Electric Revolution Tax implications

Electric RevolutionTax implications 6 June 2019

Electric Revolution Agenda • Age of rapid change • Direction of travel • Macroeconomic • Vehicle CO2 emissions • OpRA and ULEV demand • Rise of cash • Market trends • Benefit in kind statistics • Car and fuel benefit • BIK increase example • Company car tax • ICE to EV comparison • Private fuel benefit • ICE • EV • Company car plus fuel benefit tax • ICE to EV comparison • Employer’s NIC • Other tax benefits • Summary • Questions and answers Dan Rees Associate Director and Fleet Specialist drees@deloitte.co.uk 020 7007 3791 www.cartaxguide.co.uk • Leading car and fleet consulting practice in the professional services sector in the UK • Over 85 combined years’ experience of the industry • Worked with many major brands on a variety of projects • Dan is a public speaker and contributor to industry press

Age of rapid change Direction of travel Macroeconomic Changes to vehicle CO2 emissions certification Future of mobility & connected cars Wider workforce Rising company car tax rates and increased complexity (OpRA) Government’s air quality plan Fleet Essential need Perk Electrification and associated challenges Changing powertrain demand Rise of cash and alternative funding options Short to medium term themes Future themes

Age of rapid change Macroeconomic Macroeconomic • Weak sterling raises supply chain costs • Potential Brexit related trade barriers and import tariffs could add costs to the chain • Changing consumer demand for SUVs, larger, heavier and more costly models • Changing consumer dynamics, i.e. increasing desire to rent cars for shorter periods Macroeconomic Changes to vehicle CO2 emissions certification Wider workforce Rising company car tax rates and increased complexity (OpRA) Essential need Perk Changing powertrain demand IMPLICATION: If fleet policy thresholds aren’t evolving in line with demand changes and price rises, then will be that policy has eroded the value of cars available to employees on the company car scheme. Rise of cash and alternative funding options Short to medium term themes

Age of rapid change Vehicle CO2 emissions Vehicle CO2 emissions • New ‘real world’ vehicle certification test • CO2 emissions results are c.43% higher under new test • EU Commission stated new test results should not impact vehicle taxation • New test results put through algorithm for CO2 figures representative of old test to use in existing tax system • However, results from algorithm c.17% higher than old test (i.e. not representative) • Results of Government consultation into tax system to use new test figures from April 2020 expected summer 2019 Macroeconomic Changes to vehicle CO2 emissions certification Wider workforce Rising company car tax rates and increased complexity (OpRA) Essential need Perk Changing powertrain demand IMPLICATION: If fleet policy thresholds haven’t increased in line with emissions changes, then the policy could have become more restrictive on emissions grounds, potentially excluding popular fleet models. Many drivers of newer cars are already experiencing higher BIK. Rise of cash and alternative funding options Short to medium term themes

Age of rapid change OpRA and ULEV demand OpRA and ULEV* demand • Tax is key incentive to drive lower CO2 emission cars • Car BIK is rising, exacerbated by significant CO2 increases from change to test and increasing P11D prices • ULEVs are only route for employees to materially reduce BIK, but they are not suitable for all drivers • There can be significant lead times for new ULEV models • Plug-in grants for hybrids reduced/removed • Tax compliance complexity also increased due to OpRA (ULEVs exempt from OpRA) Macroeconomic Changes to vehicle CO2 emissions certification Wider workforce Rising company car tax rates and increased complexity (OpRA) Essential need Perk Changing powertrain demand IMPLICATION: Significantly increasing BIK is causing companies and individuals to re-evaluate whether providing/receiving company cars is the best route forwards in the short/medium term, particularly where lower BIK ULEV (and pure EV) options are not suitable. Rise of cash and alternative funding options Short to medium term themes • *ULEV: Ultra Low Emission Vehicle (sub 75g/km CO2)

Age of rapid change Rise of cash Rise of cash and alternative funding • Rising BIK causing opt out to cash as new key trend, particularly in ‘perk’ population • Increased ‘grey fleet’ requires monitoring for duty of care reasons • Fleet finance industry embracing change with ‘Affinity’ scheme, i.e. personal finance • Innovative approaches to cash allowance arrangements for essential need population appearing – utilise enhanced tax/NI free business mileage allowance payments • Salary sacrifice scheme for ULEVs could become popular, as low BIK and exempt from OpRA Macroeconomic Changes to vehicle CO2 emissions certification Wider workforce Rising company car tax rates and increased complexity (OpRA) Essential need Perk Changing powertrain demand IMPLICATION: Demand for cash allowance options will increase. Companies need to manage costs either way. Structured cash arrangements could deliver cost savings to employer and employee for the same cars (“win-win”). Rise of cash and alternative funding options Short to medium term themes

Market trends Total Benefits Revenue £3.9b Benefit in kind statistics Source: HMRC Benefits_in_Kind_Statistics_July_2018.pdf Total Fuel Duties TotalVehicleExerciseDuty Total Tax Revenues £605.8b £5.7b £27.6b £605.8b Company Car Tax Revenue £2.1b Revenue figures are inclusive of both income tax and NIC “Total Tax Revenues” figures taken from the HMRC Annual Report for the 2017-18 tax year. All other data contained within this slide is with reference to the 2015-16 tax year.

Market trends Car and fuel benefit The charts below show the changes in the number of people receiving company car and car fuel benefit over time. Car benefit has been relatively flat over the past 7/8 years, but given the increase in units under salary sacrifice in that time, it could indicate that fleet related BIK has been falling. Latest figures suggest a fall in car BIK is underway. Car fuel benefit is extremely costly to both employer and employee, so it is no surprise to see numbers falling. A higher rate taxpayer has to be driving more than approx. 26,000 private miles a year for the tax on the benefit to be less than the cost of the fuel. Between 2008/09 and 2015/16 the number of people receiving: • a car benefit fell by 5%. • A car fuel benefit fell by 40%. Source: HMRC Benefits_in_Kind_Statistics_July_2018.pdf

Market trends BIK increase example Typical perk level diesel car with a list price of £35,000 and emissions in 2017/18 of 104g/km (old CO2 test), rising to 120g/km, up 15% (under new CO2 test). £4,760 Annual tax bill +£1,680 (55%) BIK percentage: 34%? £4,620 Annual tax bill +£1,540 (50%) BIK percentage: 33% £4,480 Annual tax bill +£1,400 (45%) BIK percentage: 32% £4,060 Annual tax bill +£980 (32%) BIK percentage: 29% £3,080 Annual tax bill BIK percentage: 22% 2021/22 2020/21 2017/18 2018/19 New company car With CO2 emissions based on new test, up by 15% 2019/20 The BIK tax cost in 2013/14 for this car would have been £2,100 (15%). The tax cost would have increased by 127% in two 4-year car cycles to 2020/21 (assuming P11D price has not also risen in that time). The tax increases from 2018/19 are comprised of: • The scheduled BIK percentage increases already set out by the Government (estimated 1% increase in 2021/22). • The increase of the diesel supplement from 3% to 4%. • The increase in CO2 emissions that have occurred through the new CO2 laboratory test.

Company car tax ICE to EV comparison Assumes higher rate taxpayer (40%) Tax cost (£,000s) 4 VW Golf Hatch 2.0 TDI 184 GTD 5dr DSG List price: £30,275 | CO2: 118 (Diesel) 3 VW Golf Hatch 1.5 TSI EVO R-Line 5dr DSG List price: £27,155 | CO2: 119 (Petrol) 2 1 VW ID.3 List price: c.£30,000 | CO2: 0 (EV) 2018/19 2019/20 2020/21

Private fuel benefit ICE Private fuel benefit tax is generally more expensive to an employee than the fuel itself, unless private mileage is very high. The cost to the employer of providing this ‘benefit’, which includes fuel cost less net VAT plus NI, is also high. Employer cost Annual private mileage Employee cost £3,886 £3,334 30,000 25,000 20,000 15,000 10,000 5,000 £1,571 £556 £2,988 Private fuel benefit tax cost Based on the diesel VW Golf, emissions of 118g/km, realistic fuel efficiency of 54mpg, fuel price of £1.32/litre and 2019/20 company car tax rates for a higher rate taxpayer. Private fuel cost

Private ‘fuel’ benefit EV As electricity is not a fuel for fuel benefit tax purposes, the employee simply pays tax/NI on the amount reimbursed for electricity for private mileage, which is a fraction of the cost in an ICE. The cost to the employer is also low in comparison, which means electricity for private mileage could be an interesting additional benefit in an EV. Employer cost Annual private mileage Employee cost £3,886 £3,334 £1,372 £504 30,000 25,000 20,000 15,000 10,000 5,000 £1,571 £556 £2,988 £229 £84 Cost of electricity plus NI Based on the VW ID, zero CO2 emissions, electricity cost of 4p/mile for a higher rate taxpayer. Tax/NI on electricity cost

Company car plus fuel benefit tax ICE to EV comparison Assumes higher rate taxpayer (40%) and 10,000 private miles – for EV Tax cost (£,000s) 7 VW Golf Hatch 2.0 TDI 184 GTD 5dr DSG List price: £30,275 | CO2: 118 (Diesel) 6 5 4 VW Golf Hatch 1.5 TSI EVO R-Line 5dr DSG List price: £27,155 | CO2: 119 (Petrol) 3 2 1 VW ID.3 List price: c.£30,000 | CO2: 0 (EV) 2018/19 2019/20 2020/21

Company car plus fuel benefit tax Employer’s NIC Assumes 10,000 private miles – for EV Tax cost (£,000s) 3 VW Golf Hatch 2.0 TDI 184 GTD 5dr DSG List price: £30,275 | CO2: 118 (Diesel) 2 VW Golf Hatch 1.5 TSI EVO R-Line 5dr DSG List price: £27,155 | CO2: 119 (Petrol) 1 VW ID.3 List price: c.£30,000 | CO2: 0 (EV) 2018/19 2019/20 2020/21

Other tax benefits EVs

Summary Options per population • Costs of cars are rising, affecting choice lists • BIK is rising, tax cost higher for the same car • A trend towards cash is emerging, particularly at perk level • Introduction of cash allowances increase tax complexity • Tax incentives available for electric cars – consider where to deploy • Salary sacrifice for EVs could develop (low BIK and exempt from OpRA) • ‘Affinity’ schemes, based on PCH (personal contract hire) • BIK risk if Affinity scheme personal finance reflect specific corporate discounts Wider workforce Fleet Essential need Perk • EVs could work well for perk users, so good population for pilot scheme • Cash could be a good option for many perk drivers (but depends on cash levels) • Business should check cost of provision of cash versus cars (or analyse appropriate levels) • Provide clear communications on the benefits of each option • Efficient and low emission diesels likely to remain best option for a high business mileage population for some time • EVs could work in this population in certain scenarios • Employ a WLC approach to take into account comparative costs of cars • Consider smarter cash allowance arrangements to generate employer and employee savings and free choice

Questions …and answers

Electric Revolution Tax implications