A review of ten years of CO 2 -based company car taxation: impact and potential

Company cars represent the majority of UK new car sales and thus have a dominant effect on the fuel use characteristics of the entire car stock. In April 2002 a major reform of the company car taxation system was introduced with the car’s CO2 emissions being a key part of determining the cash equivalent of the benefit on which tax is due. HMRC studies have indicated that this tax reform has produced a substantial and ongoing improvement in company car fuel efficiency. This was largely through the tax system favouring diesel cars and led to the substantial rise in diesel cars sold in the UK. However, as the transport policy agenda has moved towards the promotion of hybrid and low carbon vehicles, it is notable that these have had little uptake in the company car sector, despite adjustments in the tax structure providing them with substantial incentives. This paper presents an analysis of the way in which this tax structure makes it difficult for low carbon cars to compete against diesel vehicles. Battery electric cars also suffer the disadvantage of not being well suited to the high mileages characteristic of company cars. However the tax structure looks set to particularly favour new generation hybrids and plug-in hybrids. Indeed, the company car tax structure could well tip the balance to making plug-in hybrids the dominant clean vehicle technology. However, the 2012 change to the tax bands failed to take into account the effect on the uptake of low carbon vehicles and could undermine an already fragile uptake of new low carbon technology vehicles.