TT228: Taxation implications of the emission scandal

October 29, 2015

As you may be aware, a proportion of diesel vehicles have been caught up in the emission scandal. In short the VW group has been accused of and has admitted to fitting devices to some vehicles which during emission testing which gives lower nitrogen oxide (NOx) readings than when driven in normal road conditions. This is thought to affect the car’s performance and it has been reported that this may also potentially affect the car’s carbon dioxide (CO2) emission. This scandal also affects other vehicle brands including Audi, Skoda and Seat which are also under the VW group.

We will consider the various tax consequences of the emission scandal.

Vehicle Exercise Duty (formally known as Road Tax)

The higher the carbon dioxide emission of the car, the higher the vehicle excise duty payable.

The Government has confirmed that we will not incur higher Vehicle Excise Duty (VED) if the existing vehicle is found to be fitted with illegal software that manipulates emissions tests.

Employee car and fuel benefit charge

If you provide an employee with a car available for private use, the employee suffers a benefit in kind (BIK) charge which is reportable on the form P11D. The employer also has to pay Class 1A National Insurance Contributions (NIC) at 13.8%. There is also a charge if fuel is provided for private use.

The higher the carbon dioxide emission of the road car, the greater the employee’s BIK charge and Class 1A NIC payable in respect to the vehicle and fuel charge.

The car and fuel BIK is based on the carbon dioxide emission of the vehicle as per the UK or EU approval vehicle. Our understanding is that the car and fuel BIK charge remains unchanged. Following queries raised by Newsfeed, a HMRC spokesperson is quoted as saying “Company car tax is based on the CO2 emission figures for the particular type of car, shown on either the UK approval certificate or the EU approval certificate. As the car benefit charge is calculated on the basis of the figures shown on the approval certificates, the tax position for benefit-in-kind purposes remains unchanged”.

VAT fuel scale rate charges

You can use fuel scale charges to work out how much VAT to pay back on fuel if you use a business car for private purposes. This effectively means you can reclaim all the VAT on the road fuel but you have to pay an output tax charge.

The higher the carbon dioxide emission of the car, the higher the fuel scale rate charge.

HMRC state that the carbon dioxide figure should be obtained from the UK approval certificate or in a certificate of conformity issued by a manufacturer in another member state corresponding to a UK approval certificate (corresponding certificate of conformity). This would suggest (at least for the time being), the fuel scale rate remains unchanged but we await an update from HMRC.

Capital allowances and cars

Road cars acquired by companies from 1 April 2013 (6 April 2013 for unincorporated businesses) with carbon dioxide emissions above 130 g/km qualify for capital allowances at a lower rate compared to cars with carbon dioxide emissions of 130 g/km or less.  

An HMRC spokesperson stated that the same comments made in respect to employee BIK were equally applicable to capital allowances.

We will keep you posted of any further news from HMRC in regards to the emission scandal.

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