The world has changed, car taxation will stay

The past few years have been characterised by tax relief and incentives for environmentally friendly technologies and the increasingly high taxation of polluting vehicles. The measures were particularly effective in taxing the non-cash benefit from the private use of company cars and other car taxes. In most countries, corresponding measures, especially CO2 related taxation, have been initiated or have already become law. Many of the measures will gradually take effect in the following years.

Even though sales and the usage of environmentally friendly vehicles increases year by year only a small number of such vehicles are actually used in fleets. The reasons for this have not yet changed over the years. Higher acquisition costs, low range, limited choice of vehicle models, long order times and finally low resale value cannot be offset by the tax benefits.

The climate debate, which found new vigour last year, has given rise to discussions on political measures, many of which also concern the use of cars in the future and the expansion of electromobility and alternative drive systems. Especially, the tight timeline for new CO2 emission standards introduced by the EU commission provided high pressure on car manufacturers.

The coronavirus or COVID-19 outbreak has interrupted this discussion for a moment. As the pandemic disrupts business and plunges the economic outlook into deep uncertainty, the current focus is on emergency aid to bridge liquidity, to save costs and to plan for mid-term revival after the shutdown. Many governments have suspended or deferred tax payments, also on car taxation, to help companies with its liquidity problems.

The first discussions have now started on whether further help from the government should be instated to revive the automotive industry. In many countries bonus systems for replacing old vehicles comparable to the one after the 2010 financial crisis have been suggested. Many politicians, however, are getting more and more concerned about financing all the coronavirus subsidies from and may restrict such programmes to environmentally friendly powertrains.

Finally, the coronavirus pandemic will change the way we work and travel. Working from home, communication over the internet and web sessions as well as digitisation of all kind of work will most likely not go away. Questions of hygiene in the car and inside cleaning after using a vehicle may become more relevant for the driver.

It could therefore be expected that company cars will play a much smaller role than today. Also the potential economic downturn may lead to a reduction in car purchases by private people and companies.

For governments this could mean significantly lower tax revenues than before the coronavirus pandemic. In our view it is therefore likely that car taxation will increase in the near to mid future. The world has changed, car taxation will stay.

Author: Dr. Alexander Unfried, PwC (pictured, right)

Get your copy of the 2020 Taxation Guide, a structured overview of all relevant info on company car taxation in no less than 29 countries in Europe, developed in collaboration with the network of PwC.