Fleet News

Budget 2008: industry analysis

Companies that provide cars for their employees were sent a clear environmental message from the Chancellor after his first budget made it financially more attractive to choose low emission cars.

While, the front pages lambasted Alistair Darling for his “hangover budget”, which penalised drinkers and drivers, the reaction from the fleet and lease industry was been more mixed.

Alphabet referred to it as “disappointing”, Masterlease said it “lacked substance or clarity”, while Bourne Business Consulting said it was a “watershed” for company cars.

What all commentators agreed on however, was that fleets and company car drivers need to focus on lower polluting vehicles or pay the price.

“If you’re a company car driver or business with a fleet of executive saloons with higher emissions - over 160g/km CO2 - this is last-chance saloon time,” said Mark Chessman, deputy MD, Lloyds TSB Autolease.

“Now is the time to review the number of higher emitting cars you have in your fleet – or face significant increases in cost.”

Two areas are of most significance for fleets - the changes to the capital allowances system and to Vehicle Excise Duty (VED).

The current capital allowance scheme, which allows companies to offset the cost of cars used for business against their tax bill, will be replaced by an all-new system next April.

The changes will affect companies who buy vehicles outright and fleets that lease company cars.

From next year, company cars above 160g/km will attract a 10% writing down allowance (WDA) and cars with emissions of 160g/km or below will attract a 20% WDA.

However, there are questions: “We are not clear if capital allowance pools linked to CO2 will have a balancing charge/allowance, or whether tax relief will have to be claimed into perpetuity,” explained Peter Tatlock, Masterlease MD.

“Whilst both scenarios have potential adverse tax cashflow impacts, it is the latter that will give rise to more significant disadvantages, particularly for more polluting cars that are currently classified as "expensive cars" for capital allowance pooling purposes.”

Paul Roberts, director, Lex added “Funding decisions for expensive cars with low CO2 emissions may need to be reviewed, and could result in contract hire becoming more attractive for expensive cars with low emission.”

From April next year, leased cars emitting more than 160g/km will have 15% of the relevant payments disallowed.

The Government is also considering the option of applying the disallowance only to the final business user in a chain of leases.

But the lack of clarity in the budget is already causing concern in the industry.

“Lease rental disallowances are also to be aligned with the CO2 bandings proposed for capital allowances, although there is little additional detail,” said Mr Tatlock.

“Our view that the concept of lease rental disallowances is unfair and discriminatory to the vehicle leasing industry.”

The changes to the Vehicle Excise Duty bands has also got the industry talking.

The fleet and business sector will bear the brunt of a £1.2 billion increase to VED in the 2009 and 2010 tax years, says Alphabet.

However, there is a silver lining, says Masterlease: “We have a year’s breathing space...This gives the industry time to adapt computer systems and processes to meet the new CO2 requirements,” said Mr Tatlock.

But there remains uncertainty over what effect the changes to the VED rates will have on fleets.

“The increases will have an ongoing small but noticeable effect in encouraging fleet adoption of greener vehicles,” said Gary Killeen, commercial leader at GE Capital Solutions, Fleet Services.

But as Alastair Kendrick from Bourne Business Consulting warns: “The penalties at the higher end may mean executives opt out of car schemes.”

Meanwhile David Brennan, managing director of LeasePlan, said the new ‘showroom tax’ on vehicles producing over 255g/km of CO2 will “undoubtedly impact company car policies”.

There could also be other issues for fleets to manage.

“Increased fleet administration is a possibility due to a potential rush to register higher emitting cars prior to April 2010,” warned Lex director, Paul Roberts.

However, the Society of Motor Manufacturers and Traders (SMMT) claims the VED band changes will have a limited impact: “Sales taxes on higher emitting cars have little effect on CO2 emissions and create an unwelcome market distortion,” said SMMT chief executive Paul Everitt.

“Introducing what is effectively a sales tax for many new cars is a retrograde step.

"Trying to force people out of high-value cars has no environmental merit and will be seen as a smokescreen for revenue-raising.”

Fleet managers will welcome the delay in introducing the fuel duty increase, which was supposed to come into effect next month, as Mr Brennan explained.

“The delay in the 2p duty rise is welcome, although it’s just delaying the inevitable. Businesses would be happier if it had been discarded completely,” he said.

However, others in the industry disagree. Toomey Opticar’s Jim Salkeld said: “Delaying the promised 2p per litre levy was not helpful, and we need some serious debate to shift taxation from direct (income as well as business) to a carbon levy at the point of purchase,” he said.

“Drivers of Band G cars may be inconvenienced by increasing GVED over the next two years, but this will hardly register in the whole life costs of such vehicles.”

He says drivers may move to cars registered before March 2001.

“Statistically the emissions of all these cars combined would not appear on any scale to two decimal places when compared to total traffic emissions.”

Fleets should also take note that more increases are on the way.

"The budget proposes to link increases in fuel duty to inflation after 2009.

"This will have a multiplier effect, with index-linked tax increases magnifying the impact of the huge rises in fuel costs that are affecting not only road users but all areas of business and commerce,” warned Mark Sinclair, director of Alphabet.

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