Michael Ring (Mayo, Fine Gael)
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322. To ask the Minister for Finance the way the BIK taxation regime can be reformed to achieve the reductions set out in the Climate Action Plan 2023 (details supplied); and if he will make a statement on the matter. [13086/23]

Michael McGrath (Cork South Central, Fianna Fail)
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Recent Government policy has focused on strengthening the environmental rationale behind company car taxation. Until the changes brought in as part of the Finance Act 2019, Ireland’s vehicle benefit-in-kind regime was unusual in that there was no overall CO2 rationale in the regime. This is despite a CO2 based vehicle BIK regime being legislated for as far back as 2008 (but never having been commenced).

In Finance Act 2019, a CO2-based BIK regime for company cars was legislated for from 1 January 2023. From the beginning of this year, the amount taxable as BIK is determined by the car’s original market value (OMV) and the annual business kilometres driven, while new CO2 emissions-based bands determines whether a standard, discounted, or surcharged rate is taxable.

In certain instances, this new regime will provide for higher BIK rates, for example in relation to above average emissions and high mileage cars. It should be noted, however, that the rates remain largely the same in the lower to mid mileage ranges for the average lower emission car. Additionally, EVs benefit from a preferential rate of BIK, ranging from 9 – 22.5% depending on mileage. Fossil-fuel vehicles are subject to higher BIK rates, up to 37.5%. This new structure with CO2-based discounts and surcharges is designed to incentivise employers to provide employees with low-emission cars. The policy actively encourages lowering the emissions profile of the company car fleet, which will form part of the range of policies targeting the emissions reductions set out in the Climate Action Plan.

I am aware that there have been arguments surrounding the mileage bands in the new BIK structure, as they can be perceived as incentivising higher mileage to avail of lower rates, leading to higher levels of emissions. The rationale behind the mileage bands is that the greater the business mileage, the more the car is a benefit to the company rather than its employee (on average); and the more the car depreciates in value, the less of a benefit it is to the employee (in years 2 and 3) as the asset from which the benefit is derived is depreciating faster. Mileage bands also ensure that cars that are more integral to the conduct of business receive preferential tax treatment.

In addition to the above and in light of government commitments on climate change, Budget 2022 extended the preferential BIK treatment for EVs to end 2025 with a tapering mechanism on the vehicle value threshold. This means that the quantum of the relief is phased down from €50,000 in 2022, to €35,000 in 2023, €20,000 in 2024, and €10,000 in 2025. This BIK exemption forms part of a broader series of very generous measures to support the uptake of EVs, including a reduced rate of 7% VRT, a VRT relief of up to €5,000, low motor tax of €120 per annum, SEAI grants, discounted tolls fees, and 0% BIK on electric charging.

However, I recognise that that the new regime is resulting in a significant number of employees with vehicles in the typical emissions range experiencing larger increases in their income tax liabilities since the start of 2023.

To address the issue, I have received agreement from my government colleagues to introduce a relief of €10,000 to be applied to the Original Market Value (OMV) of cars in Categories A-D in order to reduce the amount of BIK payable (this is not applicable to the highest emission cars in Category E).

In effect, this means that, for the purposes of calculating BIK liability, employers may reduce the OMV by €10,000. This treatment will also apply to all vans and electric vehicles. For electric vehicles, the OMV deduction of €10,000 will be in addition to the existing relief of €35,000 that is currently available for EVs, meaning that the total relief for 2023 will be €45,000.

In addition, I will be changing the upper limit in the highest mileage band by way of a 4,000km reduction, so that the highest mileage band is now entered into at 48,001km. This will go some way to address the point raised by the Deputy in relation to mileage.

These temporary measures will be retrospectively applied from 1 January 2023 and will remain in place until 31 December 2023. It is proposed to introduce the measures at Committee Stage of the Finance Bill 2023.