The complex Benefit in Kind levy on company cars is being made simple. John Cradden reports on the changes - and who wins and who loses.
Low-mileage drivers of company cars who are not fully subsidised by their employers will lose out under proposed changes in benefit-in-kind (BIK) rules made by the Minister for Finance, Mr McCreevy, in the recent Finance Bill.
It has also emerged that drivers paying income tax at the 20 per cent rate are hit much harder under the new rules than those in the marginal, 42 per cent bracket.
The new rules are aimed at simplifying the horrendously complicated system for valuing BIK on company cars, which contains no fewer than 17 different mileage brackets.
At present company car motorists who pay for their own petrol, insurance, servicing and repair and road tax could reduce BIK liability by up to 11.5 per cent. This is in addition to reductions achieved by doing more than 15,000 miles a year.
The new rules say that BIK will simply be charged as a percentage of business mileage, which means that drivers whose company car expenses are not fully subsidised will end up shelling out more than those whose expenses are fully met by their employers. In addition, the number of mileage brackets has been reduced from 17 to five.
"The simpler system is to be welcomed," says Ciaran Medlar, a partner with accountants BDO Simpson Xavier, "but some motorists will lose out, especially those whose employers do not fully cover the cost of their business motoring." He adds that the new rules would be a disincentive for employees who covered a relatively low business mileage to accept a company car as a perk.
Under the new rules, if a company car user does more than 15,000 work-related miles per year, the BIK levy is reduced on a sliding scale from 30 per cent to 6 per cent. So someone who drives less than 15,000 a year will be taxed on 30 per cent of the vehicle's open market value, while someone who drives over 30,000 miles a year will be taxed at 6 per cent.
For example, someone with a company car worth €30,000, who does under 15,000 miles a year, is subject to income tax at 42 per cent and pays for his or her own fuel will pay an extra €747. The same person doing up to 20,000 miles will pay an extra €758, according to BDO Simpson Xavier. If all running costs are paid by the employer, the difference is significantly reduced.
Niall Benson, managing director of recruitment consultants Contract People, publishes a guide to company car costs. He says the new system will be "easier to understand and easier to implement" - and, he adds, it doesn't represent a change in the basic principle of BIK on company cars in that the more business miles you cover, the less you pay.
However, based on Benson's calculations comparing how 34 drivers with €20,000 company cars in the old system (two in each of the 17 different mileage brackets; one on 20 per cent PAYE, the other on 42 per cent) fare under the new one, six individuals will get more than the old system, but 28 will get less. "In fact," he says, "if you look at the six winners all are within the 42 per cent PAYE bracket. Nobody in the 20 per cent PAYE bracket wins."
The Revenue Commissioners has confirmed that drivers working in Dublin will still be able to claim a 20 per cent reduction in the BIK levy if they can prove that 70 per cent or more of their working time is spent away from the place of work and between 5,000 and 20,000 business miles are done annually.
It's probably just as well that the new system is simpler, since there is a new complicating factor in that PRSI will soon be applied to cars and other benefits-in-kind. From next January, company car drivers will all have to pay PRSI and other levies at a combined total of 6 per cent on the estimated benefit up to a total income of €40,000 a year. Beyond this, the 2 per cent health levy applies.
Reports have suggested that new levies will offset the savings which some high-mileage, fully subsidised company car drivers will make under the new system.
Liam Cassidy, general secretary of the Sales, Marketing and Administrative Union, which represents sales workers, says that many of its members, 95 per cent of whom have company cars, are unhappy, especially given the addition of the PRSI levy on BIK from next January.
In a separate development, the Finance Bill also reversed a VRT exemption given for certain "lifestyle" vehicles over two years ago. This means that thousands of motorists will face a huge hike in the price of these vehicles.
The vehicles which are known as double cabs, are essentially 4 x 4 pick-up trucks with two rows of seats and a flat loading area in the back. They usually have large diesel engines of over 2.5 litres and typical prices start from €21,000 ex-works.
For a variety of reasons the regulations governing their taxation were changed from June 2001, after which the cars were not subjected to VRT apart from a nominal €50 charge. This had knocked as much as €7,000 off their price and sparked huge demand for the vehicles.
Mitsubishi Motors, which markets the best-selling L200 Double Cab, was selling around 80 units a year before the VRT exemption. Last year it sold 1,200, according to general manager Paddy Murphy. The decision to classify double cabs as commercial vehicles here in June 2001 mirrors a similar decision taken in Britain in 1999, he says. In Britain Mitsubishi sells a massive 7,500 L200s a year.
The Finance Bill confirms that double cabs will now be subjected to a 13.3 per cent VRT, which will mean a price rise of up to €4,000. This is still lower than the 30 per cent rate the vehicles were subjected prior to June 2001.