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Volume 205: debated on Tuesday 10 March 1992

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The motor industry is and will remain at the very heart of British manufacturing.

Facing a sharp fall in domestic demand over the last year, the industry responded in exactly the right way, by switching production to exports, which rose by 20 per cent. in 1991. The fall in domestic sales should not be allowed to obscure this growing strength, which should make Britain a net exporter of cars by 1996 for the first time since 1974.

None the less, I recognise that the last year has been a difficult one, and the measures I am proposing today will help the industry, while building on and continuing the reform of the taxation of cars that I and my predecessors have introduced.

Before the 1988 Budget, the car scale charges—the income tax charge on those who have the benefit of a company car—were too low. Since then, we have moved much closer to realistic levels. I propose this year to increase the scale charges only in line with inflation. Otherwise, the real value of the tax payable would actually fall.

But there are still aspects of the car scale charges which are both arbitrary and unfair. For most cars the tax payable is determined not by reference to the value of the car but rather by the car's engine size. As the Monopolies and Mergers Commission has pointed out, this causes distortions. It also discriminates against diesel cars. The unfairness in the current system may have been acceptable when the tax charge was only a fraction of the true value to the user, but that is no longer the case.

We need a system that better measures the value of the benefit. That means basing the tax charge on the price of the car, not its engine size. I therefore propose to introduce price-based scales as soon as practicable. The Inland Revenue will be publishing a consultative document in the summer on the details and timing of such a move.

The car fuel scales, which measure the taxable benefit of free private fuel provided by the employer, have remained frozen since 1987. I propose to increase the scale for free petrol by 4·5 per cent. But at the moment we apply the same charge to diesel as to petrol, even though the cash value of free diesel is less.

That means the fuel scales are too high for diesel cars, so I propose to introduce a new, and significantly lower, scale for diesel, bringing the tax charge closer into line with the value of the benefit received.

While the income tax treatment of cars has until recent years been much too generous, in other ways cars have been the subject of discriminatory tax treatment. I have some changes to announce that will reduce that discrimination, and provide a boost for all businesses buying cars and for the car industry itself.

First, companies that offered their employees the alternative of cash or a car have found themselves liable to pay VAT on the salary forgone by those who chose the car. That is clearly nonsensical. I shall be laying an order to make clear beyond doubt that, from 1 April, a VAT charge will no longer be imposed in these so-called salary sacrifice cases.

Second, the capital allowances available for business cars are currently restricted for cars costing more than £8,000. That limit is now unrealistically low and I propose to increase it to £12,000, enabling full capital allowances to be given on most business cars. This measure will cost £50 million in 1993–94, building up to £220 milion when the change has its maximum effect. But the revenue cost in the long term will be small.

At present, most taxi and car hire firms and driving schools cannot recover the VAT they pay on their cars even though their cars are their business. I propose to end this anomaly from 1 August, at a cost of £50 million in 1992–93.

Those measures will go some way towards improving the neutrality of the tax system as its affects cars purchased by businesses. But I have one further measure to announce, which will affect all those buying new cars.

In 1973, car tax was introduced, to make up the difference between VAT and the former purchase tax. It has remained unchanged, at 10 per cent. of the wholesale price, ever since. This tax distorts consumer spending, and car manufacturers have long complained that our taxes on new cars are higher than those of other main European producers.

This Government have always sought to reduce distortions in the tax system, and I therefore propose to reduce car tax by half, to 5 per cent., from midnight tonight. That will directly reduce the tax burden on all new cars. I trust that car dealers will respond by passing the full benefit of this reduction—about £400 on a typical family car—to the buyer. The halving of car tax will cost about £635 million in 1992–93, and £765 million in the following year.