Chancellor of the Exchequer George Osborne delivered the recently elected coalition Government’s Budget today (Tuesday, June 22) in what was billed as the most brutal statement in a generation in a bid to tackle the country’s £155 billion deficit.
He laid out a five-year programme to eliminate the hole in the public finances, which he said was essential to protect Britain from the debt crisis sweeping Europe and to rebuild the British economy.
Mr Osborne said: “Reducing the deficit is a necessary precondition for sustained economic growth; today’s plans will help to restore stability and balance to the economy, underpinning private sector confidence to support recovery.
Calling the Budget ‘progressive’, Mr Osborne said: “We have provided the foundations for economic recovery in all parts of our nation and given our country some of the most competitive business taxes in the world.”
While the rise in VAT from 17.5% to 20% on January 4, 2011 will steal the headlines a number of other changes in tax rates will impact on how businesses fund their company vehicles and whether they continue to pursue cash alternative schemes to company cars (see below).
In addition, the emergency Budget statement confirmed a number of changes that were announced in the last Government’s spring 2010 Budget. These include changes to company car tax and fuel duty increases.
Below are the key measures impacting on the fleet and motor industry.
Value Added Tax
As widely anticipated the Government will increase the standard rate of Value Added Tax (VAT) to 20% from 17.5% from January 4, 2011. The Society of Motor Manufacturers and Traders has calculated that the move will add around £300 to the price of the average new car.
Insurance Premium Tax
The Government will increase the standard rate of Insurance Premium Tax (IPT) to 6% from 5% and the higher rate to 20% from 17.5% from January 4, 2011.
Employee and employer National Insurance (NI) rates will increase by 1% from April 6, 2011 as announced in the March Budget by the previous Labour Government. As a result employee rates will increase from 11% to 12% and employer rates from 12.8% to 13.8%.
However, to help offset the 1% rise in employer NI, the Chancellor announced that the level at which employers start to pay their contributions would increase by £21 per week above indexation from April 2011. The value of indexation will be determined by data available in the autumn. The Chancellor said that the negative effect of the employer rate rise – the so-called ‘tax on jobs’ – would be largely reversed by increasing the threshold.
A reduction in the main rate of corporation tax from 28% to 24% will take place in 1% cuts over the course of four financial years starting on April 1, 2011.
The Chancellor also announced a reduction in the small profits rate of corporation tax from 21% to 20% from April 1, 2011 rather than rising to 22% as inherited by the previous Government.
A reduction in the main rate of capital allowances on plant and machinery, which includes vans and cars, from 20% to18%, and the special rate from 10% to 8% from April 2012.
All the above tax changes will impact to a greater or lesser extent on the optimum funding mechanism chosen by businesses to fund their vehicles.
While the rise in VAT will clearly trigger an increase in vehicle list price, fuel and service, maintenance and repair costs, the effect of all the other tax changes will to some degree impact on whether organisations buy or lease their company cars and vans, provide staff with a cash allowance or opt to introduce a salary sacrifice scheme.
Consequently, over the coming months many organisations will be conducting wide-ranging reviews of their current fleet funding routes to ensure that both they and their employees, who will also be effected by changes in personal allowances, do not lose out financially from the changes.
Whatever, the reviews highlight it can be expected that new vehicle registrations will be higher than previously expected in the final months of 2010 as fleets and private motorists look to beat the January 4, 2011 2.5% increase in VAT.
Other Budget announcements
The Chancellor said that there would be no new increases in fuel duties over and above those already announced by the previous administration in the March 2010 Budget.
Therefore, there will be a 1p a litre rise in duty on October 1 and a further 0.76p a litre rise on January 1, 2011.
The Chancellor also reiterated that fuel duty would increase by 1p a litre above inflation in 2011/12, 2012/13, 2013/14 and 2014/15.
Meanwhile, the Chancellor has asked the Office for Budget Responsibility to undertake an assessment over the summer of the effect of oil price fluctuations on the public finances. Informed by this assessment, the Government will examine options for the design of what it calls a ‘fair fuel stabiliser’.
The introduction of the stabiliser in a bid to keep pump prices in check was one of the election pledges of the Conservative Party.
In their manifesto the Tories said that the stabiliser would ensure that when oil prices went up, tax on fuel would reduce; and when oil prices dropped, taxes would rise. It is claimed that such a policy would keep prices at the pumps more consistent and would ensure that families, businesses and the whole British economy were less exposed to volatile oil markets, and that there was a more stable environment for low carbon investment.
In addition, reflecting the coalition Government’s commitment to investigate measures to help with fuel costs in remote rural areas, the Government is considering the case for introducing a fuel duty discount in remote rural areas. This includes possible pilot schemes in Scotland.
Green Investment Bank
The Government says it is determined to address barriers to investment in a low-carbon economy. Therefore, following the annual Spending Review, the results of which will be announced on October 20, the Government will put forward detailed proposals on the creation of a Green Investment Bank to help the UK meet the low-carbon investment challenge.
The Government says it is considering a wide range of options for the scope and structure of the Bank. The options will be evaluated for effectiveness, fiscal affordability and transparency.
Company car tax
The Chancellor said that the Government would reform company tax so that it continued to provide an incentive to businesses purchase the lowest emitting vehicles on the market.
As a result, the coalition Government intends to press ahead with the company car benefit-in-kind tax threshold changes that it inherited from the previous administration.
From April 2011, the basic threshold for the 15% band of company car tax will therefore be reduced by 5 g/km of CO2, so that the band applies to cars emitting between 121 and 129 g/km. The percentage of list price subject to tax will then continue to increase by one percentage point with every 5 g/km increase in emissions, to a maximum of 35% (see table below).
The £80,000 cap on car list prices used to calculate the taxable benefit arising from company cars will also be abolished on April 6, 2011, as will discounts on higher-emitting hybrid cars and alternatively fuelled company cars.
From April 2012, the 10% band for cars emitting 120 g/km of CO2 or less will be removed, as already announced, and the benefit-in-kind tax system of bands will be extended so that they increase by one percentage point with every 5 g/km of CO2 increase in emissions, from 10% . The 10% band will apply to cars that emit 99 g/km of CO2 or less.
G/km of CO2 % of list price
|120||120||up to 99||10|
- Add 3% for diesels up to a maximum of 35% (2012/13 unconfirmed)
Capital allowances for zero-carbon goods vehicles
The Chancellor confirmed that legislation would be in the Finance Bill in the autumn for an enhanced capital allowance for zero-carbon goods vehicles. It will apply to vehicles purchased from April 2010, and will be in place for five years as announced by the previous administration in the March 2010 Budget.