Clause 51 - Taxable benefits: calculating the appropriate percentage for cars

Finance (No. 3) Bill – in a Public Bill Committee at 12:00 pm on 7th June 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 12:15 pm, 7th June 2011

I want to discuss the clause because it raises interesting issues on which it is important that the Minister responds. It relates to taxable benefits on company cars and, with effect from 6 April 2013, modifies the current appropriate percentage bands and carbon dioxide emission thresholds by revising the relevant threshold down to 95g of CO2 per kilometre from the current 100 grams.

The background to the clause is relatively straightforward in that the appropriate percentage of CO2 emissions multiplied by the list price of a car, adjusted for any taxable adjusted accessories, provides the level of chargeable benefit for company car tax for employees and the level of class 1A national insurance contributions for employers. From 6 April 2012, the graduated table of company car tax bands will provide for a 0% band for zero-emission cars, which is welcome, a 5% band for ultra-low emission cars, which means emissions of 1 to 75 grams of CO2 per kilometre, and a new 10% band for other low-emission cars, but with a 1% increase for each rise in emissions of 5 grams of CO2 per kilometre above 100 grams of CO2 to a maximum of 35%.

The clause changes the 10% band for low-emission cars to 76 to 95 grams of CO2 per kilometre from 6 April 2013. The rule under which there is a 1% increase in the appropriate percentage for each rise in emissions of 5 grams of CO2 per kilometre above 100 grams of CO2 to a maximum of 35% will apply instead to each rise in emissions of 5 grams of CO2 per kilometre above 95 grams of CO2. Long-winded and complex as it is, that means that there will be an impact on nearly all company car drivers from April 2013.

I would welcome the Minister’s confirmation that this is in effect a tax rise for all those who drive a company car that is anything other than ultra-green in its CO2 emissions. I will not urge my hon. Friends to vote against the proposals, but I recall that before the election, the Labour Government were accused on a number of occasions of introducing “stealth taxes”—I think that was the phrase, as my hon. Friends may recall  in due course. Will the Minister confirm that this is a tax rise for company car drivers from April 2013? How many people and businesses will the changes hit? What incomes do they have? What is the likely total tax take of the change?

I refer to another esteemed organ of the media: The Daily Telegraph, which, like the Daily Mail, I agree with and look at; I obviously support everything it says. I understand that it is the gospel truth on these matters. It said on 23 March 2011:

“The Chancellor has increased the amount they pay by one per cent with drivers of larger cars…being hardest hit…This will mean, for example, that the driver of a two litre Ford Mondeo, who is a higher rate taxpayer, will face an annual tax bill for the car of £2,127, an increase of £76. It is estimated that the change will earn the Treasury an additional £125 million” a year.

“Only drivers of company cars emitting less than 95 grams of CO2 per kilometer—such as the Toyota Prius —will be exempt from the increases. “

I would welcome the Minister’s confirmation that company car drivers will pay more. That is not because we are going to vote against the clause, but because I would like to hear from the Minister that she is increasing taxation on company car owners and drivers by that amount. Will she give me figures on what it will mean for an additional normal car, and what it means in total for the Treasury take?

Photo of Bill Esterson Bill Esterson Labour, Sefton Central

My right hon. Friend rightly asks a Government Minister to put it on the record that this is a tax increase. Does he agree that it is ironic that the Government are taking this line—not just for the reason he rightly gives—since for many years they have claimed to be a friend of the motorist? Although I do not want to vote against the measure, I think it is important that the Government are honest about what they are doing.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend. The Daily Telegraph, which rarely gets these things wrong, has said:

“On taking office the Coalition promised to end what it described as the ‘war on the motorist’. But last night the company car tax rises drew an angry response.

‘This budget isn’t particularly good news for company car drivers,’ said Kieren Puffett, Editor of the Parker’s car buying website.”

That was in the Daily Telegraph; it must be true. The coalition did promise to end the war on motorists. I want the Minister to tell the Committee that this measure will increase the cost to company car drivers. I want an assessment of how much and how many company car drivers will be hit.

Photo of Karl McCartney Karl McCartney Conservative, Lincoln

As ever, I am honoured to serve under your chairmanship, Mr Hood. Is the right hon. Member for Delyn aware that there are fewer ministerial cars under the coalition Government than under the previous Government? What car does the right hon. Gentleman drive, if he drives at all?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

First, there are fewer ministerial cars under this Government than the previous one. I previously used a Government car, as on occasions I had to leave the confines of the Department to come to Divisions, and I found it useful to have that support.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Is the right hon. Gentleman saying that he took a ministerial car to get to a Division?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The Minister will know that meetings in the Home Office to discuss security threats affecting airports and trains—which I dealt with as Minister responsible for counter-terrorism—were on occasion disturbed by Divisions. I came to the House from the Home Office, which is more than eight minutes’ walk away, to vote. That is not a particularly contentious point. Ministers in the current Government will, on occasion, jump in a car when a Division bells rings, to go from a Government office to the House of Commons to vote. That is a side issue in today’s discussions.

To answer the hon. Member for Lincoln, with due respect it is none of his business nor anyone else’s what car I drive now. If he wants to talk to me afterwards I will put it on the record outside. It is not a company car and it is not a Jag or a Rover. The clause is about company cars. My car is paid for from my salary as a Member of Parliament, which is the only income that I, unlike some other Members, receive. That is a matter for me and my bank. The clause is about company cars. Will the Minister and the hon. Gentleman tell me that the clause raises the cost of company cars, is a stealth tax and has a green purpose, which we support, as mentioned by my hon. Friend the Member for Sefton Central? I want to hear from the Minister how much the measure costs. Will she confirm the £125 million figure from the Daily Telegraph? Will she give me the average increase for company car drivers of the cost of the measure? Will she give an estimate of the total number of motorists who will be hit by the rise?

Photo of Alison McGovern Alison McGovern Labour, Wirral South

Does my right hon. Friend agree that when the history of this Government is written, and there is a footnote about cars, the car that will be remembered is the one that drove behind the Prime Minister as he cycled into the House of Commons?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The key issue [ Interruption. ]

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend has made her point in her own inimitable way.

I just want the Minister to stand up and say that she has raised taxation on company cars and that she has done it to be greener. I want her to tell us how much it raises and how many company car drivers are being hit by the measure, simply so that we can have that on the record.

Photo of Ian Murray Ian Murray Labour, Edinburgh South

My right hon. Friend mentioned the article in The Daily Telegraph and the section that refers to “the war on motorists”, but is this not another example of the Government’s war on the squeezed middle? A significantly larger number of people are being pulled into higher-rate tax. Living standards are plummeting to the levels of the 1920s. The measure is just another tax on people who work very hard for very little.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes a valuable point. I am only quoting from The Daily Telegraph, so it may be wrong—who knows?—but it says that

“the driver of a two litre Ford Mondeo, who is a higher rate taxpayer, will face an annual tax bill for the car of £2,127, an increase of £76.”

That, coupled with the increase in value added tax and the loss of child care benefits, as we discussed in earlier sittings, and with a range of other measures, is an important issue. I will not vote against the clause, but I at least want the Minister to stand up and give some response. I am sure that she will say that the Government have increased the threshold for which the reimbursement is taxable from 40p to 45p a mile, which is welcome, but will the Minister please tell us exactly how much is being raised, how many people are being hit and what the average cost is? Will she also tell us whether the resources gained from that additional taxation will go to the transport budget and help to meet the potholes repair bill, or will they just go towards the general deficit?

Photo of Bill Esterson Bill Esterson Labour, Sefton Central

My right hon. Friend is asking the right questions. Does he agree that, along with the proposal, it would be useful for the Minister to provide a combined analysis of the increased cost of motoring, the VAT increase and the various fuel duty increases that we have debated in Committee? We would then have an assessment of just how much more motorists have to pay.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

That would be helpful, because the combined impact of all the changes is significant for motorists.

I say to the Minister, so that she can reflect on these matters, that the measure, while it will increase costs for motorists and company car users and while it will raise money for the Treasury, is specifically designed to be a green measure and, therefore, to help to reduce the environmental impact of larger vehicles. I ask the Minister again what assessment she has made of the environmental or behaviour-changing effects of the proposals? Does she have a target to get company car drivers, and therefore fleet buyers, to reduce the litre size of the engines of the cars purchased? At the moment, she has indicated that the measure will, on average, impact on the two-litre motorist. Has she done any modelling in the Treasury of the potential impact on the size of cars bought by fleet buyers? We need an assessment of whether the change in taxation will change the behaviour of those who currently have company cars and who will hold them for the next three, four or more years. Has the Minister made any assessment of the number of people who will be affected by the change based on not only their future behaviour but their previous behaviour? That is important.

When introducing the measure, the then Financial Secretary, Mr Paul Boateng, said in a written answer:

“The new company car tax system from April 2002 is designed to achieve lower levels of harmful emissions from cars.”—[Official Report, 4 July 2001; Vol. 371, c. 171W.]

That will only be the case if lower levels of emissions are put in place for fleets of company cars. Has the Minister modelled that in any way, shape or form? If she has, could she share that modelling with the Committee?

Many employees who have company cars are given them for four years or, in some cases, even longer if they are on longer-term contracts. Decisions have been made based on the current rate of taxation. This change was announced in the 2011 Budget and will come into effect in two years’ time. Therefore, people will be hit in two years’ time who may still have their current cars. What is the Minister’s assessment of the impact? She appears to have assessed that the measure will raise £125 million for the Exchequer in 2013-14. How many company car drivers will that hit in 2013-14 and, indeed, what will the impact be of the £130 million in 2014-15 and the £135 million in 2015-16? What are the numbers and what is the impact? Will the Minister give that information to the Committee?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury 12:30 pm, 7th June 2011

Mr Hood, it is a pleasure to see you in the Chair today. Clause 51 makes changes to company car tax rates that will take effect from 2013. The shadow Minister calls it a stealth tax, but I hardly think that a tax that will be introduced in two years can be described in such a way. In fact, company car tax provides for the benefit-in-kind charges under income tax and employer’s national insurance contributions that apply to company cars. As I said, these rates were announced at least two years in advance precisely to give business some certainty about the level of tax involved in the provision of a company car. That broadly mirrors the previous Government’s approach in giving advance notice of company car tax regime changes.

As we have heard, the typical lifespan of company cars is around four years, so less than half of current cars will be affected. The right hon. Member for Delyn asked about the number of cars that will be affected. About 30 million cars are driven around the UK and about 1.1 million of those are company cars. We assess that less than half of current company cars will be affected by the measure.

As the right hon. Member for Delyn pointed out, the company car tax regime was reformed in 2002, and is now based on CO2emissions. As we explained, that has had the effect of encouraging the uptake and development of more fuel-efficient cars in company fleets and has resulted in average new car emissions being reduced by around 30g/km by 2010. The changes made by the clause are in response to the continuing and rapid advances in vehicle technology. For example, industry data show that for the average brand new company car, the average CO2emission level fell from 166.6 g/km in 2006 to 153.4 g/km in 2009. That is a reduction of 2.7% per annum, which I am sure all hon. Members welcome. To help to encourage businesses and drivers of company cars to drive the most environmentally-friendly cars, the clause sets out key changes to apply in 2013-14.

From 6 April 2013, the appropriate percentages for all vehicles with CO2emissions between 95g/km and 219g/km will be increased by 1 percentage point. Effectively, that will result in a freeze in rates for cars emitting under 95g of CO2per kilometre. Committee members will know that it is an EU target that all new cars will emit only 95g or less by 2020. So to achieve this overall measure, the relevant CO2thresholds in the graduated table of company car tax bands will be moved down by 5g per kilometre. Zero CO2-emitting cars retain the appropriate percentage of 0%, and the 5% rate will also remain for ultra-low carbon cars emitting between  1g and 75g of CO2per kilometre. The right hon. Member for Delyn referred to the importance of the company car fleet, which feeds into the second-hand car market, so encouraging the uptake of cleaner company cars will also have beneficial effects on the second-hand car fleet in due course.

It is not easy to estimate how much extra company car drivers will pay, because that will depend on the list price, the CO2 emissions, and the employee’s income tax rate in 2013, but an illustrative example is that a Ford Focus driver paying the basic rate of income tax could see an increase of around £34.

The hon. Member for Sefton Central asked about the Budget’s overall impact on motorists. It introduces a £1.9 billion package to support motoring and motorists, and we have worked to ensure that it will alleviate the substantial pressure on the cost of living that has resulted from high oil prices feeding into high petrol prices.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

Yet around the end of May, the Daily Mai l said that the Budget proposals for company car drivers amounted to stealth taxes that are detrimental to business drivers.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Well, as I think has been pointed out, the company car drivers who will bear most of the tax increase will be those with the biggest and most CO2-emitting cars. Ultimately, we must strike a balance between ensuring that the company car tax regime keeps up with changing technology, and that the tax regime has the same impact on people who are lucky enough to have a company car—most people with a job in this country do not have a car as part of that job—and encourages them to pick an environmentally friendly car.

Another key part of the Budget is the second tranche of the rise in the personal allowance, which will help more than 1 million people by taking them out of tax altogether, and 23 million more broadly by reducing their income tax. We are introducing support across the board to help people who are in work. Overall, the changes incentivise manufacturers to develop and businesses to purchase low-carbon vehicles while ensuring the sustainability of public finance, and helping to reduce the UK’s CO2 transport emissions. The measure strikes the right balance.

Question put and agreed to.

Clause 51 ordered to stand part of the Bill.