Policy paper

Income Tax: cars appropriate percentage - increasing the diesel supplement

Published 22 November 2017

Who is likely to be affected

Employers and employees where the employer provides the employee with a diesel company car which is made available for private use.

General description of the measure

This measure increases the appropriate percentage used for calculating the cash equivalent of a taxable benefit when a diesel car is made available for private use to an employee.

The diesel supplement is increased from 3% to 4% for all diesel cars that are not certified to the Real Driving Emissions 2 (RDE2) standard. The supplement will apply to those cars propelled solely by diesel (not diesel hybrids) and registered on or after 1 January 1998, which do not have a registered Nitrogen Oxide (NOx) emissions value. It will also apply to models registered on or after 1 January 1998, which have a registered NOx emissions value which exceeds the RDE2 standard.

This measure removes the diesel supplement altogether for diesel cars which are certified to the RDE2 standard.

Policy objective

Increasing the diesel supplement supports the UK’s transition to less polluting zero and ultra-low-emission cars. This measure will also help reduce NOx emissions and improve local air pollution in support of the ‘UK plan for tackling roadside nitrogen dioxide concentrations’.

Background to the measure

At Spring Budget 2017 the Chancellor announced the government would continue to explore the appropriate tax treatment of diesel vehicles, to support the UK plan for tackling roadside nitrogen dioxide concentrations. At Autumn Budget 2017 it was announced that from 6 April 2018 the diesel supplement rate will be increased to 4% and applied to cars which are not certified to the RDE2 standard.

Detailed proposal

Operative date

The measure will have effect on and after 6 April 2018.

Current law

Sections 121 to 148 of the Income Tax (Earnings & Pensions) Act 2003 (ITEPA) provide for calculating the cash equivalent of the benefit of a car which is made available for private use. This is normally based on the list price of the car plus taxable accessories, multiplied by the level of carbon dioxide (CO2) emissions the car produces, which is expressed as the appropriate percentage.

Section 141 ITEPA 2003 sets out the basis for calculating the appropriate percentage for diesel cars registered on or after 1 January 1998 by adding a further 3 percentage point supplement to the appropriate percentage.

Proposed revisions

Legislation will be introduced in Finance Bill 2017-18 to amend Section 141 of ITEPA, increasing the diesel supplement rate from 3 percentage points to 4. This will apply to all diesel cars registered on or after 1 January 1998.

Cars which are certified as meeting the Real Driving Emissions 2 (RDE2) standard under Annex IIIA of Commission Regulation (EU) 2017/1151 will be exempt from the diesel supplement. This will be set in legislation at a value of NOx no greater than 80mg/km.

The RDE2 standard sets a maximum permitted level of car NOx emissions in real world driving situations, and it is measured through portable emissions-measuring equipment in a variety of real driving trips. Cars must pass the certified level of NOx emissions irrespective of the driving behaviour during the test - for example, the level of emissions produced when an engine is under stress, say, by driving uphill.

Manufacturers will certify NOx emissions. The certificate of conformity manufacturers produce will record which Euro-standard the vehicle is certified to. Diesel cars certified with a real-world NOx emissions figure greater than the RDE2 standard or those registered on or after 1 January 1998 without a certified NOx emissions figure will be subject to the 4% supplement from 6 April 2018.

The maximum level of the appropriate percentage for cars including any diesel supplement will remain at 37%. The legislation will also make consequential amendments to sections 139(7)(a) and 140(5)(a) of ITEPA to reflect the diesel supplement applies only to certain diesel cars.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
-	+70	+35	-30	+130	+90

These figures are set out in Table 2.1 of Autumn Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Behavioural responses are included to take into account the change in the total taxable benefit from company cars in response to a change in tax rates.

Impact on individuals, households and families

This measure will affect individuals who drive a diesel car provided by their employer and made available for private use where the car either has no registered NOx emissions value or does not meet the standard set out by RDE2. At present, there are approximately 800,000 individuals in this category who drive diesel cars, and they will now pay more tax as a result of the diesel supplement increase. However, 350,000 company car drivers per year replace their company cars, so within a few years, most affected drivers will have an opportunity to choose new cars which are not subject to the supplement.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The measure will impact those sharing protected characteristics which are representative of company car drivers, and these are more likely to be male than female and in working age groups.

Impact on business including civil society organisations

This measure is expected to have a negligible one-off cost on the approximately 100,000 employers who provide diesel cars to employees that are made available for private use. One-off costs include updating systems to reflect the new rate and checking whether diesel cars fall within the RDE2 standard.

It is likely that few, if any, cars will meet RDE2 standards in 2018 to 2019. To prevent employers from having to contact HM Revenue and Customs (HMRC) in respect of any that do, HMRC will issue guidance on how they should be treated so that the diesel supplement is disapplied. It is estimated that this may affect the low hundreds of employees therefore negligible further administrative burden cost for 2018 to 2019.

For 2019 to 2020 onwards employers will have to note reported NOx emissions for new diesel cars and check whether or not these meet the RDE2 standard. Given the churn of company cars over a 3 to 4 year period, it is expected that this will involve additional reporting for approximately 230,000 individuals each year. This is expected to have a negligible impact on administrative burdens as it is expected to be a minimal addition to the time that employers now take to note the CO2 emissions figure to establish the appropriate percentage. The information will be available on the same documentation (the certificate of conformity) which lists the CO2 emissions figure.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

HMRC currently expects the IT changes required to deliver this measure will cost in the region of £1.1 million. This figure could change if the IT systems needed to deliver this change and which are currently under development are not in place at the appropriate time.

Other impacts

Carbon assessment and wider environment impact: by strengthening the incentive to purchase cars with a lower number of harmful particulates (that is, ultra-low emission vehicles or zero-emission) this measure is expected to contribute to the reduction of air pollution and supports the National Air Quality Plan.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from both P11D forms and through Real Time Information (RTI) for voluntary payrolling for the tax year 2019 to 2020 onwards.

Further advice

If you have any questions about this change, please contact the Employment Income Team employmentincome.policy@hmrc.gsi.gov.uk