Clause 23 - Taxable benefit of cars: the appropriate percentage

Finance Bill – in a Public Bill Committee am 2:45 pm ar 21 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The clause relates to the taxable benefits on company cars that are made available for private use, known as company car tax. The company car tax calculation, which previously had been calculated purely on the basis of business mileage, was rightly reformed in 2002 by the previous Government to be based on CO2 emissions.

Sections 121 to 148 of the Income Tax (Earnings and Pensions) Act 2003 provide for calculating the cash equivalent of the benefit of a company car that is made available for private use. In broad terms, the calculation depends on the list price of the car multiplied by the level of carbon dioxide emissions that that car produces. The outcome of the calculation is expressed as the appropriate percentage, which means that the lower the cars emissions are, the lower the percentage.

The appropriate percentage for such cars was an area on which we had a lengthy discussion during last year’s Finance Bill Committee. We do not want to replay that unnecessarily this year, but many concerns were raised by Opposition Members about the impact that increasing by 1 percentage point the tax rate on company cars emitting carbon in excess of 75g per kilometre would have on people’s pockets—particularly those on modest incomes, such as district nurses, midwives and carers, who often have little choice about whether they use a company car. [Interruption.] I hear reassuring noises from my hon. Friend the Member for Gateshead, who contributed passionately to last year’s debate.

This year’s clause on the appropriate percentage for such cars deals specifically with ultra-low-emission vehicles. That is, in the words of the tax information and impact note, part of the Government’s package

“to incentivise the purchase and manufacture of ultra low emission vehicles in the UK.”

I am keen to return to that wider issue when we consider clause 67, which looks at the capital allowances for cars with low carbon dioxide emissions, as supporting the growth of this industry is of particular interest to me and a number of my colleagues as north-east MPs.

As members of the Committee may know, the 2002 reforms to the company car tax regime mean that changes to rates are announced at least two Budgets in advance; that practice is intended to provide a level of stability and certainty in the company car market. Indeed, it is particularly helpful for fleet operators when making vehicle purchasing decisions, as the average length of company car ownership is between three and four years. The clause therefore legislates for changes that will not be made until April 2015, and relates to the decision, confirmed in Budget 2013, that the five-year company car tax exemption for zero and low-carbon vehicles will come to an end in April 2015, as originally legislated for in the Finance Act 2010.

I do not wish to confuse members of the Committee about the various dates involved, but they are key to discussions on this provision. The Minister will no doubt be aware of the impending ending of the exemption and the significant concern that that has caused to all involved in the burgeoning zero and low-carbon-emission vehicle industry. Consumer choice is absolutely critical to that industry, not least because fleet purchases—that is, company cars—accounted for the vast majority of the UK’s first 1,000 electric car and van sales.

Indeed, the proposed ending of the exemption led John Lewis—not the department store, but the chief executive of the British Vehicle Rental and Leasing Association—to express this concern just last year:

“By eliminating their company car tax exemption from April 2015, the Chancellor is getting rid of one of the main incentives for fleets to operate” electric vehicles. He concluded:

“This measure could kill the electric car market stone dead.”

Dr Ben Lane, the managing editor of Next Green Car—I am sure we all read that publication—suggested that the changes presented

“a serious challenge to the UK electric vehicle market”.

He said:

“At a stroke, this will remove one of the key fiscal drivers of the new market for plug-in electric vehicles.”

He went on:

“While fiscal incentives should be time-limited, 2015 is far too early to expect electric vehicles to compete with much lower priced petrol-hybrids and clean diesels. With battery and plug-in hybrid development still ongoing, and sales volumes still low, the playing field isn’t yet level enough for a fair fight. If this goes ahead, the electric vehicle market will be killed off before it’s even started.”

The measures in the clause to mitigate the ending of that exemption from company car tax are therefore a hugely welcome improvement. Also announced in Budget 2013, they mean that from April 2015 there will be two new company car tax bands for ultra-low-emission vehicles, a 5% band for cars with emissions of 0g to 50g of CO2 per km, which will rise to 7% by 2016-17, and a 9% band for cars with emissions of 51g to 75g of CO2 per km, which will rise to 11% in 2016-17.

Those rates are, for the record, lower than the 13% rate suggested by Budget 2012 for all zero-emission and low-carbon cars emitting less than 95g of CO2 per km in 2015-16, which was to rise to 15% by 2016-17. According to HMRC’s tax information and impact note, the clause will see a basic rate taxpayer who drives a zero-emission car with a list price of approximately £28,500 paying £450 less company car tax in 2015-16 than they would have done at the 13% rate.

A rate of 5%, however, is clearly higher than paying nothing at all. Will the Minister outline exactly what company car taxation the aforementioned basic rate taxpayer will be paying in 2015-16 compared with what they pay at present—which is, as far as I understand it, nothing? I would also like to hear what specific assessment has been made of the impact of these changes on the growth of the ultra-low-emission vehicle industry, particularly given the importance of company car purchases in supporting growth in that industry, and the critical role the industry plays in supporting apprenticeships and high-skilled jobs in regions such as mine, through the excellent Gateshead college, which is in the constituency of my hon. Friend the Member for Gateshead, and also through Nissan, with its significant local supply chain.

It is a positive development that after 2013 company car tax rates will be announced three years in advance to give the automotive and company car sector a level of certainty that will boost confidence and, hopefully, stimulate greater demand. It is also welcome that Budget 2013 stated that the Government will review these incentives  for ultra-low-emission vehicles in the light of market developments at Budget 2016 to inform decisions on company car tax from 2020-21 onwards. However, I urge the Minister to make a commitment that this matter will be kept under constant review, and that the Government take steps to act accordingly for the reasons I have outlined. My hon. Friends may also put forward similar arguments, given that it such a crucial sector to support in these early days of its development.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead 3:00, 21 Mai 2013

I echo my hon. Friend’s concerns, particularly about the future of the developing electric vehicle market. As my hon. Friend pointed out, Nissan is producing the Leaf at its Washington plant, and I am very glad that on a recent visit I had the opportunity to buy one—[ Interruption. ] Not to buy one, to drive one; I could not afford one. I have to declare an interest. I do not own a car, and I occasionally hire vehicles when I have to use one. I am greenish, because I do a lot of walking in my constituency. It is neat and tidy, my constituency, in terms of overall size.

The problem with developing the electric car market is first and foremost that the vehicles are, on the face of it, quite expensive. There is a high capital outlay at the beginning, but there is an immense saving on fuel as the vehicle is used. We therefore need to incentivise the market to get more of these types of cars on the road. If the Government are to be the greenest Government ever, one would think that incentives for electric vehicles such as the ones being produced by Nissan are crucial in terms of making sure we all collectively reduce our CO2 emissions.

In my area, the 6,000 jobs at the Nissan plant do not automatically rely on the production of the Leaf, but the growth of the Leaf product is crucial to the plant’s place in the European market in particular. An awful lot of vehicles from the Washington plant, as I mentioned last week, are exported directly to Europe via the dock at Jarrow. But in addition to the 6,000 jobs at the Nissan plant, something like 25,000 to 30,000 jobs in the supply chain industries working directly for Nissan are affected by what we do.

In developing the electric car market, we have to remember that we do not yet have an adequate network of charging points around the country. On top of that, it is a developing technology, in which we are hoping to see some breakthroughs in battery life and the mileage that cars can achieve in a day without recharging. One of the developments that has taken place is the updating of charging points. A rapid charging point can give a vehicle something like an 80% charge in the space of 20 to 30 minutes, which is vital for making sure people can carry on using their vehicles.

If incentives are withdrawn in the way that has been outlined, and company fleets shy away from purchasing electric vehicles because of the erosion of the tax relief, that will be a matter of grave concern. I am reflecting the opinions of people in the market itself. We could see something that is vital for our green investment future being strangled at birth, particularly through the fleet markets being eroded.

We need to get more of these vehicles on to our roads so that people can see what their performance is. Their performance is high but the capital outlay often makes buying an electric vehicle seem prohibitive. We need to demonstrate that they are the technology for the future.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

My hon. Friend makes a powerful case for electric vehicles. I visited Nissan with him and drove one of the new Leaf vehicles. I would love to be able to purchase one. One of the issues in a region such as ours that hampers the development and roll-out of electric vehicles is confidence. It boils down to confidence in the market, confidence in Government support for these new technologies and, as my hon. Friend eloquently puts it, confidence that they will not be strangled at birth. They will obviously multiply immediately once we start seeing more electric vehicles on the road; there will be that confidence for more people to buy into the technology.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

My hon. Friend makes a powerful point. I will listen with interest to the Minister’s response. Nissan is a fundamental industry for the north-east of England but it is also a fundamental industry for our future in terms of how it develops this technology to try to reduce our overall CO2 emissions from vehicular traffic. If we are not careful, a lot of our collective aims and objectives could be thwarted by something that might be regarded as a tad careless.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 23 makes changes that affect the level of tax payable on the private use of a company car. Company car tax was reformed in 2002 to reduce the carbon dioxide emission levels of cars. The amount of tax paid on a company car is now based primarily on the amount of carbon dioxide it emits. The changes made by the clause develop that reform and are in line with a wider £100 million package to support the purchase and manufacture of ultra-low-emission vehicles, also known as ULEVs, in the UK. At Budget 2013, we guaranteed reduced rates of company car tax for ULEVs until at least 2020. We announced a three-year extension of the 100% first-year allowance for ULEVs from 2015-16 and committed to reviewing both the company car tax and capital allowance incentives for ULEVs in light of market developments at Budget 2016.

We also said when we would announce company car tax rates. As we have heard, since 2002 they have been announced at least two years in advance. In future, company car tax changes will be announced three years ahead and I welcome the support for that policy. This will continue to provide stability and certainty in the company car market. It will allow employers and company car drivers to plan changes to their fleets well ahead of any tax changes.

The clause introduces two new company car tax bands for ULEVs which are effective from 2015-16. The detail of the bands is set out in the legislation but they effectively ensure that ULEVs will be taxed at a lower rate than conventionally fuelled cars. In 2015, ULEVs will also be taxed less than planned by the previous Government.

Let me provide an example. In 2015-16, a basic rate taxpayer driving a zero-emission car with a list price of £28,500 will pay £470 less company car tax than on a typical conventionally fuelled car. A higher rate taxpayer will pay £940 less. Those new bands support the purchase and development of ULEVs in the United Kingdom.

The clause also sets out the 2015-16 company car tax rates for non-ULEVs. The appropriate percentage of the list price subject to tax for the cars will increase by two percentage points, with effect from 6 April 2015.  That ensures that company car tax continues to reflect changes in fuel efficiency and supports the sustainability of public finances. A basic rate taxpayer with a popular conventionally fuelled car with a list price of £18,000 will pay approximately £72 more in 2015-16. The higher rate taxpayer will pay £144 more.

Employees can pay less by choosing a less polluting company car. The increase should be seen in the context of the larger extent of tax increase of £1,335 in the first allowance, which took place last month. Budget 2013 also announced a further increase of £560, which means that the personal allowance will increase to £10,000 in 2014-15 and, from April 2014, the cumulative effect of the Government’s personal allowance increases will have taken 2.7 million people out of income tax. A typical basic rate taxpayer will see a cash gain of £705 per year.

I was asked specifically about the impact of the CCT measures on ULEV sales.

Photo of David Gauke David Gauke The Exchequer Secretary

Shall I just continue responding to the question?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I was going back to a previous point.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I could not let this opportunity pass. While the personal allowance will decrease the tax burden on certain taxpayers, the increase in VAT to 20% and other changes to the tax and benefit system have been shown clearly to increase the tax burden on the very families that the Minister claimed in his statement the Government want to support. Ultimately, families will be worse off in 2015 than they would otherwise have been.

Photo of David Gauke David Gauke The Exchequer Secretary

I am tempted to broaden out my remarks and argue about the fact that we inherited such a large deficit and to say that, had we not taken the steps that we had, we would not have reduced the deficit by a third, while the Opposition favour increasing borrowing. But I will not make those points. I shall turn instead to the questions asked about the clause.

Given that the market is at an early stage of development, it is not possible to estimate precisely the impact on ULEV sales. It is fair to take into account the wider support that the Government provide to ULEVs. We are taking steps to encourage their purchase and, hence, contribute to our objectives to reduce greenhouse gas emissions from road transport, while supporting the manufacture of ULEVs in the United Kingdom. It is worth pointing out, in that context, that we have listened to the views of car manufacturers, and that we have announced a £100 million package to support the purchase and manufacture of ULEVs. It is also worth saying that some of our improvements to R and D tax credits are helpful. In its response to the Budget on 20 March, the Society of Motor Manufacturers and Traders stated:

“The Chancellor’s actions to improve R&D tax credits will help trigger extra business investment, and the change to the Company Car Tax rules for ultra-low emission vehicles will be welcomed by many in the UK automotive sector”.

It goes on to say that

SMMT is ‘delighted’ with the introduction, from April 2015, of two new bands at 0-50 g/km of carbon dioxide…and 51-75 g/km CO2”.

Of course, we will continue to monitor the ULEV market.

3.15 pm

Perhaps I should also turn to the point made by the hon. Member for Gateshead about recharging infrastructure. The Government have committed £74 million to recharging infrastructure. In February 2013, the Department for Transport announced a £37 million package to pay 75% of the cost of installing charge points in houses, on streets and at railway stations, and 2,800 charge points have been installed via the plugged-in places scheme since 2010.

Concerns have been raised about why we did not keep the zero rate for the lowest emission cars. I reiterate that the previous Government legislated that the rate for zero-emission cars would end in 2015. It is also worth pointing out that, under our plans, electric cars will be taxed at 5% in 2015 and 7% in 2016; the previous Government would have taxed electric cars at 9%, which is obviously more. I hope that that is helpful to the Committee.

Photo of David Gauke David Gauke The Exchequer Secretary

I give way on the controversial point that 9% is more than 5%.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

Does the Minister accept that in the three years since the 2010 election, a notional Labour Government might actually have changed their mind?

Photo of David Gauke David Gauke The Exchequer Secretary

I certainly do accept that. In fact, I notice that there is a tendency by the Labour party to place great weight on its own plans to reduce the deficit, and yet on any specific element of such plans—most notably on the fuel duty escalator—when pressed, it makes clear, as it did this morning, that it would not have stuck to the plans anyway. So I certainly do accept that any efforts to reduce the deficit would probably have been abandoned by the Labour party.

Photo of David Gauke David Gauke The Exchequer Secretary

Before I get drawn into debates about how this Government have reduced the deficit by a third, I will give way to my hon. Friend.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I want to help my hon. Friend the Minister. I appreciate that maths is not the greatest strength of the Opposition Front-Bench spokesman, as he once again demonstrates, but £120 billion is a lesser number than £180 billion, is it not? There has been a decline in the deficit from £180 billion to £120 billion, so the deficit has fallen by a third. It may help the Front-Bench spokesman if my hon. Friend reiterates that point.

Photo of David Crausby David Crausby Llafur, Bolton North East

Order. Minister, I think we should get back to clause 23.

Photo of David Gauke David Gauke The Exchequer Secretary

I will, in moving seamlessly towards clause 23, say that my hon. Friend is right that the deficit has indeed been reduced.

Clause 23 strikes a balance between supporting the UK’s ULEV market and ensuring that all company cars are subject to a fair level of tax. Together with the wider support that the Government are providing to ULEVs, particularly on recharging infrastructure, the measure will encourage the purchase and manufacture of ULEVs in the UK. Indeed, Nissan recently launched its zero-emission car, the Leaf, in Sunderland, as we have heard.

Photo of Mike Thornton Mike Thornton Democratiaid Rhyddfrydol, Eastleigh

I have a technical question. I understand from people who are knowledgeable about electricity generation in this country that a significant take-up of electric cars—for example, to 20% to 25% of motor vehicles—would severely affect our ability to produce enough electricity. Has that been taken into account?

Photo of David Gauke David Gauke The Exchequer Secretary

Just as I was concluding my remarks I was thinking, “Should I give way to my hon. Friend?” I am pleased I did, because he raises an interesting query that I am sure all members of the Committee would like to mull over. I am not going to prevent members of the Committee considering that point but, if he will forgive me, I am not able to provide an answer straight away.

This is a sensible approach; we are striking the right balance; this is a more supportive approach to ultra-low emission vehicles than the one we inherited. I am pleased that we have cross-party support and hope that the clause will stand part of the Bill.

Question put and agreed to.

Clause 23 accordingly ordered to stand part of the Bill.