Friends of the Earth welcomed the announcement at the Budget that the Government is to consider the case for replacing the existing business mileage discounts for company car users with discounts for driving fewer private miles in company cars. In order to contribute to the initial informal consultation on this issue Friends of the Earth would like to make several points.
Road traffic needs to be reduced
Reducing CO2 emissions, as the recent Kyoto Summit demonstrated and the Government's own 20% reduction target emphasises, is a pressing global issue requiring immediate action. Transport is the fastest growing source of CO2 emissions in the UK. Road transport alone is responsible for some 20% of the UK emissions(1). Friends of the Earth, in developing the concept of environmental space as a policy tool, has calculated that in order take its fair share of the responsibility for preventing dangerous climate change the UK must reduce CO2 emissions by 88% by 2050(2). Current emissions from road traffic alone exceed the 2050 target.
The high concentration of cars and lorries in urban areas and the release of toxic chemicals, congestion and social dislocation that comes with it is a major public concern. The Royal Commission on Environmental Pollution concluded that: ">At present pollutants from vehicles are the prime cause of poor air quality that damages human health, plants and the fabric of buildings". Moreover, it is often those from the third of UK households do not have regular access to a car that suffer most from these damaging impacts.
The Government has recognised the need for traffic reduction. In 'Developing an Integrated Transport Policy' the current forecasts for traffic growth are described as "clearly unacceptable, because of its economic and environmental effects". The Secretary of State for the Environment, Transport and the Regions has placed a particular emphasis of reducing traffic by effecting a shift from car travel to public transport.
Although company cars account for around 8% of cars in the UK they are responsible for 20% of car traffic(3) and clock-up some 45 billion miles year. Company cars on average have larger engines which tend to have lower fuel efficiencies. There is also evidence to suggest that they are driven in a manner that is likely to increase fuel consumption(4). Traffic reduction is also about making streets saver for cyclists and pedestrians and it is relevant to note that the Department of Transport calculated that company car drivers have on average 30% to 50% more accidents a year than comparable drivers of private cars, allowing for mileage and other factors(5).
The current mileage banding system increases business mileage
Company car drivers under the present mileage banding system are rewarded with greater tax relief when they drive further. This provides an incentive to increase business mileage in order to pass the 2,500 miles and 18,000 miles thresholds. Purely in terms of minimising tax liability there is a clear benefit, as the accountants Coopers and Lybrand advise, to ">ensure, if possible, that your business mileage is at a rate of 2,500 miles or more or 18,000 miles or more"(6).
Evidence of the strength of this incentive is difficult to measure. Firstly, deliberate extra mileage to gain greater tax relief is effectively tax evasion and not something people would readily provide data on. Secondly, although the incentive may lead to deliberate increases in business mileage it will also lead to a more general, but probably no less significant, effect on all business travel decisions.
Friends of the Earth, whilst conducting research into the potential for telematics to replace business mileage found strong anecdotal evidence that, even in firms with well established video-conferencing facilities, there was a culture of "getting in a few big car journeys" particularly toward the end of the tax year in order to reach the higher tax relief threshold. This supports other anecdotal evidence from a recent survey(7) of company car drivers which found that over 60% believed that the present mileage banding system encouraged drivers to make business trips which were not strictly necessary and 15% admitted personally to doing so in order to reach the next tax band. When this 15% of drivers (a sample of 328) were asked how much additional business mileage they drove, the survey found that on average 860 miles per driver was driven in response to the incentive provided by the current banding system.
Recent research(8) based on the company car records from a five companies with a total sample of 13,936 cars has provided evidence of bunching just above the mileage bands thresholds. Although the sample covered cars with total mileages below national averages, the evidence shows how the incentive in the tax system to drive further is distorting behaviour. One of the most startling pieces of evidence is that twice as many drivers claimed for mileage in the 2,500 - 3,000 interval as did in the 2,000 - 2,500.
The current system installs a disincentive for using alternatives modes of transport or access.
The present system of mileage banding acts as a disincentive for drivers to use other modes of transport for business travel. In addition having a company car also affects decisions on travel mode outside of work and it would seem commuting distance.
In the same way that the incentive to drive further embedded in the existing tax system can encourage additional unnecessary mileage it can also affect the choice of travel mode for business travel. This is over and above the effect of having access to a company car which is likely to be significant. Public transport, cycling and, to a lesser extent walking, can all offer more convenient and quicker alternatives to car travel within urban areas. Rail can offer an attractive business travel alternative for inter-urban journeys. Finally, telematics increasingly can replace business travel, particularly between sites within a firm. All of these alternative modes of transport offer significant environmental benefits over car travel. But they also offer benefits to both the employee and employer. For example, rail travel offers the opportunity to either work or relax while travelling, cycling in congested urban areas is often quicker, increases fitness and is cheaper and telematics can reduce travel and time costs.
The National Travel Survey found that company car drivers use the train for only 3% of journeys over 50 miles compared to about 15% of main drivers of private cars used for business. Company car drivers doing over 6,000 business miles per year use the train for only 2.1% of longer business journeys compared to 8.2% for lower business mileage company car drivers.
Access to a company car for private use itself is major disincentive to use alternative methods of transport such as walking, cycling, bus and rail. However, the current tax system does nothing to reduce this, despite the fact that it is the private benefit of a company car that is taxed. This issue is discussed in more detail in the next section.
On average company cars do around 35% more commuting miles than private cars owned by people of similar socio-economic group who commute by car. This differential doubles to 70% when comparing low business mileage drivers with and without company cars(9).
Clearly is not just a company car that will affect the decision of people to commute further. Many of these low business mileage drivers will have high earnings and be able to afford to live further away from their work. However, it doesn't help.
Domestic mileage also is a problem. The provision of a company car appears to lead to an overall increase in household car ownership, among comparable households of between 10% and 20%. The impact this has on total household domestic mileage is also 10% to 20%. The link here again to the disincentive to use alternative modes(10).
Although private mileage on average for company car users themselves (as opposed to whole households) and comparable non company car users is similar there is a significant difference for low business mileage drivers. Evidence(11) suggests that these drivers do 15% to 20% more domestic miles than equivalent private car drivers.
This perverse incentive embedded in the current banding system contradicts Government policy in at least three areas.
The Government's statement of intent on environmental taxation states that "the Government will aim to reform the tax system to increase incentives to reduce environmental damage". In the case of company car taxation the present system perversely provides an incentive pollute more.
The Government has a 20% reduction target for CO2 emissions by 2010 over 1990 levels. Given that emissions from the transport sector are growing faster than anywhere else in the economy it is ridiculous that company car taxation actually encourages greater CO2 emissions.
The Deputy Prime minister has stressed the Government's intention to ensure that transport policy effects from car travel to public transport and recently said "I will have failed if in five year's time there are not many more people using public transport and far fewer journeys by car. It's a tall order and I urge you to hold me to it". The current tax system provides an incentive for company car drivers to drive rather than use public transport at work and does nothing to counter the incentive for them to do so outside of work as well.
Shifting the mileage banding for tax relief from more business mileage to less private mileage.
There are number of clear advantages to this proposal. In particular that it:
removes an incentive to drive further;
installs an incentive to drive less;
removes a disincentive to use alternative modes of transport and access for business needs;
provides an incentive to use alternatives modes of transport and access for private needs;
contributes to road traffic reduction because of these effects;
provides a better method of accounting for private benefit of company cars in the tax scheme.
1. Department of Energy, 1996. Digest of Energy Statistics. London, HMSO.
2. McLaren, D., Bullock, S., and Yousef, N., 1997. Tomorrow's World: Britain's share in a sustainable future. London, Friends of the Earth.
3. Department of Transport, 1996. Transport Statistics Great Britain. London, HMSO.
4. Robinson, K., 1997. Companies and cars- the way forward. London, Ashden Trust.
5. Robinson, K., 1997. Op cit
6. Coopers and Lybrand, 1997. The CCH Company Car Tax Guide 1996/97. London, Coopers and Lybrand.
7. The Ashden Trust, London First and the University of Westminster, 1997. Company Car Taxation; A Contribution to the Debate. Available from the Ashden Trust, 9 Red Lion Court, London EC4A 3EB
8. Ibid
9. Department of Transport, 1996. Op cit
10. Ibid
11. The Ashden Trust et al, 1997. Op cit
