§ I turn next to the tax treatment of company cars. From its introduction in 1976 until 1988, the income tax charge on company cars significantly under-estimated their true value. Since then, charges have been steadily raised to more appropriate levels. I propose this year to complete that process, by bringing the car scales up to a level which fully reflects the true value of the benefit of a company car. That requires an increase in car scales of 8 per cent., bringing additional revenue of £100 million in 1993–94.
§ However, as I said last year, the structure of the current regime remains unsatisfactory. In most cases, the value put on the benefit, and the tax that is payable, are determined not by the price of the car, but by the size of the engine. That might have mattered less when the scale charges were very low, but it now gives rise to serious distortions.
§ Following consultation with the industry, I propose from 1994–95 to replace the current car scales with a simple system based on the price of a car. The annual benefit of a company car will be valued for income tax purposes at a fixed percentage of the manufacturer's list price. To ensure that the reform is revenue-neutral, I propose to set that percentage at 35 per cent. Company car users will then pay income tax at their marginal rate on that amount.
§ However, I do not believe that it would be right to apply the full rigour of the charge to those who use the company car largely for business purposes. I therefore propose that there should be a discount of one third for 178 those company car users who drive more than 2,500 miles a year on business, and a discount of two thirds for those who do more than 18,000 business miles. In future, the tax on company cars will rise or fall automatically with the price of those cars. It follows that there will no longer be any need to set the tax charge each year in the Budget.
§ My reform will reduce tax distortions in the car market and enable manufacturers and fleet managers to plan production and purchasing in a more rational and stable system. For these reasons, I believe that it will be welcomed. I also propose to replace the existing complex arrangements for taxing employees' private use of company vans with a simple scale charge, covering both the van and any fuel provided, set at the modest level of £500. This will raise £10 million in the year ahead and £35 million in 1994–95.