GUEST OPINION: HMRC and the confusion over diesel hybrid benefit-in-kind
28 November 2011
The first diesel electric hybrid cars are just around the corner, but as tax expert Jeff Whitcombe of BCF Wessex reveals, HMRC's position regarding how they should be classified for benefit-kind-taxation is less than clear
According to HMRC guidance, the 3% supplement applied when calculating the appropriate benefit-in-kind percentage of a diesel-powered company car must be applied to all diesel cars, subject to the overall cap of 35%.
For a while I have thought it should not be applied to the new diesel hybrids that are coming to market, but having read some articles that suggest otherwise, I decided to investigate further to see if my interpretation of the tax position is correct.
The appropriate BIK percentage for a car with CO2 emissions is derived from section 139 of the Income Tax (Earnings and Pensions) Act ('ITEPA') 2003, but this is subject to:
. section 141 ITEPA - diesel cars
. any regulations set down by the Treasury under section 170 (4) ITEPA - power to reduce the appropriate percentage.
According to section 141 ITEPA, diesel cars are subject to the 3% supplement, but, and here's the interesting bit, the supplement only applies to cars that are "propelled solely by diesel".
Statutory Instrument (SI) 2001/1123, Income Tax (Car Benefits) (Reduction of value of appropriate percentage) Regulations 2001, which was issued by the Treasury in accordance with section 170 (4) ITEPA, was the legislation via which the appropriate percentage for alternatively powered cars has been historically reduced. To aid annual reporting, eight codes (see 'Fuel codes prior to April 2011' table, above right) were issued for use when notifying HMRC of the type of fuel used to power a car.
According to SI 2001/1123, a hybrid car was effectively described as a car "capable of being propelled by electricity and petrol". In its Employment Income Manual, HMRC clearly stated that when determining whether a discount should be applied, a diesel hybrid should not qualify as a type H car "because it is not capable of being propelled by petrol and electricity". However, SI 2001/1123 was revoked with effect from 6 April 2011 and, for reporting purposes for 2011/12 onwards, the eight types of car have been reduced to three:
. Type E - continues unchanged
. New type D - includes former types D and L
. New type A - includes former types P, H, B, C and G.
HRMC's Employment Income Manual merely states that, for 2011/12 onwards, all diesels should be merged into type D and that the appropriate percentage should be supplemented by 3%, subject to the cap of 35%. It adds that type H cars (that is petrol/electric cars) should be merged into new type A, with no reduction in the appropriate percentage.
Meanwhile, the Company Car and Car Fuel Benefit Calculator merely refers to the three new types, E, D and A, with no other guidance provided, and the latest online P11D Guide relates to 2010/11, so only shows the eight former car types.
The department's Form P46 (Car) sets out a seemingly helpful transposition of the old codes to the new codes, adding that a "hybrid electric car combines a petrol engine with an electric motor". But, as this definition of a hybrid no longer applies, perhaps the most appropriate HMRC guidance should be that set out in Booklet 480, which states that "hybrid electric cars have an internal combustion engine and a battery system capable of propelling a car". There's no mention of the petrol and electricity combination in this definition, and Booklet 480 also tells us that "it should be clear from the vehicle's documentation if a car is a hybrid electric car"; again, there's no differentiation between petrol and diesel.
Advice received from the HMRC Employer Helpline is that a diesel hybrid is a diesel car and all diesels should be categorised as type D; this is the letter that should be included on Form P46 (Car) and Form P11D. But, is this correct? Or, given the current legislation, should a diesel hybrid actually be reported as a type A car?
Given SI 2001/1123 has been revoked, there no longer seems to be a statutory definition by which a hybrid car is restricted to one that is capable of being propelled by electricity and petrol. So, we should resort to the only other relevant legislation, section 141 ITEPA, which unambiguously states that the 3% supplement only applies to cars that are solely propelled by diesel. Therefore I contend that the supplement should not be applied to diesel hybrids.
But, given the articles that I've read and the position taken by HMRC, I'm beginning to wonder whether I constitute a minority of one. Or do you agree that we should try to convince HMRC to change its interpretation of the legislation and update its guidance and statutory returns (forms P46 (Car) and P11D), and in the meantime encourage employers to report diesel hybrids as type A cars to ensure that this widely held misconception does not lead to some drivers paying more tax than they should?
Jeff Whitcombe of BCF Wessex Consultants Limited advises on a range of employee reward and employment tax issues. www.bcfwessex.co.uk