Let me demystify things a bit. Corporation Tax is an effective means of taxing company profits. As with most taxes there are a variety of rates, allowances and exceptions. What we’re most concerned with here are the allowances that companies are allowed to claim for leased plant and machinery which, of course, includes vehicles. A leasing company (the lessor) can claim allowance for the natural depreciation of its assets (subject to certain rules) and in the case of contract hire, these allowances are reflected in lower rentals to the customer. So far, so good.
The Government proposed last year to change the rules significantly. Instead of the contract hire company claiming the allowance, the Inland Revenue was suggesting that it would be more equitable for the customer, in this case the lessee, to claim.
Imagine – instead of having a relatively small number of companies each claiming for a relatively large number of vehicles, you’d have the complete opposite – a large number of companies each claiming for a smaller number of vehicles.
The overall costs of contract hire would not have risen but administratively, if nothing else, this was the stuff of bureaucratic nightmares.
Many, particularly smaller firms, would have found it virtually impossible to cope with understanding, let alone implementing, the new regulations. The BVRLA put up a strong case for leaving things much as they were. Yes, there are changes being discussed, some of them still to be announced – such as the £12,000 ‘expensive’ car limit – but more of that later.
The Revenue was not initially convinced, arguing that if the full allowance was not passed on to customers, then the contract hire industry would be profiting unfairly. What was needed, they said, was an in-depth and robust look at the operation of the allowances which was duly undertaken by them.
The results showed clearly that the effect of contract hire companies claiming allowances was fully reflected in rental costs and it was thus reasonable to leave the allowances where they were.
The changes, although published as a draft document and thus available to alteration, will, we believe, be incorporated in the Chancellor’s Pre-Budget report due in November with implementation in April next year. The net effect will be to re-position contract hire in a slightly more favourable position, certainly vis-à-vis other forms of funding such as finance lease. Leasing decisions, quite properly in my view, will in future be made purely on commercial grounds rather than for tax reasons.
One other factor is worth mentioning here. Had the original changes gone through as planned then rental companies would also have been denied the benefit of the allowances with a consequent increase in funding costs.
Inevitably, these higher costs would have had to be passed on to customers. The allowances would not have been available to corporate customers, who make up 60% of the UK rental market, so that the increase in rates would have been a real one. Hardly good for a market which is already highly competitive.
I mentioned the £12,000 ‘expensive’ car limit earlier. This is the point at which a sliding scale for allowances kicks in and which was originally intended to catch the ‘expensive’ vehicle. We have long argued for the abolition of such an arbitrary limit and would like to see it replaced with disallowances based on the CO2 emissions of a vehicle ie. the higher the emissions, the higher the disallowance but it must be based on a limited number of CO2 bands. This has yet to be decided but we also anticipate that this will be soon and that it will be included in the Pre-Budget statement.