[] TL: SUBSIDISED POLLUTION: COMPANY CARS AND THE GREENHOUSE EFFECT (GP) SO: Greenpeace UK DT: 1990 Keywords: atmosphere cars business funding greenpeace groups climate change reports uk europe / [part 1 of 2] A report for Greenpeace UK Malcolm Fergusson Earth Resources Research Ltd 258 Pentonville Road London N1 9JY January 1990 ATMOSPHERE CAMPAIGN GREENPEACE 30-31 Islington Green, London N1 8XE Tel: 01-354 5100 ACKNOWLEDGEMENTS Thanks are due in particular to Peter Bibby, Alistair Hanton, Stephen Potter and my colleagues at Earth Resources Research for their help and advice during the compilation of this report. The views expressed herein remain entirely the responsibility of the author, however. Contents Executive Summary Introduction The Ownership and Use of Company Cars The Cost of Company Motoring Environmental Impacts Overseas Comparisons and Alternative Approaches Conclusions References Appendices Executive Summary Road vehicles give rise to a wide range of environmental pollutants. Motor cars are the most common and most widely used form of road transport, and produce the most pollution. Pollutants produced by cars include nitric oxide and nitrogen dioxide; carbon monoxide; lead; diesel particulates and hydrocarbons. These primary pollutants can also lead to the formation of secondary pollutants, including ground-level ozone and peroxyacetylnitrate. Both primary and secondary pollutants can be directly or indirectly harmful to human health and to the environment. The main gaseous emission from motor transport systems is carbon dioxide. Carbon dioxide is the largest single contributor to global warming, resulting in approximately 50 per cent of the total warming effect. Carbon dioxide emissions from road transport in the UK totalled 98 million tonnes in 1988; and official forecasts imply dramatic increases. By 1988, up to 3.8 million cars in the UK were estimated to be company owned or financed. These gave rise to some 22 per cent of the carbon dioxide, and 20 per cent of the regulated pollutants. Company cars are typically larger (by 230cc of engine capacity) and less fuel-efficient than the average new car. Company-owned vehicles were used on average for an additional 1,700 miles (2,735 kilo metres) of private travel per year in 1980. As well as using more petrol directly, they also give rise to further unnecessary pollution when they are sold on the second hand car market. In spite of increases in the last two budgets, company car scale charges do not reflect the true value to a motorist of the use of a company car. Failure to levy National Insurance on company car benefits in kind represents a further and substantial subsidy to company motoring, as does failure to tax the provision of free parking. The provision of free petrol for private use is of considerable concern from an environmental perspective. This encourages excessive and unnecessary use of the company car. Even on cautious assumptions, it seems that the total loss to the Exchequer through company assisted motoring is of the order of œ2.8 billion per annum. This suggests that corporate motorists are adding unnecessarily to the greenhouse effect, and are being subsidised at a rate of approximately œ820 per tonne of CO2 produced. Introduction This paper will consider a number of aspects of company car ownership and use in the UK, with particular reference to financial and environmental implications. The primary purpose is to review the current position of company car ownership and use from an environmental perspective. As such, the analysis will draw heavily upon a range of data sources and previous works on related subjects. 1.1 Information on Company Cars Perhaps the most comprehensive analysis to date of the issues surrounding company car use is "The Company Car Factor", a report compiled by the transport consultants Transport and Environment Studies (TEST) in 1984. Subsequently, the analytical approach established by TEST has been adopted to update the available information by, amongst others, Peter Bibby, in his report "Company Car 88". The present study adds further information from Department of Transport statistics and the most recent National Travel Survey, along with data from a GLC report of 1985 entitled "Company Assisted Motoring in London". Additional material on recent company policies and practice is derived from a number of survey sources including "Monks Guide to Company Car Policy"; survey reports published by Les Services PLC and Income Data Services Ltd (IDS); and several other publications from within the motor trade. Data on atmospheric emissions from motor vehicles is derived from a report compiled for the World Wide Fund for Nature by Earth Resources Research (ERR). Government research on this issue is to be found primarily in a 1986 report from the Transport and Road Research Laboratory (TRRL). Further work sponsored by the Department of Transport (DTp) is currently in progress. Although originally scheduled to be completed in 1989, it remains unpublished at the time of writing. 1.2 The Company Car Phenomenon No hard and fast definition is adopted here for the term 'company cars', since the company car phenomenon is not confined to those cars which are directly purchased in a company name. In reality, the latter are just one element in a wide range of company (and state) subsidies to private as well as business motoring; and these subsidies form part of the still wider spectrum of fringe benefits or payments in kind which an employer may offer to an employee. Often such fringe benefits offer tax advantages over direct cash payments. In general they are also judged to increase an employee's loyalty to their company (the so-called 'golden handcuff' effect). In the case of company cars, however, there are serious environmental impacts which lend the issue an importance far beyond its fiscal implications. As will be illustrated below, a large (and growing) proportion of all new cars are registered in a company name, for the use of employees of that company. Much of this use may be in the course of work where cars are issued to sales representatives, maintenance engineers and so on; but on average 74 per cent of the mileage travelled in company cars is for private purposes (unpublished data from NTS 1986). Typically company cars remain available for private use by their drivers, and as such, the drivers are expected to pay tax on this use as a benefit in kind from their employers. Where cars are available solely for business use and are garaged on office premises they are termed 'pool cars'. Their users are not liable for tax on their use; but in principle at least the definition of this category is quite strict, and does not therefore cover a large element of the company car total. Beyond this, many company cars (and in some cases second cars) are provided for company executives and managers as a 'perk' or status symbol. Often these are not justified by any particular need for mobility in the course of work, and are used primarily either for travel to and from work or for other private and family travel. It is also worth bearing in mind that many company cars are not owned directly by the company which employs the car's driver. Many employers prefer to reduce their own involvement in the day-to-day running of their car fleets by leasing or contract hire of vehicles from specialist fleet management organisations. The development of such arrangements in recent years has made it far easier and more attractive for some companies to offer company cars to their employees, such that 40 per cent of all fleet cars are now managed in this way. Quite aside from those cars bought directly by a company (company purchased), many others are bought by private individuals with part or full financial assistance from an employer. This approach is often preferred, as private cars tend to hold their value better than those registered to companies, and thus reduce the financial loss through depreciation. Cars purchased in this way are commonly referred to as 'company financed' cars, and are also subject to taxation as benefits in kind. A further important group of financially-assisted car owners are the self-employed, officially referred to as sole traders, who may also claim significant tax allowances on their cars for use in the course work. As was demonstrated in the TEST report, self-employed people often buy quite small, second hand cars and tend to keep them longer than do corporate motorists. This fact is often cited as evidence that many company motorists might also opt for less profligate driving habits if their choice of car had to reflect the full costs of motoring, or if they were offered cash values in exchange. 2 The Ownership and Use of Company Cars This section of the report will review recent figures and trends in company car use and ownership. Official statistics give a reasonably good picture of trends in company car ownership, but they only refer to those purchased directly in a company name. Additional data sources are therefore cited to estimate the full total of company car users. 2.1 The Number of Company Cars in the United Kingdom In recent years, new car sales have boomed in Britain as in many other countries, and the most recent figures show no letting up of this trend. As Table 1 illustrates, company purchase has far outstripped this general growth, such that company purchases represent a growing share of a growing market. More than half of all new cars are now purchased directly in a company name. Table 1 Number of Cars First Registered by Year Total Cars Registered in a Company Name Year (thousands) (thousands) % of total 1978 1579.4 663.3 42 1979 1705.0 767.3 45 1980 1519.3 638.1 42 1981 1493.7 597.5 40 1982 1584.3 633.7 40 1983 1806.1 704.4 39 1984 1759.3 738.9 42 1985 1842.1 828.9 45 1986 1883.2 866.3 46 1987 2016.2 967.8 48 1988 2210.3 1127.3 51 Source: DTp Transport Statistics Great Britain 1978-88 However, it is rather more difficult to determine what proportion of the total car stock is company owned at any given time. Most company cars remain in company ownership for between two and four years, after which time they are sold either to company employees or on the general second hand market. Official statistics do include estimates of the total number of cars registered in company names, but these seem to be unaccountably low in comparison to the numbers of new registrations. Thus for example, a comparison of the company car totals from Tables 1 and 2 for 1988 shows a total stock which is barely double the number of cars newly registered in that year. This would seem to suggest an average retention of little more than two years in company ownership, whereas industry surveys, including Monks Guide, suggest that cars are typically kept for between two and four years, with an average retention of around three years. A recent survey by the LEX group also supports this estimate, suggesting that the average lifespan of leased vehicles is around two years and eight months. Estimates based on these surveys are therefore presented alongside the official statistics in Table 2. Table 2 Estimates of the Company Car Stock (Omitted .. unscannable) Our own estimates suggest that, even allowing for accidents and other early write-offs, there would have been around three million company registered cars in use during 1988, comprising nearly 16 per cent of the car stock. This figure is also supported by sources within the vehicle leasing industries. As noted above, this total ignores the additional vehicles which are company financed or run by self-employed workers. Applying data from the NTS as in the TEST and Bibby reports suggests a total of approximately 3.8 million cars which are company owned or financed, or just under 20 per cent of the total stock. 2.2 Engine Capacities and Country of Origin A further feature of note in relation to company cars is their size. As the TEST report demonstrated, company cars are typically larger (and hence generally more expensive and less fuel-efficient) than the average new car. This effect is clearly a function of company purchase rather than the income levels of company car users, since the discrepancy persists even when the data is corrected for income differences. In Table 3 over leaf, data on engine capacity from the TEST report is shown alongside more recent figures. In all cases, the data have been corrected to allow for the proportion of company cars registered to private addresses, which cannot be derived directly from DTp statistics. This process is described in detail in the TEST report. Table 3 Average New Car Engine Sizes (litres) Individual Company Difference Year Purchase Purchase/Finance 1979 1.36 1.66 0.30 1981 1.30 1.61 0.31 1983 1.34 1.61 0.27 1988 1.38 1.62 0.24 1989 1.39 1.62 0.23 Note: Capacities are 'corrected' to reflect the proportion of company financed cars registered in personal names (see TEST, 1984) As this table illustrates, company cars continue to show a higher average engine capacity than those privately purchased. The difference has diminished slightly since the time of the TEST analysis (from 270cc to around 230cc), owing to a gradual increase in the engine size of privately purchased vehicles. Nonetheless, this difference continues to have significant environmental implications, as will be described below. Table 4 New Car Sizes by Main Source, 1988-89 (Omitted .. unscannable) Tax subsidies to the company car sector have often been justified by both the motor industry and politicians alike as a means of supporting the British motor manufacturing base. Such arguments have worn somewhat thin in recent years in view of the enormous trade deficits attributable to car imports (approximately œ4bn out of a total œ12bn deficit). As Table 4 illustrates, it remains the case that companies buy a higher overall proportion of their cars from UK sources than do private individuals. On the other hand, companies buy many of their 'executive' class (and hence high price) cars from overseas manufacturers. This is reflected in the markedly higher engine capacities of imported company cars, and suggests that the benefit to UK manufacturers may be far less than is sometimes claimed. 2.3 The Use of Company Cars The 1978-79 National Travel Survey (NTS) suggested that company cars were typically driven around 12,000 miles per annum for private travel purposes, at a time when the overall average was marginally above 9,000 miles. Thus company cars travelled a third more miles, quite irrespective of their legitimate business use. As Table 5 shows, the more recent 1986 NTS indicates a similar contrast in use rates, which is only partly explained by higher business mileages and by the tendency of people in higher income groups to travel further. Table 5 Distances Travelled per Week by Car Car Purchased by Household Company Business Use 7 67 Commuting 37 81 Other Private Use 86 111 Total Mileage 130 259 Source: National Travel Survey, 1986, unpublished data The contrast in distances travelled by car for commuting purposes is also clear from the table. The 1985 Central London Car User Survey showed a similar pattern, but as this was a survey primarily of commuters and other urban drivers, the contrast between private and company cars was less marked in this case. Hopkin in her research at TRRL took account of differences in driving behaviour between people of different circumstances and social groups, but concluded that company-owned vehicles were used on average for an additional 1,700 miles (2,735 kilometres) of private travel per year. The Central London survey emphasised the enormous significance of company cars in central London travel, however. For example, 42 per cent of all drivers interviewed were travelling in company cars. These latter drivers were also consistently involved in longer trips - on average of 65 minutes' duration. This contrast was partly accounted for by long journeys on an employer's business, but even on commuting trips company assisted motorists were involved in trips ten minutes longer on average than those driving with no company subsidy. This difference can only partly be explained by company car owners being forced to drive to work in order to have their cars available during working hours, since only a very small proportion of commuters (8.3 per cent in the London survey) use their cars at all during the working day. Rather, this figure supports the hypothesis that company motorists are encouraged to commute by car through the subsidies which they receive, even over distances where unsubsidised travellers would consider using an alternative mode of travel. Table 6 Company Assistance to Central London Commuters, 1985 (Omitted .. unscannable) The 1978 Central London Parking and Car Use Survey also underlined the importance of company-owned parking spaces as a factor in car use in central London. Of the spaces identified in the study, 57,000 were categorised as private and non- residential, making up 44.5 per cent of the total. The Car User Survey established a strong link between assisted motoring and assisted parking, since 68 per cent of company car commuters into central London received assistance with parking or parking costs as well, along with 51 per cent of those commuting into the inner zone. The corresponding proportions for private motorists were much lower, at 57 and 41 per cent respectively. Table 6 provides additional data on assisted motoring in London. 2.4 Company Cars and the 'Greening of Industry' In the 1988 and 1989 budgets, changes in petrol taxation lent considerable impetus to the switch to lead-free petrol, to the extent that sales of the latter have now reached 25 per cent of total sales. The incentives for company fleet managers to take the initiative in this area were highlighted after the March 1989 budget changes, and many have indeed responded quickly to this opportunity. The IDS survey suggests that some may have gone further by insisting that even company motorists using their own cars use lead-free petrol wherever possible. In another recent report entitled "The Green Effect on Company Cars", the Hertz Leasing group have gone one better by arguing strongly for the immediate introduction of three-way catalysts for all new company purchases, without waiting for the EC regulations to take effect. Their argument is in effect rather self-serving, as the report concludes that most companies would be well advised to hand over their fleet management to a specialist firm (such as Hertz Leasing, perhaps), and let them worry about the intricacies of the green revolution instead. Nonetheless, the report takes a positive approach to the impending introduction of catalytic converters, presents the main technical issues clearly and accurately, and dispels many of the prevalent myths and misunderstandings regarding the costs and pitfalls on the path to an "all cats car fleet. The key conclusion is that "there is no reason why the company fleet cannot incorporate the appropriate technology straight away making a start at reducing the level of atmospheric pollution" From an environmental standpoint, the main weakness of the report is its focus on the regulated pollutants (oxides of nitrogen, hydrocarbons and carbon monoxide), and the relatively little attention which it gives to the more intractable issue of global warming. It is recognised that a reduction in CO2 emissions will require improved fuel efficiency; but it is implied that this must be achieved through improved engine designs, such as the lean burn and orbital motors, or a switch to non petroleum based fuels. No mention is made of other alternatives which are already available, such as promoting smaller cars, less powerful engines, lower mileages or more reasonable speeds. The Cost of Company Motoring Clearly the budgets of 1988 and 1989 have reduced the public subsidy on company cars, at least in respect of the car scale charges. However, it is argued below that no dramatic change will result, and that there remain a range of significant encouragements to car-based commuting, and company-financed motoring in general. 3.1 Scale Charges for Private Use As noted in the introductory section, company car users who have private use of their cars are expected to pay tax on this as a benefit in kind. This is achieved by adding a 'scale charge' to their taxable income level, which is intended to reflect the value of this benefit to the user. Similarly, a fuel-charge is applied where drivers receive free petrol for personal use. The car user then pays tax on the additional charge at the appropriate tax rate, depending on their income level. [] TL: SUBSIDISED POLLUTION: COMPANY CARS AND THE GREENHOUSE EFFECT (GP) SO: Greenpeace UK DT: 1990 Keywords: atmosphere cars business funding greenpeace groups climate change reports uk europe / [part 2 of 2] Table 7 Typical Scale Charges by Year (Omitted .. unscannable) In his 1988 budget speech, Chancellor Nigel Lawson declared that "Far and away the most widespread benefit in kind is the company car, which is substantially under-taxed ... an employee with a typical company car may be taxed on only about a quarter of its true value ... The discrepancy is so great that it cannot be put right in a single year." At that time he responded by approximately doubling the vehicle scale charges, which seemed to imply that a further doubling of the scale charges for the private use of company cars would ensue in 1989. As Table 7 illustrates, there had been a steady increase in these charges through the 1980s, culminating in the doubling of the charges in 1988. The latter led to widespread protests from the motor trade, predicting a collapse in motor sales and hence in the British car industry itself. As the Independent reported on March 16th, 1988 "Motor industry officials warned last night that the Chancellor's decision to double taxation on company car benefits could deal a serious blow to British car makers and lead to a flood of imports ... "Describing the changes as 'savage and unnecessary' the Society of Motor Manufacturers and Traders warned that it would encourage companies to go out and buy smaller, imported cars." In reality no such collapse occurred, and on the contrary, car sales once again reached new records in 1988. While imports grew, domestic car production also reached its highest level since 1977. Nonetheless intense lobbying took place in advance of the 1989 budget, and the Chancellor did not carry out his implied threat to double the scale charges once more. Instead he opted for a rise of around one third, which further reduced, but failed to eliminate, the under taxing of private use of company cars. The most recent estimates of the current magnitude of tax loss from scale charges are set out in Appendix 2, and summarised in Table 8 below. As in 1988, it should not be concluded that the increase in scale charges will have a major impact on the purchase or use of company cars. In fact Monks Guide concludes that little or no change will result "The new scale charges were increased less than had been anticipated ... Our discussions with a wide group of companies over the last two months suggests [sic] that company cars will remain an important feature of UK remuneration practice." The popular press were more outspoken on the outcome of the 1989 budget. Thus for example the Daily Telegraph reported on March 15th "Company car drivers were relieved that the Chancellor did not go further in increasing their personal tax contribution ... The increase was not as much as the industry had feared." As Appendix 2 illustrates, the underestimation of the true value of a company car also varies according to the size and price of vehicle, such that the effective subsidy is largest for the most expensive (and generally most polluting) of cars. There seems to be no good reason for this bias in the scale charges, which can only encourage the apparent preference for larger than average cars in the company car fleet. From an environmental perspective it would be preferable to ensure that the largest cars were the most heavily taxed, thus encouraging a move towards smaller and more fuel-efficient models. 3.2 National Insurance Contributions It is now generally accepted that company motorists should pay tax on the effective value of their private motoring in company cars. The scale charges discussed above in effect treat this value as additional salary for taxation purposes. However, if this value were paid as actual salary in cash, both employer and driver would also be liable for national insurance contribution (NIC) payments on this additional sum. Since no NIC is at present payable by employees on income above œ16,900 per annum, many company car drivers would be unaffected by such a change; but employers must pay 10.45 per cent on all payments with no upper threshold. As the table above suggests, failure to levy NIC on company car benefits in kind represents a further and substantial subsidy to company motoring. It has been argued that such charges would pose serious technical difficulties on account of the structural differences between Inland Revenue and National Insurance payment systems. There is some basis to this claim; but certain other benefits are already subject to NIC, and so the principle at least is already established. Table 8 Summary of Lost Revenue from Company Cars (1989 Estimate) (Omitted .. unscannable) 3.3 Free Parking Spaces A further subsidy to company car use arises from the provision of free parking, typically on company premises. In the past parking benefits were regarded by the Inland revenue as de minim is and ignored accordingly, but since 1988 they have been declared to be officially tax-free. Again technical difficulties have been cited as an argument against taxation; but the London Amenity and Transport Association (LATA) have consistently argued that these would not prevent collection in inner London, for example, where company owned parking is at its most common, and also of the highest value. Furthermore, recent revaluations of commercial property which itemise parking spaces separately have recently been published, and would provide a good basis for taxation. Table 8 includes the most recent estimates of the tax value lost to the Exchequer through free parking. (Note: Grand total is 2824.7 British pounds.) As noted above, the provision of free parking is of central importance to the issue of traffic in London and other major cities, since in many cases it may be a critical factor in the motorist's decision to commute by car. A parking space in Central London can be worth œ100 or more per week at current prices. While motorists may be happy to accept this provision as a tax-free perk, many might choose to commute by alternative means if they were required to pay full taxation on the parking benefit. 3.4 Free Petrol and Fuel Charges As Appendix 1 illustrates, the provision of free petrol for private use of a company car is common practice in the UK. Monks Guide indicates that for all management grades, the majority of companies pay for some or all of their private fuel use. Only 43 per cent offer private petrol to the lower staff grades; but this rises to more than 80 per cent for board members. The IDS survey suggests that many of the companies which pay for only "some" petrol may in fact be paying for all except that used during annual vacations. This practice is of considerable concern from an environmental perspective. As is explained elsewhere in this report, private cars are and will remain one of the most polluting forms of transport (catalytic converters notwithstanding); and car use is growing fast. Taking the rates of free petrol provision alongside our estimates of total company car availability suggests that there may be of the order of two million motorists in the UK (particularly if one includes spouses or other household members with access to a company car) who are in effect totally insulated from the everyday running costs of their private motoring. Clearly this will encourage excessive and unnecessary use of the company car, and may induce their drivers to travel by car when other transport modes or destinations would otherwise appear more attractive, purely to ensure that they gain the maximum benefit from their petrol allowance. The current arrangement of fuel charges for taxation purposes is extremely regressive, and does nothing to counter this effect. Fuel scale charges are broadly in line with the average level of private use of company cars, and are payable in all cases where the employer provides free fuel for private motoring. However, the same charge is levied irrespective of the actual level of private use, and it would be surprising if motorists were not tempted into travelling above average mileages by the open-ended availability of free motoring. If anything, the current arrangement is likely to encourage drivers to generate more private mileage in order to get the best 'value' from their tax liabilities. These arrangements for taxing free petrol were introduced for administrative simplicity, and rely on arbitrary business mileage cutoffs to distinguish 'perk' and 'job need' cars from the rest. For example, if a company car totals less than 2,500 business miles in a given year it is regarded as a perk, and the car scale charge is increased by 50 per cent accordingly. Conversely, both scale and fuel charge are halved for company car users whose business use exceeds 18,000 miles per annum, but regardless of the level of private use. This is logical only to the extent that 'job need' cars are less readily available to a spouse during working hours, for example, and may accumulate less private mileage for this reason. However, since most company cars are in any case used for commuting to work, there is no obvious correlation between business and private mileages unless one assumes that a sales representative who travels extensively on business will be too tired to drive much during the weekend. Aside from the irrational nature of these distinctions, they have the additional undesirable effect of encouraging corporate motorists to 'generate' unnecessary business mileage in order to ensure that they exceed one or both of these thresholds, and thereby reduce their tax liability. Hence both business and private motoring may be encouraged by the current regressive arrangements. Many organisations (including for example the RAC and the British Vehicle Rental and Leasing Association (BVRLA)) have criticised the current arrangements on taxation of free petrol for private motoring for these and similar reasons. From an environmental perspective, such an open-ended incitement to generate extra car mileage is unacceptable, and should be discouraged by heavy taxation. 3.5 Corporate Taxation and Company Cars In 1987, Ashworth and Dilnot drew attention to the effects of company cars on corporate taxation. In brief, a further taxation anomaly arises from the fact that the capital costs of car provision (including VAT) can be offset against a company's corporation tax liability, irrespective of the degree to which the provision is for business or personal use. The extent of the financial advantage conferred through corporation tax is difficult to assess, and Potter has recently criticised the results of the Ashworth and Dilnot study. However, the central point which arises from their work is that this element of the benefit accrues to the employer rather than the employee, and would thus remain as an incentive to the provision of company cars even if the benefit to the user were fully and fairly eased. It should be noted that these benefits are not reflected in the calculations presented in this study, and thus the estimates of the total subsidy to company motoring are likely to be quite conservative. Ashworth and Dilnot suggest a number of options to rectify the corporate tax anomalies. The approach most consistent with the other taxation proposals presented in this study would be to allow against corporation tax only that element of the car cost which can be attributed to the legitimate business use of the car. 3.6 Tax Avoidance and Tax Evasion It is generally maintained in the trade literature on company cars that they continue to represent a 'tax-effective' form of remuneration. That is, they minimise the tax paid for every unit of benefit to their recipients. Where regulations are adhered to, this is of course perfectly legal and widely accepted practice; but it does mean that a sector of the populace are paying less tax than they would be if they received the same benefit directly in cash. This is then a subsidy to company assisted motoring from the rest of society, whether the benefit goes to the company or to the driver. Table 9 Inland Revenue Receipts on Company Car Benefits 1985-86 (Omitted .. unscannable)_ However, in the discussion to date it has been assumed that the tax on company cars can be and is collected in accordance with the regulations currently in force. Information from the Inland Revenue (1989) suggests that this may not in fact be the case. Table 9 above sets out data from official statistics on scale and fuel charge payments in the tax year 1985-6. This information is derived primarily from company returns which are the main basis for assessing the appropriate level of tax liability for company car benefits. As the table shows, these estimates indicated just over one million drivers were paying tax on these benefits, at a time when our estimates suggest that approaching three million company cars were actually in use. The Inland Revenue has suggested the following reasons for the apparent discrepancy: some directors and senior managers have more than one car employees earning less than œ8,500 (including the value of any benefits, even reimbursement for legitimate business expenses) do not pay tax on their benefits many company cars are replaced within three years because of high mileage or accidental damage hire and driving tuition vehicles are not generally available for private use some company cars are kept in a pool and are not taxable cars purchased by sole traders (ie self-employed) are not included in the totals Certainly some allowance must be made for 'pool' cars and those in use as hire or driving tuition cars, since neither category would generally result in an individual tax liability. However, car hire appears to account for only about 100,000 to 150,000 cars; and the British Vehicle Rental and Leasing Association (BVRLA) currently estimates the figure at around 135,000. The Inland Revenue's definition of what constitutes a pool car is sufficiently restrictive to suggest that they would not constitute more than a small proportion of the stock. It is possible to demonstrate that the low earnings categories do not contribute significantly to the total, and the self-employed are already accounted for separately in the figures quoted above. As Table 8 illustrates, employees receiving more than one car accounted for only 32,000 additional vehicles in 1985-86, the last year for which full figures are available. More recent estimates from the Inland Revenue suggest that up to 1.4 million motorists may now be liable for taxation on company cars. However, this is still well under half of the central estimate contained in this report. Recalculating the figure on the shorter company car lifespan estimate noted above (2.67 years) still results in an estimated total of 3.34 million company owned or financed vehicles in the UK in 1989. Even taking the estimate above of 135,000 hire cars and an updated estimate of 42,000 for multiple-car taxpayers from this figure, the total remains well in excess of three million. To corroborate this figure, it is worth noting that some industry sources (including a recent LEX Leasing survey) also assume a figure of around three million corporate motorists. A much higher estimate of the number of company car tax payers was recently quoted in the Observer (6th January 1990). However, the Inland Revenue have not published details of the basis of this estimate, and it seems inconsistent with the figures quoted above. As argued previously, it appears unlikely that pool cars are a large element of the total; so it seems on the face of it that only around half of the people who benefit from the use of a company car are currently paying any tax at all on this benefit. If this is so it appears to represent tax evasion on a large scale, and raises serious questions regarding the enforcement of current regulations. This is not only a loss to the Exchequer: it is also a massive inducement towards excessive use of a particular class of motor cars. Aside from this, the proportion of cars operated by self- employed people may also be on the increase, since the total number of sole traders in the UK has grown by 1.2 million people since 1979. This group represents the biggest headache for tax inspectors, as there is no central source to corroborate their incomes or outgoings; and their legitimate business expenses (including motoring costs) are particularly difficult to check. A recent article in 'The Economist' (14th October 1989) indicated that over the past ten years the number of tax inspectors has fallen by nearly one quarter, and that the morale of those remaining is currently low. Ironically, many of the most highly trained and experienced inspectors have been attracted by better pay onto the staffs of financial consultancies, who offer advice to companies and individuals on means of minimising their tax payments. 3.7 Summary of the Costs of Company Motoring Thus a picture emerges in which tax levels are insufficient to halt the growth of the company car sector; where tax structures and corporate practice encourage excessive use of company car mileage; and where the resources of the Inland Revenue appear inadequate to enforce even those regulations which do exist. Table 8 above summarises the estimated tax and other revenue losses arising from company car use. Even on cautious assumptions, it seems that the total loss is of the order of œ2.8 billion per annum. This figure is comparable to that calculated in the TEST report of 1984 when allowance is made for inflation, and suggests that overall little progress has been made in spite of tax increases. 4 Environmental Impacts 4.1 Introduction Road vehicles give rise to a wide range of environmental pollutants. Since motor cars are by far the most common and most widely used form of motor transport, they are in total the most polluting of vehicles. Pollutants produced by cars include nitric oxide and nitrogen dioxide (collectively referred to as nitrogen oxides; NOx); carbon monoxide (CO); lead (Pb); diesel particulates and hydrocarbons (HC). Hydrocarbons also fall within a broader group called Volatile Organic Compounds (VOCs), and are commonly referred to by this name. These primary pollutants can also lead to the formation of secondary pollutants, the most important of which are ground-level ozone (O3) and peroxyacetylnitrate (PAN). Nitrogen oxides are one of the two main contributors to a number of other very damaging effects commonly referred to as 'acid rain'. Other pollutants from road transport include asbestos (from brake linings), leaked or discarded sump oil, and tyre rubber dust. Both primary and secondary pollutants can be directly or indirectly harmful to human health and to the environment. Equally, transportation systems give rise in most cases to significant levels of noise and vibration. These too are known both to be damaging to the built environment and to contribute to stress in humans. Road travel alone causes approximately five thousand deaths and over sixty thousand serious injuries per annum through accidents, and many more thousands of other injuries. Of particular concern in Britain are the high incidences of deaths and injuries to children and the elderly. Apart from those directly affected by these casualties, many others may suffer loss of amenity through being discouraged from travelling, particularly as pedestrians or cyclists. A further major pollutant arises from the oxidation of the carbon in fossil fuels; that is, carbon dioxide (CO2). This is the main gaseous emission from motor transport systems, but as it is not toxic in the atmosphere, it has not in the past been commonly regarded as a major problem. However, it is threatening through its alteration of the global heat balance - the so called 'greenhouse effect'. Carbon dioxide is in fact the largest single contributor to global warming, resulting in approximately 50 per cent of the total warming effect. Recent developments, notably the increasing use of lead-free petrol and the impending introduction of catalytic converters, will have a beneficial effect on some, but not all, of the problems listed above. Recent research at ERR has led us to conclude that even the most sophisticated three-way catalytic converters will not by any means eliminate emissions of NOx, CO or hydrocarbons. The other problems noted above may be even more intractable, as a system which involves moving heavy machines at high speeds over hundreds of billions of vehicle-kilometres every year is inevitably a highly destructive one. 4.2 Quantifying the Effects In this section, research undertaken for the World Wide Fund for Nature (Fergusson, Holman and Barrett, 1989) using the ERR transport emissions model will be used to quantify some of the environmental impacts of company car use. The calculations which follow present estimates of emissions of carbon dioxide and of the so-called 'regulated pollutants' (ie oxides of nitrogen, carbon monoxide and hydrocarbons), firstly as a total for all company-financed vehicles, and secondly in terms of the 'excess' generated solely through the system of provision and subsidy of company cars. The excess pollution can be viewed as arising primarily from three sources: The tendency of companies to provide larger-engined cars than those which are chosen by private individuals using their own funds The tendency of company motorists to travel more miles by car on personal or family business The 'knock on' effect of company car engine sizes on private car fuel use through the second hand car market The first of these can be regarded as of relevance mainly to carbon dioxide emissions. Average fuel consumption figures for this report were derived from a comprehensive list of new car engine sizes and official fuel consumption test results, to which a formula derived at the Transport and Road Research Laboratory (Watson, 1989) has been applied. Applying regression analysis to the average engine sizes in Table 3 produced average consumptions for privately and company financed cars of 36.81 and 33.75 miles per gallon (mpg) respectively - a fuel penalty of 9.1 per cent on all travel in company cars. Since carbon dioxide emissions are directly proportional to petrol consumption, the same factor can then be applied to total mileages to estimate the excess carbon dioxide produced. In Section 2.3, reference was made to the work of Hopkin, indicating that company cars were used for an excess of 2,735 kilo metres of driving on average per annum. For the purposes of this calculation, this figure has been modified to reflect the increase in mileages travel led in the intervening years, giving an estimated excess of 3,011 kilometres per vehicle for 1988. Average rates of pollutant emissions derived from the WWF report referred to above were then applied to this excess travel to give an annual total. It should be noted, moreover, that the figures for excess mileage should be regarded very much as a lower bound estimate, since Hopkin considered that much more excess mileage was generated simply because company car provision made more cars available to a large number of households, which in itself tends to encourage additional car travel. Since around half of all new cars are company purchased, and most company cars are eventually sold into private ownership through the second hand car market, clearly the larger engine capacities of company cars will also have e 'knock on' effect on the average size of cars in private hands as well. In effect, people buying second hand are being offered cars rather larger than they would otherwise be expected to choose (on the basis of the preferences of new car buyers). The precise effect of this is difficult to estimate, since it depends in part on the average lifespan of different types of car. However, on the basis of DTp statistics and the data in Tables 2 and 3, it can estimated that in 1988 the private car stock had an average engine capacity of 1473cc. By comparing this with an average of approximately 1353cc for cars originally purchased by private buyers, one can conclude that the extra 120cc results from the effect of company cars on the private market. Applying data on average fuel consumptions as above, this suggests a 4.4 per cent excess in fuel use on all mileage in privately-financed cars, which in turn gives rise to 3.3 per cent all the CO2 generated from car travel. The results of the calculations are summarised in Table 10 over leaf. These indicate that company-financed cars are responsible for nearly 21 per cent of the UK car fleet's emissions of the regulated pollutants each year, of which 3.44 per cent arises purely through the excess personal travel typical of corporate motorists. This excess amounted to approximately 108,000 tonnes of carbon monoxide and 22,400 tonnes of oxides of nitrogen in 1988. Since company cars are replaced more rapidly than privately- owned ones, their proportional contribution to total emissions of NOx and other regulated pollutants can be expected to drop for a few years as a result of the introduction of catalytic converters. This is of course to be welcomed, and the effect could be accelerated if companies were to switch to catalytic converter equipped cars immediately as advocated in the Hertz report noted above. In the longer term, however, it is essential to bear in mind that this will not by any means eliminate pollution from company fleets, and that it will cause no reduction in carbon dioxide emissions. Of still greater concern are the totals for carbon dioxide, where the excess emissions which arise purely from larger engine sizes and higher mileages represent more than eight and one half per cent of total output from all cars. The excess was estimated to total approximately 5.6 million tonnes in 1988, and will probably reach a higher figure in subsequent years. As such, it represents a significant portion of the UK's contribution to possible global warming effects. As noted above, company car use is a major factor in commuting patterns in London. London traffic is characterised by severe congestion and very low average speeds - conditions in which cars operate at their lowest efficiencies, and generally produce their highest levels of pollution. For this and other reasons, it should be emphasised that the above are quite conservative estimates of the total excess pollution. Equally, a reduction in company car use in urban areas could result in a far greater reduction in pollution through relief of congestion. Table 10 Gaseous Emission Estimates from Company Cars (Omitted .. unscannable) The inescapable conclusion to emerge from these calculations is that company cars are being subsidised to produce excessive levels of atmospheric pollution, even when normal private use and legitimate business mileage are excluded. In the case of carbon dioxide, not only are corporate motorists adding directly and unnecessarily to the greenhouse effect; they are also being subsidised at a rate of approximately œ820 per tonne for the privilege. Overseas Comparisons and Alternative Approaches 5.1 Company Car Ownership in other European Countries Comprehensive information on the levels of company car ownership in other European countries is scarce. At the time of the TEST report, levels of ownership in most comparable states were markedly lower than those in the UK. These figures are set out in Table 11 below. Table 11 Levels of Company Car Ownership in European Countries Country Proportion of Company Cars (%) Great Britain 11 West Germany 6 France 2 USA 3.6 Sweden 8 Norway 13 Japan 0 Note: 1982 data from TEST 1984 More recent data from West Germany (FRG) suggests that company cars are as common there as in the UK; but this remains very much the exception. No detailed information on the levels of use of company cars in the FRG is available; but it is worth noting that in general car mileages travelled in Germany are significantly lower than those in the UK, in spite of the more extensive road network available. This contrast was highlighted in a recent report from the Open University, which suggested that such cultural differences may militate against the impression of high levels of car use in the FRG (Hughes and Potter, 1989). Company car ownership levels in Sweden remain low by comparison to those in the UK, although standards of living and general car ownership levels are high. There has however been a marked increase in the purchase of company cars in recent years, which has been the subject of a recent review as part of a comprehensive transport policy reappraisal. A recent summary of executive and senior management remuneration confirms the picture that the UK has by far the highest levels of company car use, as illustrated in Table 12. However, differences in tax structures seem at present to be contributing to a more marked increase in some other countries than in the UK, with the result that the contrasts illustrated in Table 12 may diminish over time. Table 12 European Levels of Company Car Ownership 1989 (per cent) Directors and Senior Managers Percentage with cars Country Level 2 Levels 2/3 Level 4 Austria 91 73 5 Belgium 88 82 8 Denmark 92 50 n/a France 95 83 3 Germany 93 80 6 Ireland 93 83 6 Italy 86 83 7 Netherlands 89 84 6 Spain 89 85 3 Sweden 81 78 5 Switzerland 68 31 2 United Kingdom 97 98 9 Notes: Level 1 Chief Exec/MD Level 2 Deputy Level 3 Directors Level 4 Senior heads of dept (non-Director) Source: Monks Publications, 1989 5.2 Transport Policies in Other European States In fact, reappraisals and changes in transport policy such as those noted above for Sweden are in progress in a number of European states at the present time. These developments have recently been summarised in a further report from TEST (1988). In Italy, cities such as Bologna and Florence continue to be in the vanguard of authorities which have restricted car use in order to preserve the environment of their crowded city centres. Typically these policies have combined improvements in public transport alongside reductions in car access. Similarly, many countries are turning to light rail as a solution to road transport restrictions. Primary examples include schemes in Grenoble, Marseilles, Lille and Toulouse. Yet more recently, improvements in traffic flow and air quality during their bicentennial celebrations have moved the authorities in Paris to implement permanent restrictions on car access. Up to 100,000 street parking spaces are to be abolished, and the extra space used for public transport lanes and pedestrianisation. Penalties for infringements are also to be increased to include temporary suspension of driving licences. A 'Guardian' review (23rd October 1989) of the recent TEST report observes that "Other nations are pouring growing sums into new railways and light railways, developing tramways, closing car parks and abandoning inner city road building schemes. The contrast with Britain could not be starker ..." 5.3 UK Transport Policy In the UK, major new road schemes, including a huge new network of urban motorways across London, remain at the centre of official transport policy. While subsidies to public transport networks have been progressively reduced (already to levels below those which are typical in other western European states), this report suggests that the public subsidy to company motoring may still be growing as company cars become more and more common. In spite of the lessons of European experience, there seem at present to be few signs of a radical rethink of UK policy. However, one local initiative of relevance to transport provision has been devised by the local authority of the Royal Borough of Kensington and Chelsea. Their proposed scheme for a new personnel remuneration package includes the availability of free LRT travel cards for London travel zones 1 and 2 for all staff of more than two years standing as an extension of previous season ticket loan schemes. It is intended that these cards will reduce business mileage claims within the borough, but as yet the benefit offered will be fully liable for both income tag and NIC payments, with no allowance for business use. As a result this particular benefit is not 'tax efficient' by comparison to the provision of private motoring, but it may offer a model for alternative benefit packages which are not based so heavily around the company car. 6 Conclusions In conclusion, current UK policy on company car ownership and use is a matter of serious concern from an environmental perspective. A structural subsidy to private motor transport fundamentally distorts transport requirements in favour of highly polluting forms of travel and encourages unnecessary journeys by car. The problem is particularly acute in London and other cities, where traffic congestion is a major social cost, and degrades the quality of life of the entire community. Environmental degradation is the inevitable consequence of the subsidies which arise from the practice of giving and using company cars. In some cases these subsidies result from specific shortcomings of current fiscal policy, such as the consistent under taxation of private use of company cars. These weaknesses can and should be overcome by decisive action in the next budget. Others however arise from more structural problems, such as the inherent difficulties of creating an equitable and operable tag system for benefits in kind. These can to some extent be mitigated by reforms to the tax structure and by the application of extra resources to the Inland Revenue; but there are limitations to this approach. Some specific policy recommendations are included in Appendix 3 below. In the longer term, the main hope for an equitable system of taxation must lie in the progressive elimination of benefits in kind, and notably of the company car perk. The elimination of hidden subsidies from industrial costs and wages is a stated aim of current government policy, but it is clear that measures to date have not progressed sufficiently far to achieve this aim, and on the contrary the scale of this particular problem continues to grow. As argued above, there is a clear need for a comprehensive set of policies for transport provision in London and for the UK as a whole. In view of the importance of the impact of company motoring upon transport provision and environmental quality, such policies should include fiscal policies for inclusion in the next budget to combat company car use as an aspect of excessive car use in general. References Ashworth M and Dilnot A, 1987, Company Cars Taxation, in Fiscal Studies, Vol 8 No 4, Institute of Fiscal Studies, London The Automobile Association (AA), 1989, Schedule of standing and Running Costs, Automobile Association Technical Services, Basingstoke Bibby P, 1988, Company Car 88, London Centre for Transport Planning, London British Vehicle Rental and Licensing Association (BVRLA), 1989, Statistical survey 1988, Chichester Department of Transport, 1988, National Travel survey: 1985/86 Report, HMSO, London Department of Transport, 1989a, Transport Statistics Great Britain 1978-1988, HMSO, London Department of Transport, 1989b, National Road Traffic Forecasts (Great Britain) 1989, HMSO, London Donkin N and Yernon-Harcourt T, 1989, Monks Guide: Company Car policy, Monks Publications, Debden Green Fergusson M, Holman C and Barrett M, 1989, Atmospheric Emissions from the Use of Transport in the United Kingdom, World Wide Fund for Nature, Godalming Greater London Council Transportation and Development Department, 1985, Company Assisted Motoring in London, Reviews and Studies 27, GLC, London Hertz Leasing and Fleet Management, 1989, The Green Effect on Company Cars, Hertz Leasing, London Hopkin J M, 1986, The Transport implications of ComPanY-Financed motoring, Research Report 61, Transport and Road Research Laboratory, Crowthorne Hughes P and Potter S, 1989, Routes to Stable Prosperity, Energy and Environment Research Unit, The Open University, Milton Keynes Income Data Services Ltd (IDS), 1989, Staff Travel and Subsistence, Study No 493, London Inland Revenue, 1989, Inland Revenue Statistics 1989, HMSO, London Lex Service PLC, 1989, Lex Report on motoring, London Monks Publications, 1989, Management Remuneration in Europe, Monks Publications, Debden Green Potter S, 1990 (in press), The Sierra Set Rolls On, Energy and Environment Research Unit Working Paper, The Open University, Milton Keynes Transport and Environment Studies (TEST), 1984, The Company Car Factor, London Amenity and Transport Association, London Transport and Environment Studies (TEST), 1988, Quality Streets: How Traditional Urban Centres Benefit from Traffic calming, TEST, London Watson R L, 1989, Car Fuel consumption: Its Relationship to Official List ConsumPtions, Research Report 155, Transport and Road Research Laboratory (TRRL), Crowthorne Appendix 2 Estimated Company Car Subsidies 1989 (Omitted .. unscannable) Appendix 3 Policy Recommendations Specific policy changes to mitigate the adverse effects of company car ownership and use should include some or all of the following: Better enforcement of tax regulations should be made a priority, to ensure that tax evasion does not further exacerbate the subsidies to corporate motoring. This can be achieved by the allocation of greater resources to tax inspection, to improve staff training and remuneration. Much higher taxation of the provision of free fuel for private mileage should be introduced, and should be related to the actual level of private use. The aim should be progressively to eliminate this type of provision, as it directly encourages unnecessary motoring an environmental degradation. In most companies procedures already exist for the reporting of business mileage, and in some cases of private mileage as well. This should be made a statutory requirement as part of company reporting of company car use, to provide a basis for the realistic taxation of private use of company cars. Scale charges should be increased to reflect the full benefit of private use of company cars. The present bias in the charges in favour of cars above two litres engine capacity should be reversed to provide a progressive tax against the preference for large cars in company fleets. Greater effort should be invested in the harmonization of inland revenue and national insurance assessment procedures, to facilitate the imposition of national insurance upon private use of company cars and on other benefits in kind. At the least, corporation tax rules should be modified to ensure that only that element of company car provision which relates to actual business use can be offset against corporation tax. Pool cars would remain fully tax deductible. The 1988 decision to exempt free parking from taxation should be reversed. Parking arrangements should also be made a part of the extended reporting structure for companies operating car fleets. Tax deductions should be available on public transport allowances on a controlled basis. In particular it should be noted that, where season tickets may facilitate travel on public transport in course of work as well as to get to work, there is a clear justification for personal tax reductions on this element of the provision.