Car enthusiasts often dream of driving a fast, flash car or a hulking beast of a motor, and in times gone by access to such a vehicle in the form of a company car was possible. But times have changed. Chancellor Gordon Brown has given Va Va Voom to the Renault Clio and the rest of the small car market by introducing tax changes that have seen your average company car man forced to consider downsizing from his petrol-guzzller to an altogether more petite model.
The changes to the UK company car tax system throughout the 1990s and the early twenty-first century, coupled with a shift to an emphasis on flexible benefits at work, has meant that increasing numbers of employers are offering the option of cash over a company car. According to human resources consultancy Mercer, in the early 1990s only 6 per cent of companies offered a cash alternative compared with 92 per cent now.
Although the Government is expecting that recent tax changes will attract a different kind of company car driver rather than persuade companies to get rid of the perk altogether, issues such as congestion charging and the widely discussed tax on car park spaces for company vehicles could make the perk considerably less appealing to employers and their employees.
Deciding whether to take the cash or a car is increasingly becoming a dilemma for staff eligible for this particular perk - and the answer is not straightforward.
Up until last April tax on your company car was largely based on its size and how many miles you covered. What this meant was that the more miles you drove the bigger tax breaks you got, meaning that essential car users such as sales reps were generally better off than those who used their vehicle for the odd trip. However, since 6 April last year tax payable is now largely dependent on how environmentally friendly a car is, completely changing the profile of those who benefit.
'A general theme across the 1990s and into more recent times has been an increase by one means or another in company car tax. The recent green tax changes have not had the biggest impact but they have changed the profile of taxation on cars,' says David Wreford, senior consultant at Mercer.
'If you have a low emission vehicle you're generally speaking quids in. It's people who used to do high mileage in gas guzzling cars who are being penalised.'
The starting point for calculating the benefit charge is still the list price of the car (plus accessories) but the percentage of price actually charged to tax depends on its carbon dioxide emissions.
The normal minimum charge is on 15 per cent of the car's price and the maximum charge is on 35 per cent of the car's price. Government website www.vca.gov.uk details carbon dioxide emissions for new cars registered since March 2001. For older cars the Society of Manufacturer and Traders (SMMT) provides a similar service free of charge on its website, www.smmt.co.uk.
There has been a general shift in the type of car user who is now considering taking cash.
'Previously cash alternatives were often taken by "perk" drivers, those who wouldn't necessarily need their vehicle for business purposes. This has now swung round so that it is the essential car users who are considering the cash alternatives more seriously,' says Alison Chapman, tax partner at Deloitte and Touche.
'However, everyone should work out their own tax calculations. Do not assume that because your colleague next to you has worked out that he or she might be better off with a cash alternative that the same rule applies to you.'
If the idea of doing your own calculations seems daunting, there are numerous websites offering benefit-in-kind calculators. Deloitte and Touche has its own website dedicated to the issue of company car tax, and includes such a calculator, at www.cartax.co.uk. There is a charge of £12.50 for the service but other websites do offer it for free.
Even if you work out that you will be no better or worse off under the new rules in this tax year, check to see how this will change in the coming years. Many companies offer cars as a three-or four-year perk and the Government is tightening the rules each tax year so that cars will have to become increasingly environmentally friendly to benefit.
For example in the 2003/2004 tax year the 15 per cent tax band, for cars which emit up to 169g/km of carbon dioxide, will only be available to cars which emit 149g/km or less. For a Ford Mondeo driver using petrol rather than diesel and in the higher rate-tax band, under the old mileage-based system, his or her tax bill would have been £865 if more than 18,000 miles a year were covered. In the tax year 2002/3 this will be £1,096 but will rise even further to £1,211 in the following tax year and by a further £115 in 2004/5, according to figures from HSBC.
Swapping to a diesel-powered car might be more economical as they emit lower levels of carbon dioxide, but other less beneficial effects on the environment mean that an extra 3 per cent is payable on tax bands for diesel powered vehicles.
One disadvantage of taking the cash option is that financing your own vehicle and paying for maintenance can seem a bit of a nightmare when you're used to a company car.
You will also have to insure the car yourself and because you won't have built up a no-claims discount you could expect to end up paying a heavy price. It is worth looking for an insurer who will take into account your driving history as a company car driver to calculate premiums.
Tax brake
Finnance director John Bennett has just swapped his car for the cash option offered by his company, Westbury Homes, and bought himself a smaller model of his favoured BMW. Although John, 55, worked out he would more or less break even in terms of the tax he would have paid over the next few years, he felt that he would be better off in the long-term.
'Because I'm the sort of driver the Chancellor has aimed his reforms at, I felt tax changes would only get worse and that I was likely to suffer in the long run,' he says.
His company has only recently started offering a cash alternative to existing and new employees and to date about 30 per cent of the 700-strong workforce have opted for cash.
Perks and penalties
The sales rep
Sales rep James drives a five-door Ford Mondeo 1.8i 16v LX with a list price of £14,645. The C02 emissions are 187g/km and he drives more than 18,000 miles a year.
Under the old system he would have owed £878.40 in tax but his liability in the current tax year has risen and as the tax bands are tightened on C02 emissions in coming years, his tax liability will grow.
Tax owed:
Under old rules £878.40
2002/2003 £1,112.80
2003/2004 £1,230.00
2004/2005 £1,347.20
Middle manager
Sarah is an assistant manager at a large chain of clothes stores and drives a BMW 320i SE. The list price is £22,880 and the C02 emissions are 213g/km. She drives more than 2,500 miles a year but less than 18,000.
She loses out increasingly as the tax years roll on, but if she had gone for the same make and model of car powered by diesel, she would be better off to the tune of £635 in the current tax year, and this would remain at the same level for the next two years.
Tax owed:
Under old rules £2,288
2002/2003 £2,196.40
2003/2004 £2,379.20
2004/2005 £2,562.40
'Perk' driver in eco-friendly car
Robert is a journalist with a Volkswagen Lupo 1.0E who covers fewer than 2,500 miles a year. The list price of his car is £7,440 and the carbon dioxide emissions are low at 139g/km.
He benefits substantially under the Chancellor's new system, and his tax liability remains steady for the next two years.
Tax owed:
Under old rules £1,041.60
2002/2003 £446.40
2003/2004 £446.40
2004/2005 £446.40
· Examples based on a higher-rate taxpayer. Source: Deloitte & Touche.
