With increased BIK levies due in the New Year, the industry is pondering the effect this will have on business, says David Roe
With the January 1st deadline for the implementation of increased Benefit-In-Kind(BIK) levies on company cars fast approaching, speculation in the industry as to how the new charges will affect company fleets is rife.
The increased PRSI charges for both employee and employer, as well as increases in taxes on the market value of new cars, have led many to predict a move from company cars as an employment perk to cash-for-cars.
In such a situation, it is argued, many employees will turn to the second-hand market. While there is clearly nothing wrong with second-hand cars, in a scenario where an employee is offered cash and buys a second-hand car, the company ultimately loses control of the car and there are no guarantees that the employee will take out adequate business insurance, or that the car has been adequately serviced and is safe to drive.
Nor are there any guarantees that a car chosen by the driver is covered by an adequate warranty, leading to expensive repairs which can come back to the company as increased cash payouts.
The new charges, published in the Finance Bill 2003, raised the tax on the original market value of company cars from 22.5 per cent to 30 per cent, with overall tax and PRSI levy rising from 42 per cent to 44 per cent.
Essentially, it means that both employer and employee will pay PRSI which will be related directly to the mileage on the car over the course of a year.
Drivers who travel more than 15,000 work-related miles annually are favoured, as the BIK levy is reduced on a sliding scale from 30 per cent to 6 per cent. So someone who drives less than 15,000 a year will be taxed on 30 per cent of the vehicle's open market value, while someone who drives over 30,000 miles a year will be taxed at 6 per cent.
Additionally, BIK is to be charged as a percentage of business mileage, which means that drivers whose company car expenses are not fully subsidised will end up shelling out more than those whose expenses are fully met by their employer.
An employee, for example, who travels less than 15,000 miles in a company car worth €30,000 will be liable to pay the current 6 per cent rate of PRSI on 30 per cent the car's value - about €10,000 in this case - as well as the PRSI already paid on salary. The cut-off limit for employee PRSI is €40,420, after which no PRSI is paid.
The result, when implemented, is an increased cost to a firm on a car valued at €30,000 of €2,092, a cost many will be unwilling are even unable to sustain, Ray McKenna, KMPG's director of human capital said recently.
"While companies needing fleets will undoubtedly pay the new taxes," he says, "it's likely that in firms where a car is offered as a perk many employers are going to be looking at car fleets to see if they are really a viable option.
"It's likely that in cases where cars are non-essential, companies will be looking at offering cash-for-cars."
In anticipation of the increased tax/PRSI contributions, some fleet management service are looking at introducing a new financial product that will bypass the increased charges. The product, know as PCP (Personal Purchase Contract) is a contract between the fleet management service, the employer and the driver - a system whereby an individual is given cash to lease a vehicle for a set period at a fixed monthly charge.
The normal contract is three years. After that the company driver can either return the car, or pay optional residual value of the vehicle, and buy it outright. The monthly charge is governed by the initial cost of the vehicle, mileage covered, the period of the agreement and the estimated value of the vehicle at the end of the contract.
However, while PCPs may be a worthwhile consideration for company car drivers who travel less than 15,000 miles a year, anecdotal evidence from Britain, where PCPs have been available for several years, suggests that many companies that offered "quick-fix" cash-for-car schemes initially are now going back to fleet management companies looking to revise contracts.
The Society of the Irish Motor Industry (SIMI) says it is unclear, as yet, as to the effect the new charges will have and is unwilling to make any predictions until the budget for 2004 is published at the beginning of next month.
Since the publication of the Finance Bill 2003, its position has to been to lobby TDs around the country to implement changes that would stave off the worst effects of the new tax and PRSI rates.
In particular, says Cyril McHugh, chief executive of SIMI, it would like to see the introduction of a VAT imput credit and the implementation of a tax at the current market value of a car rather then a tax at the original market value of the car when first bought.
The implementation of a VAT credit makes sense for both the Exchequer and employers. If the cash-for-cars option becomes widespread, the Exchequer is likely to lose out as employees move into the second-hand car market and revenue from VRT drops.
At the time of writing, the SIMI had concluded meetings all over the state with politicians and members of the SIMI aimed at persuading the Minister for Finance to implement a VAT credit.
It has also met with the Minister, but as yet, it says, there are no indications of changes either way.
Currently, the company car market in Ireland is worth between 35,000 and 40,000 units annually, with an overall revenue take of close to €400 million.
Although it is impossible to predict the effects of the new charges, it is likely that in a business where profit margins have been cut close to the bone, any increased charges without an accompanying tax relief will cut even closer and threaten the livelihoods of at least some of the 50,000 people who work in the motor industry in Ireland.
