§ Mr. Kenneth Clarke
Where an employee has a company car available for private use he or she is usually taxed on the benefit of the car. The employer pays class 1A national insurance contributions on the benefit.
However, a judgment by the House of Lords in 1969 means that in some circumstances, where the benefit of a car is freely convertible into cash, the benefit is taxable under the general income tax rules rather than the special provisions for company cars. In these special circumstances the employee pays tax on the cash which he or she could get, and the employer does not pay national insurance contributions.
Some employers are making arrangements designed specifically to bring company cars within the terms of this judgment to avoid class 1A NICs and, in some cases, give a lower tax charge.
In order to remove further uncertainty and to prevent loss of revenues to the Exchequer and national insurance fund we intend to propose legislation in the next Finance Bill. The proposed legislation will ensure that where a car would otherwise be within the special income tax rules for company cars, and an alternative to the benefit of that car is offered, the mere fact that the alternative is offered will not make the benefit of the car chargeable to tax under the general income tax rules. The employee will then pay tax on what they actually get—car or cash. Employers will pay national insurance contributions as appropriate—class 1A on the benefit of a car or class 1 on cash.
We intend that this provision should apply from 6 April 1995.