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Business Car Taxation

Volume 201: debated on Friday 20 December 1991

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Motion made, and Question proposed, That this House do now adjourn.— [Mr. Goodlad.]

9.37 am

I am pleased to have this opportunity to initiate a debate on the subject of business car taxation. As hon. Members will be aware, the motor industry is especially near to my heart, not only because I represent a constituency with a large car factory, but because the west midlands is largely still dependent on a successful and viable motor car industry in the United Kingdom.

It is relevant that I should draw attention to the news in the United States today that General Motors has decided to reduce its work force by 75,000 by closing 20 factories. That shows that there exists a difficult problem in maintaining viable car production in the quantities to which we have become used.

Revenue taken from the road user in the United Kingdom is nearly £20 billion a year, only a small proportion of which is spent on the roads. Those who say that the business car user does not pay his or her track costs should look closely at the total take from the motorist. It is abundantly obvious that the motorist pays a great deal for the track costs of running a car. Nor should one overlook the commercial sector, which also pays substantially for the privilege of running its vehicles on our roads.

In asking the Minister to look carefully at the way in which the business car is taxed, I shall deal with a number of areas which the Government should examine. I do not say that all of my suggestions should be adopted or that they offer a panacea to a difficult problem, but perhaps the Government should look carefully at how that sector of our business community, which is now well overtaxed, can be helped so that there is an immediate knock-on effect to resuscitate home market demand for cars produced in our factories.

I regret that help in any form for the business car user is unlikely to come from any other political party. The Liberal Democrats do not approve of such equipment for business use. I presume that they would like everyone to travel by bus or bicycle. Given the Labour party's recent track record when in government, I cannot imagine that it would try to tackle some of the anomalies of business car taxation that have built up in recent years. Labour's attitude to the business car is that it is a perk rather than a business tool.

For some 70 per cent. of those with access to a business car, it is an essential part of day-to-day business life. It is not a perk, a symbol of their position within a company, or a vehicle to drive home and to the golf club, but a business tool. The present taxation system, which was set up many years ago, fails to take into account the changing circumstances and the different emphasis on how the business car is used today. Some 55 per cent. of all car sales in the United Kingdom are to the business sector. I stress that figure because, without a buoyant and dynamic business sector, the British car industry is set for a difficult time. At present, our car industry is one of the most successful parts of our economic environment. In the past few years, our car industry's balance of payments deficit of £6 billion has been reduced to about £1 billion, which is a tremendous turnround. It is partly as a result of Japanese investment but mostly because some of our existing car companies, such as Ford and Vauxhall, have been able to export in substantial quantities. Eighteen months ago, Ford commenced exports for the first time in 12 years. The achievement of the industry in helping our economic progress is second to none.

May I issue a word of warning. Although the manufacturing sector of the United Kingdom car industry has been doing well, the retail sector is almost a disaster area, with home market demand down to about 1·5 million units a year. That is a considerable drop from three years ago, when it was well over 2·1 million. With a home market showing little sign of life, the way forward must be to consider a stimulus to return customers and fleet owners to the marketplace. In the recent past—the last Budget did not help—they have been subjected to swingeing increases in taxation which has caused a dearth of orders in the business car market.

Since the 1988 Budget, personal taxation on company car drivers has increased by 280 per cent., including the introduction of appalling national insurance contributions on company cars and fuel introduced in this year's Budget, against which some of us spoke vehemently. We fail to understand, even now, why business cars should be singled out for an NIC surcharge when desk-top computers, telephones or other essential tools needed for the operation of our commercial sector are not treated in that way. It has compounded all the problems and caused the business car sector to hold back from purchasing new cars.

I sometimes wonder whether we fully appreciate why we have a business car sector, as it is sometimes considered an unnecessary part of United Kingdom business life. Until recently, it did not exist in a comparable way in any other European country, but more and more European countries are now beginning to realise that the establishment of a proper fleet of cars for business use can result in increased efficiency for the company concerned and can cut costs. We are all in the business of more efficiency and productivity, and this country has a very good track record in managing the fleet car sector. Many other European countries now enjoy that position as a result of British know-how being exported to the rest of the European Community.

Industry and commerce are scattered throughout the United Kingdom. We have welcomed overspill towns and the redeployment of businesses, sometimes in areas where public transport will never be viable or efficient. Companies have plants all around the United Kingdom which require up-to-date maintenance and visits throughout the year, and it is the task of the business car to conduct that exercise. We also have one of the world's most efficient distribution systems because our representatives can visit every high street in the country, taking orders, discussing with companies their type of market and establishing further business efficiency throughout the land.

I cannot imagine the impact of a sales director turning up to seek business with a British Rail "Supersaver" or "Awayday" bargain ticket. It would not fit in well with the image that his company was trying to sell. Moreover, if he were using a "Supersaver" ticket, he would have to leave the town well before three o'clock to use the remaining portion of his ticket, so public transport is not a viable alternative.

Another factor that appeals to the business car user and fleet providers is that, by updating their cars frequently, they can buy safer and more fuel-efficient models. Regular servicing and decent insurance ensures that the cars on our public highways are well maintained and insured. If employees are asked to provide their own cars, they may encounter all kinds of problems. Quality standards in terms of safety and maintenance are likely to be overlooked as employees seek to make cost savings. Difficulties would probably arise over insurance requirements because individual as opposed to fleet insurance may make the operation of the car extremely expensive. If individuals had to provide their own cars, they would want an enhanced salary to compensate for the extra overheads. In addition, there would be the thorny problem of constantly trying to establish an adequate rate of return for the use of the owner's car. A satisfactory arrangement is never arrived at and everyone feels that he is not getting the best deal. It is far better, therefore, to provide a car for business use.

Given the present state of the business car market, taxation has become extremely excessive. As the Government start to draft next year's Budget, I beg them not to entertain the concept of increasing the burden of taxation on the business car sector. Will they please lay off it, because it has been singled out for penal rates of taxation in the past few years? If we want to maintain a viable car industry, we must introduce changes in the business car taxation system. If we maintain the present level of taxation, the prospect of the British car industry producing wealth, goods and employment in the next few years will be open to question.

I have no qualms about asking the Government to come down heavily on the perk car. There is no role for the simple perk. If that means taxing the perk car more heavily in any reform of business car taxation, I shall not object. However, I cannot for the life of me understand—nor can anyone else to whom I have spoken—why there is a difference in treatment between the self-employed and those who are employees. The self-employed are subject to schedule D taxation on the business car, but the employee is taxed under schedule E. Why cannot both areas of the business community be treated in the same way? I hope that Ministers will address that puzzle, if not today then at a later date.

Let us consider benefit in kind and especially the existing mileage limits. I am sure that hon. Members know that the present system has a cut-off at 18,000 miles per annum of business use at which there is a reduction in the tax payable on benefit in kind of 50 per cent. Some 47·6 per cent. of business car users drive fewer than 18,000 miles but more than 2,500 miles a year. Some 45·2 per cent. drive more than 18,000 miles a year. Some 7 per cent. drive only up to 2,500 miles a year. The last figure applies to the genuine perk car.

Thanks to leasing companies, which keep a careful check on the mileage done by contract cars, there is growing evidence that drivers deliberately use their business cars in the early part of the year to get over the 18,000-mile limit and thus to attract the 50 per cent. discount. The loss to InterCity must be considerable as drivers elect to use their cars to qualify for the 18,000 business miles per year figure. What could be more environmentally damaging than people saying, "I am going to use the car because I must clock up 18,000 miles to get the 50 per cent. discount"? In this day and age when we have green thoughts about everything, that is a crazy system to maintain.

It is also worth noting that people who drive round our cities may spend all day in their business car. They may be delivering or servicing computers, or servicing washing machines and will probably clock up only 12,000 miles a year. They do not benefit from personal tax reduction.

I remember debating the issue with my hon. Friend the Minister of State, Treasury in the Finance Bill Committee and she said that such people should use a van so that they would not have to pay tax. That is an absurd answer. It is true that such people could use a van to go to some places, but that would only add to costs, because the user would still have to have a car. If he took his van home, there would be all kinds of problems about whether he was driving it for private use. I suggest that drivers who only do 12,000 miles around a city and who do not qualify for the reduction of taxation on benefit in kind may drive a private car to the works to pick up the van, use the van to drive back to near where they live to start their servicing work and in the evening go back home in the private car. That is very ungreen and complete nonsense.

I suggest to my hon. Friend that in the scale charges for benefit in kind, the arbitrary figure of 18,000 miles is complete nonsense. I know that many solutions are advocated by different people, which is one of my hon. Friend's problems. Everyone has a different solution to those matters and I am aware that my hon. Friend works under the great difficulty of having to listen to many representations.

It seems to me that there should be two categories. The first is the genuine perk car which should be clobbered fairly hard. After that, all business cars should receive a discount on benefit in kind taxation and there should be no mileage limit. To qualify for a discount, it should not matter whether a car is driven for 3,000 or 50,000 miles a year. That would stop some motorists seeking to do as many miles as possible to qualify for the artificial 18,000 mile barrier.

The scale bands at present are decided by the cubic capacity of engine size. That is complete nonsense and is as old fashioned as the horsepower rating which was once used to tax cars under the road fund licence. It is anti-environmental and discriminates against technical improvements. The present cut-offs are from up to 1,400 cc, from 1,400 cc to 2 litres and from 2 litres upwards.

As my hon. Friend knows, because I have talked about this in Finance Bill Committees on several occasions, the scale bands discriminate against the diesel car which is known to be more environmentally acceptable. By virtue of its engine system it has a to have a larger cubic capacity to get a similar power rating as a smaller-sized, petrol-driven car. We seem to be saying, "For goodness sake, do not worry about fuel economy of the car. Just go for arbitrary cubic capacity limits."

Vauxhall is building a factory at Ellesmere Port to make a new V-6 engine. The technology of that engine is very advanced and it is anticipated from early test results that its fuel economy will be especially attractive. However, as it is a 2·5 litre engine, it will find no use in the fleet car market, although its fuel consumption may be lower than that of a comparable 2 litre engine. What sense does that make in this day and age when we are anxious to ensure that the motorist carries out his environmental obligations? I hope that my hon. Friend will pay particular attention to stimulating a new regime for scale banding which is based on fuel economy.

I suggest that the present three bands could be replaced by new bands for cars that do up to 20 miles per gallon, cars that do up to 30 miles per gallon and cars that do up to 40 miles per gallon, although I should prefer four bands with the fourth band being for cars that do up to 50 miles per gallon. How would we arrive at the figures? Every car sold has to have Government fuel consumption figures attached to it. It has to be tested and the figures have to be prominently displayed. However, we cannot just take those figures. We could devise a better system which takes more into account the commuter mileage. We need to reduce as much daily commuter traffic as possible by arriving at touring fuel consumption figures.

The weekly magazine Autocar and Motor has formulated the figures over the years and it gives a useful guide to the fuel consumption characteristics of cars available in the United Kingdom market. The formula is arrived at by using 50 per cent. of the urban cycle, and 25 per cent. each of the 56 mph and 75 mph steady speed cycles which are already available, thanks to Government requirements. That would enable business car users to make a choice. If they wanted a more fuel-efficient car, we would reward them by placing it in a lower scale band so they would pay less tax.

If we are serious about reducing the amount of carbon dioxide emissions, such a scheme must be the way forward. We must not simply remain wedded to the idea that brute power cubic capacity is the be-all and end-all of internal combustion efficiency. It is not, and it is time that we redrew the scale charges to take into account improvements in technology and new forms of cars such as the diesel car.

My hon. Friend may say that it is a little difficult to start tinkering with the bands. The Government did that a few years ago when they were anxious to help British Leyland which had an engine that did not fit conveniently into the existing scale band charges. The Government moved the scale band charges so that the nationalised company's engine fell into the new category. There is no reason why something similar cannot be done again, but I hope that it will be based on touring fuel consumption so that the Government send a clear signal that they are serious about environmental matters and the company car.

Now I shall address corporate car taxation. The £8,000 writing down allowance has remained static since its introduction in 1979 as a luxury car limit. Even though powers were taken to enable the figure to be altered by statutory instrument, that has never happened. The average cost of a new car used for business purposes is now in excess of £10,000 and the major proportion of cars financed by way of lease and contract hire now falls within the £8,000 restriction.

As I have already said, Britain has an enviable track record of fleet management which has been exported to other European countries, yet in this case there is evidence that the Government's fiscal measures have not caught up with the changing pattern in the provision of cars for fleet use.

Now that the private usage of the business car is taxed in excess of its realistic value, the £8,000 luxury car limit has become an anachronism. The limit should be indexed or scrapped, because the compliance costs have become a considerable burden to businesses which must maintain two sets of figures to acknowledge real depreciation and the tax allowances after caculating the £2,000 per annum maximum limit.

The £8,000 restriction in deductibility of lease rentals must be addressed. The allowance does not apply to cars purchased outright or to those financed by other means such as bank loans. It applies exclusively to cars financed by means of leasing and contract hire. That is clearly unmitigated discrimination against the leasing contract hire business.

The car user's position is now being seriously affected by out-of-date legislation which is creating an unnatural situation in favour of purchase as opposed to contract hire for cars costing above around £12,000. Many users would prefer the administrative advantages of a hire agreement but are forced into purchasing due to the inequality of treatment of their car cost by the Revenue.

I welcome the enactment of section 61 of the Capital Allowances Act 1991 which removes the previous area of doubt in the interpretation of the 1990 Act as it applies to the HP case. My acute concern about the discriminatory treatment of leasing nevertheless remains. That serious anomaly is long overdue for review in order to avoid the proliferation of hybrid schemes which attempt to circumvent the problem.

On several occasions Ministers have committed themselves to the general principle of fiscal neutrality and the avoidance of artificial distortions in the tax system. The rental disallowance is such a clear case of discrimination against the leasing contract hire business that, in equity, its retention cannot be justified.

Another anomaly is the £19,250 price barrier, which has also remained unchanged for years. Unless it is moved upwards technological improvements cannot be featured in the modern company car. Nowadays, with anti-lock braking systems costing about £1,000 to fit in the average car and better security, the challenge of fitting cars with such essential devices—anyone who has driven a car without a skid brake will know that it should be a standard fitment on all cars—and keeping company cars under the £19,250 price barrier is becoming well nigh impossible. Are we therefore to say to the business car sector, which accounts for 55 per cent. of car sales in the United Kingdom that we are sorry but we do not want it to fit the latest technology because it is too expensive? No, we should raise that figure, certainly by 10 per cent., in order to encourage greater technical improvement in the average company car.

The non-deductibility of VAT is another strange anomaly. We understand that the Government take the view that there is a trade-off for the undertaxation of the user's benefit arising from private usage, which may have applied not so long ago, but does not now. There is surely some opportunity for about 50 per cent. of VAT to be deducted from the company car in line with other European countries. That is one way in which the manufacturing sector could be stimulated. It would be a major step forward if businesses were allowed some deductibility of VAT.

But a word of warning to my hon. Friend. There is much fashionable talk that the vehicle excise licence should be scrapped and passed on in the cost of fuel. In principle, that is not a bad idea, but doing it instantly in one fell swoop would be disastrous. It would throw up all kinds of anomalies, pain and anguish throughout the country. The Government could allow the £100 vehicle excise licence to wither on the vine during the next few years so that it becomes less and less important. They should not sweep it away in one go or it could result in an unwelcome backlash in the marketplace.

Finally, I should like some reduction in the special car tax. I should like that to go in one fell swoop. It may not be possible, but I could not sit down without making a further plea for the special car tax to be considered as a candidate for reduction in order to help the United Kingdom car industry.

I am sure that my hon. Friend is more than a little sympathetic to some of the points that I have made, because she has said as much on previous occasions. I do not expect all my proposals to be embraced and carried out, some perhaps, but I hope that the Treasury will start thinking along some of the lines that I have suggested on behalf of the industry. That would be more than welcome and would send out a clear signal that the Government recognise the role of business car users. They have an important role to play within the community. Their jobs, which require business cars, provide wealth and employment, principally in the west midlands but also in the British car industry generally which employs nearly 1 million people.

10.6 am

I welcome the opportunity to reply to the range of interesting points made by my hon. Friend the Member for Birmingham, Northfield (Mr. King). As the House knows, he has considerable expertise in and knowledge of these matters and is a valiant campaigner on behalf of the United Kingdom motor industry and the west midlands motor industry in particular. Such was his eloquence and such is his detailed knowledge of the matter that I shall have to be fairly brief in replying to his separate points.

The Government have no quarrel with a number of fundamental assessments made by my hon. Friend. First, we fully recognise the key importance of the motor industry to the United Kingdom's manufacturing base and to national prosperity. We have a successful motor industry and our policies during the past 12 years have played no small part in that.

At the end of the 1970s, the motor industry illustrated everything that was going wrong in our industrial life. It was overmanned, strike-ridden, to a large degree nationalised and, for the most part, had an unattractive product range. However, since then the position has been transformed. The industry has seen huge productivity gains, it has much more harmonious industrial relations and it produces superb cars, the qualities of which are constantly sung by my hon. Friend and his colleagues in the west midlands.

The British car industry is growing. The United Kingdom is seen as a good place in which to build cars. Motor analysts continue to predict that United Kingdom car production will reach the 2 million mark by the late 1990s.

I would not argue with my hon. Friend's point that the recession has brought difficulties for the car industry. He is right to draw attention to the important role played by the business car in Britain. There is no doubt that the business car is an integral part of modern business. Many businesses could not operate efficiently without cars. Of the total stock of 20 million cars, it is estimated that 5 million are owned by businesses and 3 million owned by individuals are used on occasions for business purposes.

For a variety of reasons, not least that in the past they were very much undertaxed, company cars tend to be more prevalent in the United Kingdom than in other EC member states. That is why it is important to consider carefully the tax regime which applies to them.

My hon. Friend will not be surprised when I say that I can make no specific comment this morning on his suggestions for the forthcoming Budget—clearly, I cannot anticipate what my right hon. Friend the Chancellor might wish to do in his Budget next year—but I assure him that my right hon. Friend and I and other Treasury Ministers will continue to listen carefully to representatives of the car industry as we lead up to next year's Budget.

The Government's broad policy thrust on the taxation of benefits in kind is to ensure neutrality in tax treatment between payments in cash and payments in kind. I know that my hon. Friend opposes the concept, as do the Government, of a business car simply as a perk. The car scale structure, which has been in place in broadly its current form since the mid-1970s, has served us reasonably well. However, it is no part of that structure to tax the business use of company cars; merely their private use. The structure of the tax bands recognises the difference between high business mileage and the so-called perk car.

It is never difficult to point to anomalies, because there are only five categories of car tax scale. However, there is simplicity and certainty in the current regime. My hon. Friend mentioned national insurance contributions on company cars. It was sensible to tackle cars in the light of the Government's overall aim of obtaining neutrality between cash and benefits in kind because cars represent about three quarters by value of all benefits in kind. National insurance contributions also apply to payment by gilts and will be extended to unit trusts and equities. Therefore, cars are not being singled out.

My hon. Friend suggested that car scales should be banded by reference not to engine size but to fuel economy. That would not necessarily remove the kind of anomalies for which the current scheme is criticised. It might lead to more anomalies and, given that the main policy aim is to tax the value of cars to individual drivers, fuel economy would not necessarily be the best way to achieve that. My hon. Friend is enthusiastic about diesel cars and raised the matter in our debate on the Finance Bill last year. In reply at that time, my hon. Friend the Financial Secretary explained that the car scale bands cover a fairly wide range of cars and that there were no compelling reasons for distinguishing diesels. My hon. Friend was right to speak about the increase in efficiency of diesel engines and he also spoke about the development of an engine at Ellesmere Port. I shall not dare to enter the fierce environmental debate about the relative merits of diesel fuel and unleaded petrol.

My hon. Friend spoke about cars costing more than £19,250. Such limits are closely examined every year in the budgetary process. He questions the different treatment of taxpayers in schedules D and E. I do not entirely accept that there is a fundamental difference between the two, because for self-employed taxpayers the individual costs of each car are apportioned between private and business use for tax purposes. That is what used to happen for schedule E and the change to scales is mainly to simplify administration and to save arduous record keeping. The substantial discounts that are available for increasing business use give a fair approximation of the individual apportionments within schedule D.

The £8,000 limit on capital allowances is also kept under review, and we are aware of the concern about the effect of these restrictions. My hon. Friend suggests that the 18,000 mile threshold should be reduced. It is, of course, a broad brush threshold in the way that it affects differently those whose mileage is mostly in urban areas and those who have large distances to travel for business purposes. It is kept under review, but it works tolerably well.

My hon. Friend also spoke about the VAT input tax on cars. That has not been recoverable on company cars since the start of VAT in 1973. Most company cars have some private use and if the VAT on their purchase were fully recoverable, a system would have to be introduced to tax the private use and the subsequent sale of the car. That would complicate the administration of the tax.

I reiterate that the Government take seriously the interests of the car industry. I cannot make any commitment about what the Chancellor will decide to do in the next Budget. We shall consider the serious points that have been made in the debate and in the many meetings that the Chancellor and I have had with the car trade. The Government's main concern has been to increase the level of company car scale charges with a view to obtaining parity of tax treatment between those paid in cash and those paid partly in cash and partly in kind.