The concept of Peak Car – whether, in developed nations, use of the private car has reached a zenith and is now in decline – is a subject of much debate and argument among transport campaigners and motoring lobby groups. Certainly, in the US and the UK there is evidence that car use has declined according to various indicators, in the decade ending 2006, which is taken to be an appropriate date to measure to, as it predates the current economic downturn and so is not confounded by purely temporary (I hope!) factors. One such indicator is the decline in vehicle mileages which, together with more fuel-efficient cars, has led to a steep decline in fuel sales and so in taxes and duties collected from motorists. (How those revenues should be replaced from motoring is beyond my expertise) Another is the steep decline – from about 45% to about 32% - in the proportion of 17-23 year olds who hold driving licences. In fact, if you look at a bar chart of driving licence penetration of the UK population by age group over the last 40-50 years, it looks a bit like a “wave”, with its peak moving through the age groups as the baby-boom generation has aged. True, the wave has a steeper and a shallower face, ie the penetration behind the peak (lower age) is higher in more recent decades than in earlier ones, but the peak has moved towards the 65+ bracket and so presumably will start to fade out.
This is a bit woolly of course, and I can no longer lay my hands on the links to some of these observations to illustrate them, but I can do better than that – I haven’t yet lost the link to the “On the Move” report co-sponsored by the RAC Foundation. This report is referenced on the RACF website with a page headlined “Millions more women on the road as young male drivers ebb away”. This, and the following statement:
The researchers found little evidence of ‘peak car’ - the situation in which there is no increase over a sustained period of time (and in some cases a decline) in average car mileage per person, even during periods of economic growth. Once company car mileage was excluded, those aged 30 and over outside London actually increased their car travel right up to the 2007 recession. This group accounts for 70% of the British adult population. [My emphasis]
do seem to be trying to put a spin on the finding which is in contradiction with the detail. The selective presentation of the information would not disgrace that master-manipulator of raw data, Transport for London. How can you argue against Peak Car by excluding one of the biggest car-owning regions of the country (even if car ownership there is below average) and the potential future drivers who would be needed to replace those older drivers who will, over the next decade or two, die of old age, possibly some time after they have decided that they no longer feel competent to drive?
What interests me more, though - and here I am moving into an area in which I actually have some expertise instead of some not necessarily well-founded views – is the selective exclusion of company car mileage.
From this statement, and from what is recorded in the executive summary of the report itself, you might conclude that the decline in company car use is not relevant to the overall picture, but this is highly misleading.
The first statements you come across, “the steep decline in company car use is hugely important, but obviously not something that can be repeated”, and “there is some evidence of a partial shift of business travel from company car to rail for men” (Key findings panel, page iv) are unarguable. If company car use declined to zero then it couldn’t go lower. A shift from car to rail is an obvious consequence of one of the key changes to the taxation of company car benefits, explained below.
For you see, I am a professional tax adviser, and have been since 1981.
Prior to about 1998 – I haven’t been able to pin down precisely whether it was until 5 April 1998 or 5 April 1999 as I can’t find the information on the HMRC website, so I am going from memory – company cars were subject to a standard tax charge according to engine cc bands. The bands were below 1,400cc, 1,401-2,000 cc and 2,001cc & above. Slightly lower rates applied for diesel engines in the same cc bands. There was no reference to capital cost, or to fuel consumption/CO2 emission figures. The result was of course to distort the market – an executive would prefer the Grand Luxe version of one model over the more basic version of a larger-engine model if it affected the cc band, and bunching around 1,399 and 1,999 cc engines was significant.
At the same time, the tax charge could be halved if the car was used for more than 2,500 business miles a year. The obvious result – and as a one-time company car user I can attest to this personally – was that company cars were frequently used for unnecessary business journeys, or journeys which would have been better undertaken on public transport, to get the mileage up. For example, if I had an office training course at a De Vere conference venue in Kettering, I would be sorely tempted to go home, pick up the car and drive there instead of taking the train direct from London. I even once had a colleague who drove to a client meeting in Germany, more or less getting his entire 2,500 business miles in one trip! (The CO2 per mile per passenger to fly is about half the CO2 per mile per car, ie two people can travel more greenly by air, three by sharing a car).
Company fuel benefit was also taxed in similar bands, at quite low rates, and the obvious consequence of that was that if you were going to pay £x flat rate per year in income tax for all your petrol, and if your employer placed no strict cap on the benefit he was prepared to pay for, you might as well fill your boots.
So, around 1998 or 1999, the tax benefits scaled were fundamentally changed. There has been any number of minor adjustments since, but the fundamentals have remained consistent. You compute the capital costs of the car – recommended retail when new, including all extras added – and to that you apply a charge of 35% pa. That percentage can be reduced for low-emissions cars, and what has changed year on year is the threshold for a low emissions car – the CO2 threshold has gone down from 155gm/km to 125 last year and 100 now. There is no high-business-mileage reduction.
The fuel benefit changed to a scheme where an annual base value is set and amended annually by statute. This is currently about £20,000. To this you apply a percentage, from 15% for the lowest emissions cars and 35% for the highest. In other words, a small hatchback would incur a fuel charge of about £3,000 pa and a Range Rover about £7,000 pa.
It doesn’t take a mathematical genius to figure out that a standard 3- or 4-year lease contract for most cars costs less than 35% of retail price per annum. Supplying a car, without free fuel, as a benefit (as opposed to with genuine business need, eg a travelling salesman, or a photocopier engineer) suddenly cost more in tax than the true value. So, my then employer changed its policy: instead of providing a car, they would assist you in leasing one personally, and contribute up to a specified monthly amount (permitting you to top-up to a limited extent – you could not for example have an allowance of £500 pm and then contribute a further £1,000pm to lease a Porsche). Or, you could have the allowance in cash. Either way it was taxed at its cash value.
Funnily enough, most employees opted to take the money and find themselves a car privately. Like many others, I bought out my leased car and kept it another 4 years until it had 120,000 miles on the clock. And of course once you are paying the cost yourself, and have alternatives for what you do with that money, you start to make more rational decisions. You no longer drive in the knowledge that it doesn’t matter how far, or fast, or badly, you drive because the cost to you is just an unvarying number on your tax assessment.
Hence, as the report states, “The largest reductions in company car mileage have been among men classified as ‘professionals’ (down by 63%) and ‘employer/managers’(down 35%). This results from reductions both in car ownership and in usage per company car” (Para 14 page vii) These groups are the ones most likely to have been provided with a car wholly or substantially as a tax-efficient benefit-in-kind.
The following paragraph of the report goes on to say “There is circumstantial evidence of some mileage having transferred from company cars to private cars among the employer/manager group, where private car mileage increased slightly while company car mileage decreased.” (para 15 page viii) If many company cars were provided substantially for personal use, as a benefit-in-kind, then it goes without saying that at least some of that car use would transfer from company to private. Or as my teenage daughter would say, “No shit, Sherlock?”
My final quote from the report is this: “Figures from HM Revenue and Customs show that the notional taxable value of an employee being provided with free fuel for private use rose sharply during the late 1990s/early 2000s. This resulted in an 80% drop in the number of people declaring that they have been provided with both a company car and free fuel for private use.” (Para 27, page xi)
So, in summary, a significant proportion of company cars were supplied as a benefit in kind rather than for explicit business use. Changes in tax rules have led to a steep decline in the provision of company car benefit. As the principal use of those company cars was for personal purposes, privately owned and financed cars took their place. You absolutely cannot pretend that company cars are not relevant to the Peak Car question.