Commentary: Company car is not dead

As the Government jacks up the tax on company cars, it has begun to look as if the time to exchange them for salary increases is looming. That would mean goodbye to much of what is left of the motor industry, as private motorists prefer cheaper, older cars.

Not at all, according to calculations by Rowan(14), a Camberley, Surrey firm. The perk is far from finished, even if the tax on the benefit rises much faster than inflation. On the basis of 50 detailed cases, it looks impossible to make a fair swap of a car with a salary increase. The employee would always lose.

The biggest complication is the tax asymmetry. A company car is a taxable benefit in kind, but employers can claim corporation tax at 35 per cent and VAT at 17.5 per cent against running costs. A private owner can obtain business tax relief, but within narrow limits, and cannot charge VAT against running costs. In every case, the result is that it still costs employees far more to switch to their own cars than a company saves.

To compensate an employee for giving up a fleet car worth pounds 11,000, with mileage of 20,000 miles a year, (15,000 on business), costs pounds 6,040 a year, without fuel. But to break even, the employer could only offer compensation of pounds 3,310 a year.

Over a range of cars, from Escorts to Mercedes 230Es, the average gap between company savings and what the employee needs in extra salary for losing his or her company car is over pounds 1,900 a year. Only a firm with remote prospects of taxable profits would be able to offer a fair swap to an employee - and perhaps it should not be paying for cars at all.

The figures assume the Government raises the benefit-in-kind tax penalty 15 per cent a year over the three-year life of a car lease. But it is still not worth swapping even if the tax penalty on a typical car rises as much as 50 per cent a year over the three years.