Recent tax legislation has opened up new potential savings for company car fleets, says Nic Paton
Case study: Deloitte
It may well be, to quote Benjamin Franklin, that nothing is certain in life except death and taxes. But for company car fleet managers at least, recent legislation means that, with careful planning and management, the certainty of the tax bill for their fleet can be reduced considerably.
The key factor driving change has been the government’s move, from April this year, to set capital allowances and leasing disallowances (which restrict the amount of lease rental you can deduct from taxable profits) for company cars according to their CO2 emissions. This has prompted many employers to review the make-up of their fleets and their funding methods in order to maximise tax savings.
Organisations are becoming more imaginative in other ways, too. They are exploring salary sacrifice-based car schemes, and are being more canny about fuel usage and mileage rates. Employers are also focusing on whole life costs, factoring in items such as tax, fuel, maintenance and servicing, as well as the monthly rental cost of their fleets.
Looking at emissions first, under the new rules, organisations can deduct 10% of a company car’s depreciating value from their taxable profits each year if it emits more than 160g per km of CO2, rising to 20% for those emitting between 111g and 160g per km and 100% in the first year for cars emitting 110g per km or less.
Another change is that cars go into a 10% or 20% allowance pool, according to their emissions. This means when they are sold, the proceeds are deducted from the pool, but the balance of any remaining value stays in the pool and can continue to be written down.
Employers can also deduct the full cost of finance rentals from taxable profits if the car emits 160g per km or less. For cars with higher emissions than this, there is a flat rate disallowance called the Lease Rental Restriction, which is 15% of the finance rental.
One effect of this has been to improve the corporation tax position of higher-priced cars acquired on leases after April this year, particularly if rated at or below 160g per km.
Cheaper to acquire
Similarly, cars in this emissions band that cost £12,000 or more have become cheaper to acquire on contract hire. According to Mark Sinclair, director at Alphabet, the Lease Rental Restriction has also made leasing more attractive and it makes sense for employers to consider carefully whether purchasing – either outright or through contract purchasing – is still the most cost-effective approach for them.
With an increasing number of low-emission executive cars available, it makes sense to be more proactive in the composition of a fleet, possibly introducing a cap on higher-emission models, either for the whole fleet or for everyone except the most senior executives, says Sinclair.
“If employers are focusing on cars where they can claim the 100% writing-down allowance, for example, and after three years replace them with similar cars, they are, over time, going to be deferring quite a large amount of tax,” he says. “The sort of finance they could be freeing up to be used elsewhere in the business could be quite valuable.”
But Chris Chandler, a senior consultant at Lex Momentum, says the reality for many firms is they may not be able to effect tax savings that quickly.
“At the moment, a lot of clients are asking us to find cost savings,” he says. “Many fleets are locked into a car replacement cycle, so if they are running on a four-year replacement cycle, it is going to take some time for cost savings to filter through. But tightening up on fuel and how they monitor fuel can lead to savings straight away.”
If an organisation reimburses an employee at HM Revenue and Customs’ Authorised Mileage Allowance Payment (Amap) rate, for example, the fact the vehicle is lower CO2-emitting is less of an advantage because the rate is based on engine size and fuel type, says Chandler.
So it may make sense to look at the payback from investing in a mileage capture scheme and/or fuel card to ensure they pay only for the actual mileage the employee does and the actual price of their fuel.
Ben Creswick, new business manager at Zenith Provecta, says employers are also showing more interest in salary sacrifice-based car schemes.
“A well-structured scheme should not cost the employer anything, because the sacrificed amount will cover the post-tax, discounted whole-life cost of the car, excluding fuel,” he adds.
“The employer may even make national insurance contribution (NIC) savings on the salary not paid. But there can be financial risk exposure through resignation, redundancy, maternity leave, and so on, which must be understood, budgeted for and offset.”
But Colin Thornton, sales director at Lloyds TSB Autolease, says employers should not think of such schemes as a panacea. “Salary sacrifice schemes can have a useful part to play for those people who have traditionally taken cash,” he says. “The company still sponsors the scheme and is able to appeal to the cash takers in a more tax-efficient way, but the cost of running a scheme can eat into the savings.
“These schemes do have some relevance to large organisations with large workforces where the volume of business can be guaranteed. But the devil is always in the detail. There normally has to be a blended solution, with a conventional scheme running alongside the salary sacrifice scheme.”
Employers should also be looking at the whole-life cost of their fleet, stresses Lex’s Chandler. The Lease Rental Restriction, NIC costs and fuel can account for as much as 30-40% of a vehicle’s cost envelope, he calculates. “If employers are just looking at the list or rental price, then they are potentially losing out on that 30-40%.”
Paulo Larkman, director of fleet consultancy services at Lombard Vehicle Management, says that ultimately, an organisation will normally need to look at tax efficiencies “in the round”.
It will be the combination of the Lease Rental Restriction and capital allowances, the funding method, CO2 emissions, residual values, fuel usage, length of term and size of fleet that will reveal the true picture of the tax relief available on fleet expenditure.
“It is not simply a question of whether a car is above or below the 160g per km threshold,” says Larkman. “There is no one solution that fits all.”
Case Study: Salary sacrifice savings add up for Deloitte
Back in February, accountancy and business advisory firm Deloitte introduced a salary sacrifice-based company car scheme for its 12,000 UK employees.
Since then, about half that number have registered for a quote and 400 confirmed orders have been taken. Mike Moore, director of global employer services, says: “We have had 70% take-up in the first few months and are aiming for 1,000 takers in the first year.” The scheme allows employees to sacrifice a proportion of their salary (taxed for a basic-rate taxpayer at 31%, including national insurance contributions (NICs)) and use it to take a petrol car with emissions of 120g per km of CO2 or below and pay tax on just 10% of the list price.
The firm cites the example of a Peugeot 107 three-door hatchback which, paid for privately, would cost £287 a month, but through the salary sacrifice scheme costs £158, equal to a 45% saving.
The employer saves on volume discounts and NIC costs as well as being able to recover VAT, says Moore. “Those entitled to the old car scheme, which is still running, have slightly more choice if they are at a more senior grade,” he says. “But they will still do it through salary sacrifice. As they come to the end of their term under the old scheme, they have to choose whether they want to go into the new scheme.
“This was something we started before the recession, so, for us, the biggest driver has been providing attractive benefits for all our staff. We want to be attractive as an employer.” Having a more environmentally-friendly fleet was also a key consideration for the firm. “All the direct taxes are based around the car’s CO2 emissions,” says Moore. “A third factor is we can now offer company cars to staff who might previously have been driving their own cars for work, so there is a duty-of-care element.” The key for anyone thinking of going down this route is to not to rush into it and recognise it will require some planning to do it right, says Moore.
10 ways to run a fleet more tax-efficiently:
1 Look at CO2 emissions :
Lower CO2 emissions mean lower post-tax costs, road fund licences, and employer and employee NICs. Consider refining the choice list to cap high-emission vehicles.
2 Look at cars’ residual values:
Higher residual values mean lower lease rentals and deferred tax.
3 Look at the funding options:
Consider whether you want an off balance-sheet option, such as contract hire, because it will probably mean lower post-tax costs, as well as removing the residual value risk, freeing capital, providing easy budgeting and outsourcing administration.
4 Look at the length of term:
Reducing the term may generate savings, because the CO2 emissions of new cars will continue to fall, reducing tax liabilities for employer and staff.
5 Adopt a whole-life cost fleet policy:
This should include evaluating the true running cost of the fleet by looking beyond the monthly rental cost and including costs such as fuel, tax, maintenance and servicing.
6 Look at fuel use:
Encourage drivers to research the cheapest local fuel prices before filling up, consider mileage-capture technology, look at alternatives to driving for shorter journeys, make use of the HMRC’s Passenger Payment Allowance of up to 5p per mile for each passenger carried on a business journey.†
7 Look at salary sacrifice:
As long as volume savings and administrative costs stack up, considerable tax savings can be made.
8 Go upmarket:
Under the new tax rules, premium-brand cars and well-specified derivatives of mainstream models keep their value and so offer the best whole-life cost proposition.
9 Grow the fleet:
The tax incentives to run low-CO2 fleets create an opportunity for vigilant businesses to save money, and it is now a buyer’s market in which substantial discounts can be achieved.
10 Contact the leasing company:
Have the fleet policy reviewed for other cost leakages that, if fixed, could also save you money.
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