Pre-Budget Report: Fuel duty to increase and vehicle excise duty reforms scaled down

Chancellor Alistair Darling has minimised the impact of vehicle excise duty reforms, but maintained his decision to increase fuel duty offsetting the 2.5% temporary decrease in value added tax (VAT).

In his pre-Budget Report, the Chancellor confirmed that the planned 2p rise in fuel duty, first announced in April, will be enforced on 1 December 2008. This will have the effect of offsetting the 2.5% reduction in VAT from 17.5% to 15%, also announced in the pre-Budget Report and which will expire in 2010. The new rate of VAT will become effective on December 1 and will remain in place for 13 months until the beginning of 2010.

A spokesperson for the British Vehicle Rental and Leasing Association (BVRA) said: “I don’t think [the reduction in VAT] will have a huge effect on how much people spend. As regards to the VAT aspect of contract hire that 2.5% reduction is expected to feed through to leasing prices and rates. There are other pressures that may be influencing rates to go up but at least the VAT aspect will be putting downward pressure on rates. “

The spokesperson also said cuts to VAT would reduce the overheads of banks, many of which own leasing companies, such as Lloyds TSB Autolease. This he added could have a long term benefit for employers as it could help reduce their costs.

“Because banks can’t recover VAT on their overheads, paying lower rates of VAT in the first place will mean that banks have lower overhead costs. A lot of the banks own the leasing companies or they supply them with funding so that might help reduce costs, which again could push downward pressure on rates”, he explained.

Darling has also toned down proposed changes to vehicle excise duty (VED) responding to pressure from rebel MPs. Although, Darling confirmed six new emission based VED bands will be introduced in 2009, he also outlined measures to reduce pressures on motorists during the current economic downturn. There will be no significant rate changes until 2010, when no driver in any given band will be asked to pay more than a maximum of £30 a year instead of £90 as originally planned. In addition, VED rates will not increase by more than £5 this year.

In April 2010, a differential First-Year Rate for new vehicles will be introduced and cars that emit over 225g per km, registered between 1 March 2001 and 23 March 2006, will be exempt from the top rate of VED. Cars registered before 2001, however, are not subject to these reforms.

From April 2009 cars will be placed in one of two capital allowance pools, according to their CO2 emissions, with vehicles releasing more than 160g of carbon dioxide per km attracting a 10% writing down allowance, while those which release less will receive a 20% allocation.

But Alastair Kendrick, director of Mazars, is concerned about the length of time it will take for the relief of these changes to be felt.

He said: “At the moment leasing companies get the relief over the life of the vehicle. But in regard to the proposed changes it will take 40 odd years for the leasing company to get the relief back so that’s going to really add to costs and people have not woken up to this because it has been played down.”

Phil Peace, director of sales, Hitachi Capital Vehicle Solutions said: “The lack of visibility on proposed changes to capital allowance legislation has been particularly frustrating as fleet managers will struggle to know where they stand in terms of purchasing vehicles next April.  A clear understanding of the financial and environmental benefits of making certain vehicle choices would have been reassuring at this difficult time.”
HM Treasury has also published a report summarising the findings of a review into employee car ownership schemes (ECOS) today. This sets out the background to the government’s decision not to impose a specific tax on ECOS, or alter the structure of approved mileage allowance payments (AMAPs) at the current time, but to continue to provide a clear and simple system for business and employees.

The government also confirmed its intention to modernise the tax relief for business expenditure on cars by adopting a carbon dioxide emissions based approach. The pre-Budget Report confirms this reform will take effect from 1 April 2009 for corporation tax and 6 April 2009 for income tax. A technical note and draft legislation will be published shortly.

Have your say on the Pre-Budget Report on the Employee Benefits Forum.