A fleet drive to reduce CO2 emissions is creating opportunities for revenue growth among leasing companies.
Fleet customers have excelled at cutting their vehicle CO2 emissions in the past decade, compelled by the 2002 launch of emissions-based benefit-in-kind taxes and the recent changes that also based capital allowances on vehicle pollution levels.
However, manufacturers are starting to warn that the era of substantial year-on-year, model-by-model reductions is coming to an end as new European legislation forces them to consider other particulate emissions such as NOx.
The Government has continuously shifted its trigger points to keep a long-term focus among fleets and their drivers on pursuing low CO2 emission choices. As a result, companies have increasingly turned to external suppliers for help in achieving their environmental ambitions.
The support required can be wide-ranging and include shortlisting the best vehicle options for a green fleet, providing advice on fleet policy, helping with management of drivers or offering expert tax analysis.
Studies by Sewells Research & Insight have found that companies want suppliers to help them maintain the momentum of CO2 reduction that has been so successful in minimising tax bills and costs.
Its recent study of Britain’s largest fleets, the Fleet200, concludes: “There is evidence that as fleet departments attempt to review and control costs, there will be a greater requirement for external support, outsourcing and consulting expertise to protect cost efficiencies and drive future reductions in fleet costs.”
The progress fleets have already made is clear when looking at analysis of the vehicles operated on behalf of customers by the FN50, the 50 largest leasing companies in the country.
Average customer CO2 emissions fell from 143g/km in 2010 to 131g/km in 2012.
There are also indications that this decline is accelerating, with emissions for vehicles joining the FN50 fleet during 2012 falling to an average of just 123g/km.
From an environmental point of view, it has been one of the most successful Government policies as lower average emissions means pollution from greenhouse gases has plummeted.
Among the FN50 alone, assuming the 942,324 cars they supply to customers cover an average of 15,000 miles a year, annual emissions will have fallen by 282,000 tonnes of CO2 by the end of this year compared to 2010.
Matt Dyer, commercial director of LeasePlan, says: “CO2 has been a key focus for company fleets since the overhaul to the UK company car taxation legislation was introduced as a necessary environmental change.
“When the changes to the leasing disallowance and the corporation tax relief structure were introduced in 2009, companies really began to look even more seriously at the fleet make-up and fleet policy given the black and white nature of these new rules, not to mention the revised BIK tables that were introduced at the same time.”
Gary Killeen, fleet services commercial leader for GE Capital, adds: “During the past two years, our overall fleet CO2 average has fallen from 149g/km to 130g/km.
“The reasons for this are straightforward – there has been a strategic move by fleets to gradually reduce their CO2 profile in order to minimise taxation, contain fuel bills and tackle corporate environmental concerns.”
The business opportunities for leasing companies will be unlocked through closer co-operation with fleets.
Mike Waters, senior insight and consultancy manager at Arval, believes that leasing companies can play a critical role in supporting companies as they make the transition to ultra-low emission vehicles as they are launched by manufacturers in the coming years.
This includes helping them assess the potential value of new fuel technologies. “Aligned to European targets, manufacturer developments and the Government’s fiscal policy, we expect average vehicle emissions to continue on a downward trend in the future,” he says.
“The challenge for Arval is to provide the best advice for our customers, especially in the area of vehicle selection taking a total cost of ownership approach.
“We must ensure that we proactively help them to make the optimal decisions for now and the future taking into account potential changes to taxation, new models moving into the market and the continued emergence of new vehicle technologies.”
His view was echoed by Ian Hughes, commercial director at Zenith. He expects the trend for emission reduction to further gain momentum, in part due to capital allowance changes and BIK tax band shifts.
Hughes says: “Our sales, consultancy and CRM teams work with existing and new customers to review and advise on vehicle choices lists.
“There is a lot of debate about where fuel technology will go to next and we want to make sure that we are actively engaged with manufacturers and research bodies so that we can play our part in the evolution and be in the right position to advise our customers on the best options available to them.”
Changing tax landscape creates biggest leasing challenges
The shifting sands of CO2-based tax legislation are one of the biggest challenges that leasing companies face in their battle to maintain high customer service levels.
Whenever tax rates are altered, it changes wholelife cost calculations for thousands of vehicle models, which causes difficulties for customers and suppliers.
Simon Oliphant, chief executive of Hitachi Capital Vehicle Solutions, says the key focus has to be on minimising disruption for customers and helping them understand how tax changes will affect their fleet.
“It can be difficult to advise customers on policy when things keep changing, especially Government policy, as stability and consistency is required for long-term strategic planning and decisions.”
Dyer says changes to capital allowances that are due to be introduced this year cause the greatest concern.
As Fleet Leasing went to press, it appeared likely that the Chancellor of the Exchequer would extend the 100% corporation tax relief for vehicles purchased that are under 95g/km beyond its current 2015 end-date.
However, leasing companies will still have the 100% FYA for vehicles purchased removed from April 2013 onwards. This could see leasing rates rise by 3-5% to cover costs.
Dyer says: “HM Treasury has so far been adamant that no transition period will be given, meaning that any vehicle registered after March 2013 will not qualify.
“This has led to confusion as to when leasing companies should include these additional costs in their quotation systems.”
There is concern that vehicles ordered before the changes will be delivered after they come into effect.
To ensure customers have certainty, LeasePlan will include the additional cost in its quotes from April 2013 and absorb any additional cost for vehicles ordered before the change that are delivered after it has come into effect.
Dyer says: “This has led to internal complexity and it has required an extensive engagement and communication exercise by our sales and consultancy teams to our clients and prospects.”
Graham Thompson, general manager of Agnew Corporate, adds: “The change is obviously going to create some difficulties for our sales force in having to deliver this message to customers, not to mention the IT hoops we have to jump through to accommodate these changes. Hopefully this will be the end of change for some time.”
How CO2 reductions will become ‘the law of diminshing returns’
Manufacturers will continue to develop new ways to reduce CO2 emissions on diesel and petrol engines. However, it will become a case of diminishing returns.
Kia powertrain manager Joachim Hahn believes that the big reductions have already been largely achieved.
“Manufacturers have met the European legislation requirements so there is little motivation for them to continue making the big step changes,” he says.
Hahn also points to the Euro 6 and Euro 7 legislation which puts the emphasis on other particulate emissions such as NOx.
To an extent, action to reduce particulates will have a detrimental impact on fuel efficiency and, therefore, CO2 emissions. This will be the next big challenges for manufacturers: how to cut particulates without increasing CO2 emissions.
Their success will be of fundamental importance to fleets and their company car drivers as the BIK thresholds continue to tighten, affecting employees’ tax bills and their employers’ Class1A NIC payments, which are based on the BIK value of the vehicle.
For example, a driver in a petrol vehicle currently emitting between 140g/km and 144g/km of CO2 will pay tax on 19% of their car’s P11D value in the current tax year, rising to 20% in 2013/2014 and 21% in 2014/2015.
Diesel drivers incur a three percentage points supplement (until it is scrapped in 2016/2017).
However, as Kia UK president and chief executive officer Paul Philpott says: “There comes a point when the most important emission to reduce is no longer CO2. There are still opportunities for further efficiencies, but it’s the law of diminishing returns.”
A second policy affecting fleets is capital allowance. From April 2013, the 100% FYA threshold will drop to 95g/km until 2015 and the 18% limit will fall to 130g/km.
Leased cars are treated differently, with a lease rental restriction covering the amount of lease rental payments claimable against corporation tax.
That threshold will also fall to 130g/km from April, above which companies face a 15% lease rental restriction.
It remains to be seen whether the Government will seek to drop this threshold further in future Budgets.