BUSINESS EXPENDITURE ON CARS Representations submitted on 26 February 2009 by the Tax Faculty of the Institute of Chartered Accountants in England and Wales in response to a consultation document Modernising tax relief for business expenditure on cars: a technical note issued jointly by HMRC and HM Treasury on 28 December 2008 Contents Paragraph Introduction 1-2 Key point summary 3 7 General comments 8 17 Detailed comments 18-31 Annex 1 - Who we are Annex 2 - The Tax Faculty s Ten Tenets for a Better Tax System ICAEW Tax Faculty, Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ www.icaew.com/taxfac T +44 (0)20 7920 8646 F +44 (0)20 7920 8780 E tdtf@icaew.com 1 of 1
BUSINESS EXPENDITURE ON CARS INTRODUCTION 1. We welcome the opportunity to respond to the HM Treasury and HMRC consultation document published on 8 December 2008 at http://www.hmtreasury.gov.uk/taxrelief_cars_technote.htm which provides an update to the 2007 consultation document and sets out the preferred option of Government for a new capital allowances regime for cars and the lease rental restriction. 2. Details about the Institute of Chartered Accountants in England and Wales and the Tax Faculty are set out in Annex 1. Our Ten Tenets for a Better Tax System by which we benchmark proposals to change the tax system are summarised at Annex 2. KEY POINT SUMMARY 3. We agree that the existing rules for expensive cars could be simplified but consider that the proposals will not achieve the administrative savings or other objectives sought. 4. Simply raising the existing 12,000 threshold for expensive cars to 25,000, as recommended in our earlier representation, would restore the original purposes of the expensive car rules in identifying luxury vehicles without the additional complexity involved in changing the whole allowances system. 5. If one of the policy purposes is to reduce emissions, it would be reasonable to take into account how many miles a car actually travels in a year rather than just its stated CO 2 emissions figure. 6. As to the proposals: CO2 data gathering will be costly, and The difference between 20% and 10% writing down allowances seems unlikely to have a significant impact on buying behaviour. 7. Pooling cars will impose a disincentive against disposing of old cars and investing in new and generally cleaner cars as there will be no balancing allowance when an old car is disposed of. We therefore recommend that if the new regime is adopted then short life assets elections for cars in the 10% pool be made available. GENERAL COMMENTS 8. We support the Government s stated criteria in relation to the current proposals to modernise the current regime for tax relief for business expenditure on cars. These are: Reduced compliance costs Consistency with environmental objectives to reduce CO 2 emissions Consistency with sound public finances and the Government s fiscal rules 2 of 2
9. The Government published the original consultation document in March 2006 Modernising tax relief for business expenditure on cars, which can be found at http://www.hm-treasury.gov.uk/media/1e0/d7/bud06_cars_241.pdf. The Tax Faculty responded to this consultation in September 2006 as TAXREP 28/06, which can be found at http://www.icaew.com/index.cfm?route=142207. 10. A revised document was published by HM Treasury and HMRC on 21 March 2007 at http://www.hm-treasury.gov.uk/media/708/61/bud07_capitalcars_223.pdf to which the Tax faculty responded as TAXREP 40/07 which can be found at http://www.icaew.com/index.cfm/route/148211/icaew_ga/doc. 11. Paragraph references and the extracts below refer to the current consultation document. 12. The details of the proposals are as follows: Capital allowances The existing 100% first-year allowance will be retained for expenditure until 31 March 2013 on cars with CO 2 emissions up to 110g/km; The general plant and machinery capital allowances pool (20% pool) will be used for cars with CO 2 emissions between 111 and 160g/km; and The new lower rate writing-down allowance pool (10% pool) will be used for cars with CO 2 emissions above 160g/km. Lease rental restriction The lease rental restriction will be abolished for all cars with CO 2 emissions up to 160g/km, permitting the full allowance of leasing payments against the profits of businesses leasing those cars; and A uniform fixed percentage disallowance of 15% will be applied to all leasing payments that businesses can offset against profits for all cars with emissions above 160g/km. Answers to Specific Questions Do the draft clauses deliver the Government s stated policy aims, and, if not, what changes are required to do so? 13. Whilst we think that these rules may encourage businesses to use more environmentally friendly cars, we do not think that these proposals will reduce compliance costs as claimed. A simpler solution to reduce complexity would be to raise the existing 12,000 expensive car limit to 25,000. This would enable the majority of cars to be pooled while leaving the framework of the system unchanged. Would it be a desirable simplification to exclude motor cycles from the capital allowances definition of a car? 14. We agree with the proposal which excludes motor cycles from the definition of cars in this context, however, we note that there remains an environmental issue for businesses using motor cycle couriers and delivery riders. Government may wish to consider more carefully the tax reliefs given to more polluting bikes. 3 of 3
Is the proposed 5-year transitional period reasonable? 15. We believe that it is reasonable. Would it be reasonable to allocate all expenditure incurred after commencement on cars registered before 1 March 2001 to the main (20 per cent) capital allowances pool? 16. We agree that this is a reasonable solution and welcome that fact that businesses will not need to ascertain the CO 2 emissions data for such vehicles. Since the cars are already being operated, there would seem to be little environmental benefit in imposing this additional burden on businesses. Would it be reasonable to allocate expenditure on all cars, registered on or after 1 March 2001, without an approved CO 2 emissions figure, to the special rate (10 per cent) pool? 17. Again, we believe that this is probably reasonable, as it remains open to businesses, or indeed the manufacturers, to obtain an approved CO 2 emissions figure. DETAILED COMMENTS 18. The latest document in the series once again seems simply to restate what appears to have been the Government s preferred option from the outset. The additional suggestions which we made in each of our earlier responses appear to have been ignored. Compliance costs 2.6 Business has made it clear, both in discussions and in responding to the consultations, that the current expensive car rules impose a disproportionate compliance burden. Unlike for most plant and machinery, businesses are required to put expenditure on each expensive car in a single asset pool, maintaining separate capital allowance computations for each car and identifying when a car has been purchased or disposed of. As a result, the expensive car computations are often the single largest component of the tax computation. There are similar compliance cost issues for the lease rental restriction. Outdated 2.7 Business has also often expressed the view that the rules are outdated. They were first introduced in 1961, as a surrogate benefits charge on luxury cars. That benefit element is now taxed by the company car tax regime. Furthermore, the current limit of 12,000, above which cars are deemed to be expensive, means that in today s market more than half of the business car population is classed as expensive. (Extract from current consultation document) 19. We find the idea of a car pool for all cars an attractive simplification, but we think that raising the existing 12,000 threshold for expensive cars would achieve the same effect without the need for reams of new legislation. 4 of 4
20. We reiterate that a new limit of 25,000 would restore the original policy purpose of the expensive car rules in identifying luxury vehicles without the additional complexity involved in changing the capital allowances system for cars. 21. We understand that the point of these proposals is to encourage businesses to buy more energy efficient cars and so benefit the environment. However they address only part of the issue. 22. They fail to take into consideration how many miles a car travels in a year. The adverse environmental consequences arise from use of a car rather than the theoretical emissions level of the car. A car with high emissions that does a low annual mileage may be less harmful to the environment than a low emission car that does a high annual mileage, although in environmental terms lower emission cars would be preferred in either case. If the Government s overriding policy was to limit the environmental damage caused by cars, the tax regime would favour low emission cars and also encourage drivers to ask the question is my journey really necessary?. Compliance costs of the new system 23. The proposals do not recognise the practical information capturing requirements necessary to effect the change. Whilst a business will need to know the CO 2 emission level of a car in order to complete an employee s P11D, they will not usually capture this information for use by other accounting functions. Most accounting systems will not currently have a mechanism for capturing CO 2 emissions. Hence the data gathering exercise to calculate the tax allowances will be significant for businesses with large fleets. We therefore disagree with the conclusions of the Impact Assessment that the record keeping requirements of these proposals will be minimal. Rate of WDA for new pool 24. We do not believe that the difference between the 20% and 10% rates of writing down allowance (WDA) will have a significant impact on buying decisions. 25. Furthermore, the 10% rate of allowance will inevitably lead to a greater mis-match between net book value of the vehicle and the written down value for tax purposes at a time when aligning tax and accounting rules is seen as a desirable way of reducing administrative costs. Tax deduction remaining 1 2 3 5 10 15 20 25 WDA 25% 75% 56% 42% 24% 6% 1% 0% 0% Reducing balance (RB) WDA 20% RB 80% 64% 51% 33% 11% 4% 1% 0% WDA 15% RB 85% 73% 61% 44% 20% 9% 4% 2% WDA 10% RB 90% 81% 72% 60% 35% 21% 12% 7% WDA 5% RB 95% 90% 86% 77% 60% 46% 36% 28% 5 of 5
26. As most business cars have a lifespan for a business of under 10, and in many cases under 5, years, for writing down allowance rates of 15% or less, a substantial element of the tax deduction for the expenditure will not be received until well after the car has been disposed of. In our judgement, a 25% writing down allowance is a reasonable reflection of actual depreciation. Problems with pooling 27. Newer cars are producing less CO 2 emissions than older cars (as shown by Chart 7.2 on page 184 of the 2007 Budget Red Book ). The pooling aspect of these proposals will discourage businesses from replacing their cars with a newer and probably less polluting model. When a vehicle is pooled, a balancing allowance will only arise on its disposal if the whole business ceases, otherwise the WDA continues to be given each year in perpetuity. Under the current system, expensive cars are de-pooled and so a balancing adjustment always arises on disposal, which perversely acts as an incentive to buy expensive cars. 28. Accordingly we would suggest that a short life asset election should also be available for cars in the 10% pool. 29. If this approach is adopted, it may be desirable to extend the normal short life asset election period from 5 years since rapid turnover of vehicles has of itself an environmental cost. We note that the ability to make a short life asset election could have a compliance cost, but this cost would be voluntary. Lease rental restriction 30. We support the government proposals in relation to leased cars, including the suggestion that the restriction should apply to only to one lessee in a chain of leases. Diesel cars 31. We are not experts on the environmental impact of petrol as against diesel cars but given the technological improvements in car engines generally and that diesel cars may produce more pollutants but tend to be more fuel efficient than petrol cars, we think that the differences between them are not sufficient to warrant separate treatment. AM 26/2/09 6 of 6
ANNEX 1 WHO WE ARE 1. The Institute of Chartered Accountants in England & Wales is a professional body representing some 128,000 members. The Institute operates under a Royal Charter with an obligation to act in the public interest. It is regulated by the Department of Trade and Industry through the Accountancy Foundation. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy (which includes taxation). 2. The Tax Faculty is the centre for excellence and an authoritative voice for the Institute on taxation matters. It is responsible for tax representations on behalf of the Institute as a whole and it also provides services to more than 11,000 Faculty members who pay an additional subscription. 3. Further information is available on the ICAEW Tax Faculty website at www.icaew.com/taxfac or telephone 020 7920 8646. 7 of 7
ANNEX 2 THE TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99; see http://www.icaew.co.uk/index.cfm?route=128518. 8 of 8