Carmakers and motor finance houses are predicting a huge increase in the number of company car drivers opting to take 'cash-for-cars' as a result of recent changes to the taxation system. The trend means sales staff and business managers will be faced by a new breed of customers buying privately but backed by company money.

Not all company car drivers are losers under the new tax system – indeed some will win – but the fact the system is changing has forced businesses to look at the whole question of car provision. According to Monk's annual survey of company cars 2000, around 70% of firms already offer their employees a cash alternative to the company car.

Bill Milne, Vauxhall Finance product development manager, said: “A lot of people are starting to come in with the option to opt out, or with a car allowance. We can see those numbers increasing quite rapidly. The tax changes have given some companies a good reason to get out of company car schemes.”

The new company car tax structure comes into force from April 6, 2002, but as most cars are bought on two- or three-year contracts it is already starting to affect the market. Company fleet managers are only just starting to focus on the issue and the September plate change is expected to be a watershed date.

Sales of small, fuel efficient cars – notably diesels – are expected to rise dramatically while large 'gas-guzzlers' will suffer. Ex-company car drivers will be looking for hassle-free motoring at a fixed monthly cost and will have the freedom to choose virtually any car in the market.

“Many of these buyers will have been out of the car-buying cycle for several years and will be unaware of issues such as maintenance and depreciation,” said Mr Milne.

Vauxhall Finance is relaunching its personal lease plan, a product which has been in the market for several years but failed to find favour with customers more used to owning, rather than renting a car.

The driver for change is the Government's desire to reduce carbon dioxide emissions, notably from cars. Already Vehicle Excise Duty (road tax) is based on a car's CO2 emissions.

But from April, company car users will be taxed on up to 35% of the list price of petrol cars which emit more than 265g/km of CO2. The tax burden will reduce by 1% for every 5g/km reduction in CO2 emissions, down to a minimum of 15%, for cars producing less than 165g/km.

In simple terms, the more fuel efficient the car you drive, the less tax you will pay.

An instant solution would appear to be to switch to diesel. But the Government has already anticipated this trend and, citing additional environmental grounds, has penalised diesels with an extra 3% tax loading.

Over the next three years, the tax rates all increase by 2% a year. A petrol car emitting 165g/km CO2 will incur tax at 15% of list price in 2002, 17% in 2003/4, and 19% in 2004/5 (with a 3% loading for diesel).

The exact effect of the changes is made more difficult to predict by the abolition of tax banding based on business mileage driven.

It had always been assumed the Government would use the reform of the system to penalise so-called 'perk' drivers – those doing less than 2,500 business miles a year. That has not turned out to be the case.