Executive Summary
• New capital allowance rules come into effect next April and all cars will be taxed according to the level of carbon dioxide they emit per kilometre.
• Rental disallowance will be set at a flat rate of 15% for cars emitting 160g/km or less of carbon dioxide, regardless of their upfront cost. Experts currently disagree as to whether this will ultimately increase or decrease fleet costs.
• Understanding the whole life cost of a car, regardless of funding method, is crucial in reducing corporate tax. Whole life cost relates to the total running cost of a car – its residual value to employees and fuel costs.
• Simply downsizing cars to cut costs may be counter productive. Under Health and Safety Executive (HSE) guidance cars need to be fit for purpose. So a high mileage business driver can’t be put into a small car.
• Employers can delay the impact of next year’s capital allowance changes by extending their leases by a year, but this could lead to an increase in maintenance costs.
Main feature
Carbon dioxide emissions are dominating finance directors’ conversations about the cost of their fleet, but it is a misconception to believe that lower CO2 emission cars mean increased cost savings when the new capital allowance rules come into effect next April.
It is important to note from the outset of any fleet deliberation that automotive tax is complicated. As Alison Chapman, a tax partner at Deloitte, says: “Car tax is very specific to cars and doesn’t follow any normal rules that you might have been used to in other areas of tax.”
Tracking fleet costs is equally troublesome for FDs because they tend to be drip fed through a company’s accounts through numerous nominal ledger codes, which means that FDs face the tedious task of piecing together the costs to effectively assess the overall cost to their company. But this is a necessary task for any FD attempting to minimize their corporate tax leakage; the tax efficiency of a fleet must be considered as part of an overall cost review or efficiencies will be negated. More on that later.
Funding methods
The main funding methods for company fleets are: contract hire; lease purchase; finance lease/hire purchase; employee car ownership (ECO); and outright purchase. Contract hire – more commonly referred to as ‘leasing’ – became more attractive after the VAT rules changed in 1995, disallowing companies from claiming VAT back on car purchases. Hence why companies opt to lease rather than buy in cars.
For the purpose of this article, I will concentrate on leasing and the outright purchase of company cars.
Under the current tax rules, fleets are taxed according to their value. FDs can write down 20% of the value of a vehicle costing £12,000, and up to £3,000 for vehicles above £12,000. This tax disallowance aims to offset the depreciation a vehicle suffers between its acquisition and disposal.
Companies are also entitled to a balancing allowance at the end of a leasing contract, which is based on the difference between the tax relief and the vehicle’s depreciation during that period.
As of next April, all cars will be taxed according to the level of carbon dioxide they emit per kilometre (See table, right). The “sudden death threshold”, as Stewart Whyte, managing director of Fleet Audits refers to it, is the 160g/km band.
Rental disallowance will be set at a flat rate of 15% for cars emitting 160g/km or less of carbon dioxide, regardless of their upfront cost. So, companies may be penalized for cars with higher C02 emissions – those above 160g/km – but the leasing disallowance flat rate of 15% helps offset this cost.
Providing an employer’s cost of funding is cheap, leasing could prove a far cheaper funding method for company fleets, due primarily to the removal of the £3,000 cap on the tax disallowance. As Mark Sinclair, director of leasing company Alphabet, says: “The bigger and more expensive 160g/km cars are, the cheaper they become in terms of tax relief next year.”
But Alastair Kendrick, assistant marketing manager, business to business, at Bourne Consulting, believes that leasing will generally become more expensive because of the removal of the balancing allowance next April.
He says: “It’s going to take you about 43 years for leasing companies to recover their tax relief. The reality is that they are going to have to charge interest based on the difference in that time lag in getting their relief back.”
Whole life cost
Understanding the whole life cost of a car, regardless of funding method, is crucial in reducing corporate tax. Whole life cost relates to the total running cost of a car, from its residual value to employee and fuel costs.
To consider a car’s whole life cost is to understand just how much of a balancing act fleet management is. As one source says: “Consider the difference between a Ford Focus driver and one in a BMW 1 series. A BMW 1 series costs about £23,000 and is in the 119g/km C02 emission band, so the corporate tax charge is low for this driver, but the reality is that it costs £23,000 or thereabouts to run the BMW on the road and you would get very little discount on a BMW as a corporate [in terms of volume discount].
“Comparatively, a Ford Focus driver would probably get a discount of at least 30%, so the car would only cost around £11,000, though the C02 emissions wouldn’t be as low.”
The source adds: “The question is whether a corporate wants to do something about putting people in energy efficient cars only to find that the purchase price of their fleet increases. In today’s market, that’s just not going to happen; it would put millions of pounds on their fleet cost. It’s thus a fallacy to believe that lower C02 emission cars will save tax; it will save tax but at the expense of the cost of the fleet.”
Chapman says that a further consideration for FDs is the fact that companies’ National Insurance costs are based on benefit-in-kind to the driver, so the higher a driver’s car’s C02 emissions, the higher companies’ NI costs. “You have to look at the whole life cost, which means all costs associated with the car throughout its life while you own it. FDs need to stop focusing on upfront costs. If people are allowed total free choice, based on the upfront cost of a car or its monthly rental cost, there can be thousands of pounds of difference in costs between cars over their whole life, and therefore to the company,” she says.
“And don’t automatically assume that hybrids will be a lot cheaper. Although tax on hybrids is very good, their sale price and residual value is not. In many cases, they’re not as cheap as you think they are when taking into account whole life costs.”
Kendrick agrees, adding that Health and Safety Executive (HSE) guidance must also be part of FDs’ consideration. “They can’t completely downsize the type of car that an employee is in because cars need to be suitable for the job they do. Under HSE guidance, cars need to be fit for purpose, so if an employee is doing between 20,000 and 50,000 miles a year, they can’t be in a car that’s got a small engine because they’d be absolutely exhausted driving up and down the motorway.”
Conducting a review
Whatever FDs decide on fleet management, a review is unavoidable. As Ross Jackson, managing director of Fleet Operations, says: “Given the state of the economy and the banking situation; used vehicle prices falling through the floor; the oversupply of new cars; significantly unstable interest rates; consolidation in the leasing industry; and dealerships going out of business, you have more variables than ever in the history of the industry.
This is why employers should be reviewing their fleet, including their procurement mechanisms. “A balanced approach is advisable – you certainly don’t just want to have one supplier in this market,” says Jackson.
“I would very strongly advocate that any business at this point in time needs to have a little more balance in its supply portfolio; having competing suppliers enables companies to hedge their bets.”
FDs may also want to consider delaying the impact of next year’s capital allowance changes by extending their leases by a year, but Kendrick advises them to consider the potential increase in maintenance costs if they opt to do so.
Useful online tables
Company car tax: From the 6th of April 2002, company car taxation has been based on the CO2 emission rating and P11D value (list price) of a vehicle.To view vehicles and their details by CO2 range go to: www.vcacarfueldata.org.uk/search/companyCarTaxSearch.asp
Fuel types for a range of car types: To view the fuel used by different makes and models of cars go to:www.vcacarfueldata.org.uk/search/altFuelSearchResults.asp
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