P11D prices are ‘out of date’ way of determining company car tax

Colin Tourick quoted in Fleet News, October 2017

Manufacturer discounts of up to 35% on some new cars have called into question the relevance of the P11D price in company car tax calculations.

The P11D value of a company car comprises the list price, including VAT, plus any delivery charges, but does not include the car’s first registration fee or its annual road tax.

However, almost nine out of 10 respondents to a Fleet News poll think the P11D price is failing to reflect the true value of the benefit.

One fleet manager told us: “The only winners with higher P11D prices are the HMRC by getting more revenue from the drivers’ benefit-in-kind (BIK) liability.”

Another said: “The current system is about raising revenue, not assessing the benefit.”

Company car tax was reformed in April 2002 to an emissions-based system, with the charge calculated by applying a percentage figure to the P11D price of the car. The car’s fuel type and CO2 emissions determine the appropriate percentage.

Karen Hilton, head of sales operations at Carwow, told Fleet News the list price is becoming “increasingly obsolete, and not just in the company car market”.

“Dealers make offers across the board, knowing a company car will have tax calculated on the recommended retail price (RRP) makes little sense to the driver,” she said.

On the Carwow site, the most popular company cars include the Audi A3 where the average cash saving to a buyer is around 7%; the BMW 2 Series and 5 Series, which have average RRP savings of 10%; the Mercedes E-Class, where savings average 11%; the VW Passat with savings of between 16% and 19% and the Renault Zoe with savings of up to 35% against the list price.

“However, what is clear is that with offers available almost as standard on some models, the method of calculating tax for company vehicles is out of date viewed against how the market is operating,” said Hilton.

Some manufacturers have moved to make the P11D price more effective for company car drivers. Ford has restructured its Mondeo range – including cutting P11D prices by up to £3,000 – to increase its appeal to fleets and company car drivers by offering more equipment and lower tax bills.

A spokesman said: “More than 85% of Ford Mondeos are driven by professionals as a company car, meaning they pay BIK tax based on its P11D price. 

“To minimise tax liability, prices are reduced by £3,000 (on Vignale), £2,500 (on Zetec and ST-Line Editions) and £2,000 (on Titanium Edition) – meaning savings of up to £720 over three years (on ST-Line Edition 2.0 TDCi 150PS, for 40% tax payer) plus £300 on the employer’s fleet National Insurance (NI) costs.”

He added: “The same analysis is an ongoing process across Ford vehicle lines. Mondeo has highest fleet mix, hence the latest news on it.”

Vauxhall has previously done the same with Insignia, recognising the need to make P11D pricing more attractive to company car drivers.

James Taylor, Vauxhall fleet sales director, said: “We recognise the requirements of both fleet operators and company car drivers and try to ensure the Vauxhall range is optimised  to be competitive on BIK and NI contributions.

“As part of our overall wholelife cost and total cost of ownership strategy, we actively review our pricing and positioning and evaluate those elements affected by P11D in order to be highly competitive. This strategy saw us reduce P11D pricing on like-for-like models when we recently launched the new Insignia. 

“Fleet operators and company car drivers made P11D savings of more than £2,500 compared to the previous model as part of our plan to offer low wholelife costs to our customers.”

Vauxhall also launched the Astra with much lower P11D pricing and was one of the pioneers of high-spec, low P11D trims aimed specifically at company car drivers with Tech Line.

James Dower, senior editor, Black Book at Cap HPI said the gap between the P11D price and transaction price can sometimes be “sizeable”. 

“It therefore makes lots of sense to reduce the list price and, in turn, lessen the margin in the vehicle as the car will look more attractive on company car lists from a BIK perspective,” he said. 

Caroline Sandall, deputy chair of fleet representative body ACFO and director of ESE Consulting, says that the gap between the P11D price and the transaction price has been a “bone of contention” for as long as she has been in the industry. However, she said: “Increasingly, the P11D price bears little resemblance to price paid so is not an accurate reflection of the value of the benefit received. 

“Discounts are now so common that the vast majority of private users can achieve some form of reduced price, as well as lease companies and fleets who outright purchase.” 

So should more manufacturers follow Ford and Vauxhall’s lead or HMRC change its method of calculation? Sandall believes it is something that needs to be looked at, but recognises it is not a simple change to make. 

“Nevertheless, the industry should be able to come up with something that works for all purchasers to simplify the system.”

She also argues that the plug-in grant should be taken into consideration.

“It is time for the industry to tackle this issue and find a solution that is more effective for business users than the current published list price approach, especially when considering the price applied for BIK purposes,” she said. 

However, not everybody agrees that manufacturer discounts make BIK payments based on the P11D price hard to justify.

Colin Tourick, professor of automotive management at the University of Buckingham Business School, said: “I don’t think there’s an anomaly with company car drivers having to pay BIK tax based on P11D price. In fact, I think it’s the only workable solution. 

“Various discounts may be available to leasing companies when they buy cars. These discounts change frequently and in many cases the leasing company won’t know what the net price will be until they find a dealer with the vehicle in stock and strike a price. That’s too late in the transaction for the company car driver; when they are browsing through the leasing company’s online quoting system they need to know the BIK tax they’ll be paying. 

“The only fixed, certain number in the whole system is the P11D price. HMRC can check this number easily and two employees in the same company who drive the same model of company car will pay identical BIK tax.”

He also notes that the overall tax-take the Government levies from company car drivers would not be reduced if the system was based on discounted prices. 

“They’d just hike up the rates to compensate,” he said. “So no one would gain but the system would be way more complex and almost certainly unworkable.” 

Furthermore, Tourick does not think the Government should apply plug-in grants to the P11D price. “BIK tax on these cars is already low, though sadly set to rise, so the incentive to choose them is already there,” he said.

“The aggregate amount of grant is capped and once the limit is reached it will no longer be available, so you could have two drivers choosing the same car and one pays less BIK because they got their order in before the pot ran out. 

“And finally we again have the fact that if the total BIK tax the Government collected was to be reduced, they’d ramp up the rates elsewhere. So I think it’s best to leave things unchanged.”