I. Title of the Best Practice

II. Overview of the Best Practice

A. Aim
The UK Chancellor of the Exchequer announced in the 1999 Budget a major reform of company car taxation from 2002, to encourage more fuel efficient company cars and reduce CO2 emissions from road transport. This is one of the most important fiscal measures to be announced by the UK Government to tackle climate change. It is also the first time a major income tax measure has been reformed explicitly to reduce greenhouse gases - which itself warrants special attention.

B. Company cars in the UK
Only one in ten cars in the UK are company cars (approximately 2.2 million vehicles). These cars, however, account for over half of new car sales each year, and are estimated to undertake a fifth of all car mileage within the UK. They also tend to be larger and less fuel efficient than privately purchased new cars - the average CO2 emissions from a new company car is approximately 200 g/km compared with the UK average for all new cars of 189 g/km for 1998. Company cars, therefore, are an important source of CO2 emissions from the road transport sector, accounting for an estimated 16% of road transport emissions in 1997.

The purchasing decisions of car fleet buyers, furthermore, have a significant influence over time on the average fuel efficiency and CO2 emissions of all cars in the UK, given company cars account for half of new car sales and tend to be resold into the private used car market after three years. The Government is focusing on encouraging the selection of more fuel efficient company cars - of which the most significant measure is the reform of company car taxation - as this should lead over time to a disproportional reduction in CO2 emissions from road transport.

C. The present company car taxation regime
All company cars, which are provided free for the private use of employees, are subject to a benefit-in-kind tax charge, to reflect the value of the car to the employee. This tax charge is currently determined as a percentage of the car's original list price multiplied by the employee's marginal rate of income tax. The actual percentage of list price used also varies, depending on the level of business mileage undertaken by the employee, to reflect the extent to which the company car is essential to the employee's occupation. The current discounts are as follows:

Annual business mileage	% of car list price used to determine tax charge
less than 2,500 miles	35
2,500 to 18,000 miles	25
more than 18,000 miles	15

These business mileage discounts have been widely criticised by many environmental organisations, on the grounds that the discounts provide a perverse incentive for employees to drive unnecessary business miles, in order to reduce their tax liability, thereby increasing CO2 and traffic congestion.

D. The new company car taxation regime
The 1999 Budget announced that there will be a significant reform of company car taxation from the financial year 2002/3. Although all the details of the new regime have yet to be finalised, business mileage discounts will be abolished and the tax charge will subsequently vary with the level of CO2 emissions from the company car. The regime may also take into account emissions of air pollutants from the vehicle. The reform is intended to be revenue neutral. (Vehicle Excise Duty - a circulation tax on vehicles - is also being reformed from Autumn 2000, and new cars will be taxed for VED purposes on the basis of their CO2 emissions).

The level of CO2 emissions from individual company cars will be determined by the official CO2 type approval figures calculated as part of the CO2 and fuel consumption type approval process (specified under EC Directive 93/116/EC), which all new car models must undertake before they can sold within European Union.

It is envisaged that the percentage of car list price used to determine the tax charge will based on a sliding scale of 21 bands, with each band 5 CO2 g/km wide. Minimum and maximum thresholds will be set, where cars below or above thresholds will be taxed 15% and 35% of list price respectively. The table shows an indicative sliding scale for the financial year 2002/3 to illustrate the banding. (Details of the banding are yet to be finalised, and these figures are subject to change).

Company car's CO2 type approval figure (g/km)	% of car list price used to determine tax charge in 2002/3
less than 165	15
166-170	16
171-175	17
176-180	18
181-185	19
186-190	20
191-195	21
196-200	22
201-205	23
206-210	24
211-215	25
216-220	26
221-225	27
226-230	28
235-240	29
241-245	30
246-250	31
251-255	32
256-260	33
261-265	34
greater than 265	35

The tax charge differential between each 1% of list price can be significant, and has the potential to encourage many company car drivers to select more fuel efficient vehicles. For instance, on a company car which has a list price of £15,000 (10,000), the income tax payable for the employee (taxed at the higher rate of 40%) would be £420 (270) lower if the vehicle had CO2 figure of 168 g/km rather than 203 g/km.

The minimum and maximum thresholds are likely to decrease every year, as more fuel efficient car models are produced in response to the EU CO2 from Cars voluntary agreements recently negotiated with major motor manufacturers. A potential long-term target for the minimum threshold is the EU CO2 from Cars Strategy's target of 120 g/km for the average CO2 from new cars by 2010.

E. Estimate of environmental impact
It is estimated that the reform of company car taxation by itself will save between 0.5 and 1.0 million tonnes of carbon in 2010. The reform will also ensure that the EU CO2 from Cars voluntary agreements deliver significant carbon savings in the UK, although it is still uncertain the extent to which the reform will lead to significant additional savings beyond those likely to be achieved by the voluntary agreement. (This will depend on the how the achievement of the voluntary agreements across Europe will affect the UK).

III. Categorizing the Best Practice

1. Classifications
( X ) Regulatory approach
( ) Practical action
( ) Social network mechanism

2. Social actions involved
( ) Citizens
( X ) Central Government
( ) Local Government
( X ) Business

3. Sector(s)
( ) Energy
( ) Household
( X ) Transportation
( ) Industrial enterprises
( ) Other (Non-Industrial) Business
( ) Agriculture/land use/forestry
( ) Other

4. Target greenhouse gas(es)
( X ) CO2
( ) CH4
( ) N2O
( ) HFC
( ) PFC
( ) SF6
( ) Other

IV. List of Attachments

None

V. Contact

Contact Person:	Andrew Short
Title:	Assistant Policy Advisor
Organization:	Department of Environment, Transport and the Regions
Email:	andrew_short@detr.gis.gov.uk
Tel:	+44 171 890 4882
Fax:	+44 171 676 2512
Address:	Great Minster House, 76 Marsham Street, London, SW1P 4DR United Kingdom
Note:	N/A