Free ride for company cars

The under-taxation of company cars in the EU increases annual emissions of carbon dioxide (CO2) from cars by between four and eight per cent, or between 21 and 43 million tonnes, a new study has found. The study also found that this under-taxation results in between eight and 21 million more cars on European roads.

Company Car Taxation, produced by Copenhagen Economics for the European Commission, comprehensively examined taxation arrangements in 19 EU member states. It found that significant subsidies exist for company cars, distorting the market by encouraging a higher rate of car ownership. The study also found that these subsidies encourage owners to drive a higher number of kilometres and to own larger cars, thereby increasing the associated emissions of greenhouse gases and other air pollutants.

In many taxation systems, both employers and employees can reduce their effective tax burden by providing the employee with a company car. For example, employers may not be liable for social security contributions on employee remuneration provided in this form, while employees may benefit from generous tax rules that result in a lower rate of personal taxation on this income.

Company cars are a very large section of the car market, comprising 50 per cent of all new car sales in the EU. Despite their privileged tax status, pure business use accounts for only 20 to 30 per cent of company car use, with the rest being private.

In addition to the environmental costs, under-taxation also results in substantial economic losses, with the study finding that it costs 0.5 per cent of EU GDP in direct revenue losses alone. The level of subsidies varied greatly between the member states investigated. One of the worst offenders was Belgium, where the direct cost of subsidies on company cars amounted to 1.2 per cent of GDP.

Paul Ferris

The full report is available here.

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