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Knowing your BIK from your WTLP…

With electric vehicles increasingly becoming part of the company car mix, Close Brothers Wholesale Fleet takes a look at the impact of the proposed new Benefit in Kind (BIK) rates and how the new bandings have been calculated.

What is BIK?

Benefit-in-kind is a tax levied on employees who receive perks as part of their remuneration package, including company cars.

What’s new?

In July 2019 Treasury announced its strategy for BIK rates, with a focus on efficiency and carbon emissions. According to the new guidance, vehicles with emissions of 0-50 grams per km of CO2 will be banded on range while those with a range over 130 miles will attract very little (if any) BIK charge.

Even vehicles registered pre-2020 will see a significant reduction in BIK rates, which could have both positive and negative impacts on the fleet industry. Petrol vehicles will see an increase of 1% across each banding up to 37% in addition to the standard 4% supplement for all diesel vehicles not certified to the Real Driving Emissions Step 2 standard.

How does WLTP fit in to BIK Rates?

Worldwide Harmonised Light Vehicle Test Procedure (WLTP) is a new procedure based on real driving data that better matches on road performance and is aimed at providing directives for world-wide emissions testing. It will be introduced to company car tax rates from April 2020.

Following the introduction of WLTP, emissions feedback highlighted that, on average, emission figures would rise 20-25% for vehicles with smaller engines impacted more significantly. This is because factors like ‘extras’ can make a significant difference to a vehicle’s CO2 emissions levels.

Why does this matter?

In effect, WLTP pinpoints a vehicle’s CO2 emissions, which in turn determines its BIK rate, and as emission testing procedures improve, so will the cost for a company car driver. In theory, this will drive company car drivers towards electric vehicles and help make the UK carbon neutral by 2040.

How does this impact Business Contract Hire (BCH)?

There has been the assumption that the BIK rates may change following the elections and having certainty is crucial when compiling a company car plan and predicting resale values in two to three years’ time.

Company car are a significant business expenditure, meaning firms may opt to offer employees a car allowance instead of a company car because it would mitigate any uncertainty with fluctuating charges given the vehicle would be the employee’s responsibility, and it would also reduce a company’s National Insurance Contribution burden and a staff member’s BIK charge.

In addition, because of the growth of products like PCH, acquiring a car can be cheaper for a consumer than paying BIK on a company car, particularly for a 40% tax-payer, who would typically  benefit from a more premium brand.

As a consequence, we could potentially see the growth of business affinity schemes providing a PCH product over a standard BCH as firms mitigate their exposure and risk to fluctuations in BIK rates.

Is this the end of BCH?

No, because there is a very real opportunity for BCH to continue to thrive but only as long as the supply of electric vehicles grows along with the associated infrastructure (charging points etc). Company car drivers and businesses could continue to utilise BCH given BIK rates are stacked in favour of electric vehicles and hybrids.

From 2020 onwards, company drivers will pay very little company car tax on electric vehicles and because of this we don’t anticipate the company car market to disappear overnight.

While the number of company car drivers have dropped over the past two to three years, it’s not certainly possible for this to be reversed, but only if the availability of alternatively-fuelled vehicles grows.

What next?

We anticipate the company car market will continue to decline while supply and infrastructure of electric vehicles is still in its infancy; however, this won’t last forever.

But, what the change in BIK has done is shake up the market because, typically, businesses would only provide a company car because it was the most cost effective option for the employee. Now, thought, with PCH products being both affordable and competitive, businesses have the option of providing a car allowance without the employee being worse off. This will clearly put pressure on the BCH market, but the future isn’t negative and a by-product may be a change in consumer behaviour is if incentives continue.

To find out more visit www.closeassetfinance.co.uk/wholesale-fleet or contact a member of our Close Brothers Wholesale Fleet team.