. He gave up his Ford Mondeo, and in view of the increasing cost of company car taxation, he decided to opt for a Ford Focus. The emissions are 159 g/km and the list price was £15,967. The rate of tax in 2009 was 19% bringing the benefit in kind to £3,034.

In 2010/11 this has increased to 20% and therefore £3,193 and from April 2011 this will increase to £3,353. From April 2012 his benefit will rise to 22%, making the benefit £3,513, and from April 2013 (the latest announcement) £3,672. Overall, if Bill retains the car until it is 5 years old, his tax charge will have increased by 21%.

Julie’s car
Julie was keen to invest in a fuel efficient car through her business (a limited company), and she therefore bought a car with list price of £9,600 and an emissions rating of 118g/km. She is currently taxed at 10% of list price – a benefit of £960.

In April 2012 her benefit in kind will become 14% of list price – £1,344, and in April 2013 it will rise to 15% – £1,440. Her rise in tax charge is 50%, even though she followed the policy that she thought the Government was supporting.

Free fuel for private motoring
Where an employee is provided with free fuel for private motoring by his employer, he is taxed at the relevant percentage (determined by CO2 emissions) of the fixed fuel benefit. This is currently £18,000, having been increased from £16,900 in April 2010 (an increase of 6.5%) which was the first increase for two years.

It has been announced that the new base figure will be £18,800, a 4.4% increase.

Company car drivers, and particularly directors of OMB’s should bear in mind that this brings the total increase since April 2008 to 11.2%, during which time fuel prices have increased by substantially more.

Planning point: review the provision of free fuel for private motoring in view of the very limited increase in this figure.

VAT fuel scale charges

When a business recovers VAT on fuel purchased for use in a company car, a VAT charge is made if the car is used for private journeys. The VAT fuel scale charges will increase for VAT accounting periods starting 1 May 2011, by an average of 11%. Once again, businesses suffering a 20% increase in fuel prices may find that recovering VAT on fuel once again becomes worthwhile.