Watchdog: Company car tax

Is company car tax being legally applied? That was the question put to us by reader Clifford Sherwood, from Leeds, so we investigated. “Benefit In Kind (BIK) is a good idea,” Clifford told us. “But the way it’s applied is ridiculous. How can my tax on the 36th month of ownership be based on the value of my car when it was new?”

It’s a good point. The BIK on Clifford’s 2011 2.0-litre TDI Audi A4 is based on its P11D valuation of £26,705. He paid tax at a rate of 13 per cent in his first year which, when applied to his 40 per cent income rate, left him with a bill of £1,388.66. But company car tax went up for the 2012/13 financial year, and the new 16 per cent rate means a bill of £1,709.12. It’ll rise to 17 per cent for 2013/14, leaving Clifford with £1,815.94 to pay.

According to the latest residual predictions, though, his car will be worth a little under £12,000 by then. So while his asset’s value will fall by nearly 60 per cent over the course of ownership, the tax on it will rise by over 30 per cent.

And Clifford pointed out a further problem: “Why are cars taxed based on their list price value at all? They are almost always sold at a discount. I negotiated 13 per cent off mine.”

We asked the Treasury how it justified taxing an asset based on its value without taking into consideration depreciation or discounts from list price. A spokesman told us BIK is based on list price to ensure fairness – as larger companies can buy in bulk and receive greater discounts from list price.

The spokesman added: “The Government seeks to give as much certainty as possible to those who pay company car tax. That’s why at the Budget we announced rates four years in advance. Calculating liability based on list price is a straightforward and fair way of levying the tax.”

Unfortunately, a leading tax expert – Ana Wisdell, director at legal firm Thomas Egger LLP – told us there were no grounds to challenge the legality of company car tax rules.

The problem
Benefit In Kind for company cars is based on an asset’s value. But it disregards depreciation. Clifford wanted to know if this set-up was actually legal.

Treasury's response
A spokesman said: “Calculating liability based on list price is a fair way of levying the tax. It also ensures those in smaller fleets don’t unfairly pay higher tax.”

Legal advice
Lawyer Ana Wisdell told us: “Tax often isn’t fair but as long as the legislation is clearly worded, it doesn’t matter. From my knowledge of asset value-based benefit taxes, I’d say there’s no wiggle room on this.”

Our verdict
The current Benefit In Kind system does seem unfair. But would it be possible to introduce a fairer system without creating a bureaucratic nightmare? Let us know what you think.
 

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