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Do you have to pay a 3% company car tax supplement on a hybrid diesel?

Tax expert Jeff Whitcombe argues that the 3% levy placed on diesel company cars for tax purposes does not apply to the new breed of diesel hybrid company cars
296_New_Citroen_DS5 300x177
New Citroen DS5 uses diesel hybrid technology - and escape 3% diesel company car tax surcharge

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3 November 2011

Citroen DS5 diesel hybrid
New Citroen DS5 uses diesel hybrid technology – and escape 3% diesel company car tax supplement

WE’VE had the petrol-electric hybrid car for a while – think Toyota Prius, Honda Civic Hybrid – but with Peugeot’s new 3008, we now have a hybrid diesel. And we can expect more cars like this in the future. So if it’s a diesel, should you pay the 3% company car tax supplement? Jeff Whitcombe, a tax specialist at BCF Wessex, thinks not. Here’s why.

FOR a while I have thought that the 3% supplement applied when calculating the appropriate percentage of a diesel powered company car should not be applied to a diesel hybrid. However, having read some articles that suggest otherwise, I contacted HMRC’s Employer Helpline for guidance.

According to HMRC the 3% company car tax supplement must be applied to all diesel cars, subject to the overall cap of 35%. Is HMRC’s interpretation correct? Read on and see what you think.

Primary legislation

The appropriate percentage for a car with CO2 emissions is derived per Section 139 Income Tax (Earnings & Pensions) Act (“ITEPA”) 2003, but this is subject to the provisions of:

Section 141 ITEPA – diesel cars; and

any regulations set down by the Treasury under Section 170 (4) ITEPA – power to reduce the appropriate percentage.

Per Section 141 ITEPA diesel cars are subject to the 3% supplement, but, here’s the interesting bit, this section only applies to a car which is propelled solely by diesel (my emphasis), as clearly stated at Section 141 (5) ITEPA.

Peugeot 3008 HYbrid4
Peugeot 3008 HYbrid4: diesel hybrid technology for Peugeot MPV

Secondary legislation

Secondary legislation has been set down by Statutory Instrument (SI) 2001/1123, Income Tax (Car Benefits) (Reduction of value of appropriate percentage) Regulations 2001, which was issued by the Treasury pursuant to Section 170 (4) ITEPA.

As you may know, discounts were applied by SI 2001/1123 because this is the legislation via which the appropriate percentage for alternatively powered cars has been historically reduced. For example, until 5 April 2011 the appropriate percentage for a hybrid car was reduced by 3%. To aid annual reporting the following eight codes were issued for use when notifying HMRC of the type of fuel used to power a car.

Type of fuel, Code Petrol, P Diesel – car not Euro IV compliant, D Diesel – Euro IV car, L Car cannot in any circumstances emit CO2 when driven, E Hybrid electric, H Gas only, B Bi-fuel with CO2 emissions figure for gas, B Car manufactured to be able to run on E85, G Bi-fuel conversion or other bi-fuel not within type B, C

Per SI 2001/1123, a hybrid car was effectively described as a car capable of being propelled by electricity and petrol.

Notwithstanding the exemption set out at Section 141 (5) ITEPA, per Paragraph 24820 of the 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 the following three.

Type E – continues unchanged; New type D – includes former types D and L; and New type A (for All other) – includes former types P, H, B, C and G.

 

So for 2011/12 onwards, how should we treat a diesel hybrid car? Not convinced by the advice given by the HMRC Employer Helpline I looked at other sources of information provided by HMRC.

HMRC guidance

The Employment Income Manual merely states that, for 2011/12 onwards, all diesels should be merged in to 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.

The Company Car and Car Fuel Benefit Calculator merely refers to the three new types, E, D and A, with no other guidance provided.

The latest online P11D Guide relates to 2010/11 so only shows the eight former car types noted above, in accordance with SI 2001/1123.

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 noted above, this definition of a hybrid was established by a statutory instrument which no longer applies, so 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 no differentiation between petrol and diesel.

Conclusion

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 (5) 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 1.

Or do you agree that we should we 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 is a partner at BCF Wessex.

 

Update on 3% company car tax supplement applied to diesel hybrids

Since Jeff’s special report, HMRC has recognised the validity of the argument and has lifted the 3% company car tax supplement on diesel hybrids. You can read the story here: Yeeha! HMRC says diesel hybrids are exempt from 3% company car tax surcharge

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Ralph Morton

Ralph Morton

Ralph Morton is an award-winning journalist and the founder of Business Car Manager (now renamed Business Motoring). Ralph writes extensively about the car and van leasing industry as well as wider fleet and company car issues. A former editor of What Car?, Ralph is a vastly experienced writer and editor and has been writing about the automotive sector for over 35 years.

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