Less CO2 means less tac for fleets and employees

If you're new here, you may want to subscribe to our or .

| Sourced From |

Significant tax savings can be achieved by opting for low CO2 emission cars.

Drivers have been taxed on the benefit of a company car according to CO2 emissions since 2002.

As an example, compare two cars under contract hire arrangements with a list price of approximately £25,000 – a petrol one with emissions of 244g/km and a diesel one of 123g/km.

The difference in benefit-in-kind (BIK) tax for a higher rate taxpayer is £5,100 over a three-year replacement cycle.

Throw into the mix the cost of fuel for 5,000 private miles a year, a large part of which is tax, and the difference in cost rises to £6,300, or several good family holidays.

Simply choosing a car with lower emissions than an equivalent is not only better for the planet, but it is also lowers the tax cost for the employee and the employer.

The tax changes in 2002 prompted driver action in the selection of lower emitting cars, but many businesses continued to ignore emissions, erroneously thinking that it was largely a driver issue.

However, Class 1A National Insurance Contributions (NIC) will have been paid on each driver’s BIK.

The current rate is 12.8%, rising to 13.3% in April 2011.

Taking the above example, the difference in actual NIC cost to the business, after tax relief, over three years is £1,200.

Normally, NIC, tax and fleet management are dealt with in unrelated departments so it is understandable how this could have been overlooked.

Most businesses continued to focus on the upfront funding costs, missing the importance of emissions in terms of wholelife cost, and didn’t incentivise or push selection of lower emitting cars in fleet policies.

But businesses’ attitudes towards CO2 emissions in general seem to be changing.

Where perhaps lack of understanding, suspicion or even antipathy reigned several years ago, many have now embraced fleet policies which at the very least cap emission levels.

The term wholelife cost has become industry mainstream; everywhere you look in fleet press you see it mentioned.

Deloitte has been extolling the virtues of car selection using post-tax wholelife cost since 2002 for cost-saving reasons, including the NIC point raised previosuly.

With the introduction of the new tax legislation for the treatment of company car related expenditure in April 2009, the tax relief businesses can obtain is now affected by car emission levels, which is a further direct tax consequence for businesses choosing cars for their fleets.

These changes are likely to prompt action from businesses looking to reduce fleet costs, which could prove to be a more powerful motivator for change than simply leaving the choice to the drivers.

To demonstrate the power of using wholelife costs to differentiate cars rather than the upfront cost, the wholelife cost difference of the two cars used as example earlier, doing 15,000 business miles a year, is £6,550 over the three-year period, despite them having the same list price.

Significant wholelife cost differences are also apparent when using lease rental as the main choice parameter as opposed to list price.

The wholelife cost should include funding, maintenance, administration, insurance, business fuel and Class 1A NIC costs, along with the associated VAT recovery and tax relief of each item, where applicable.

If any of these is missing, then the figure simply isn’t the true post-tax wholelife costs.

Restructuring fleets based on wholelife cost has the potential to make significant cost savings.

With manufacturers competing to produce cars with lower emissions and the Government continuing to tighten tax legislation to meet EU directive emissions targets, businesses must ensure that they actively manage car selection policies to keep up with the pace.

View it as reducing your tax bill, which may bring some enjoyment to the process.

By choosing to adopt a green network of vehicles, fleet operators are putting their cars in a more marketable position when it comes to defleet time.

We know from recent experience that car buyers are very sensitive to the threat of rising Vehicle Excise Duty (VED) and to rapid increases in fuel prices.

This time last year the cost of diesel rose above 130 pence per litre for the first time and the Government had announced a reform of VED which would have increased the costs of the most polluting cars (ie, those emitting more than 225g/km of CO2) from £230 to more than £400.

A combination of these factors effectively increased the annual rate of depreciation for high-emission, three-year-old cars by £1,000 more than the market norm.

What we can say with reasonable certainty is that the Government has only delayed its proposals to revamp the method of calculating VED, and that the burden of extra cost based on CO2 output is likely to return from 2011.

Furthermore, even though fuel prices have fallen significantly from last year’s all-time high, the long-term trend is an upward one.

Add to this the likelihood that even when we start to move out of recession, perhaps during the latter part of next year, unemployment will still be much higher than it is today, and credit will be tightly regulated and in limited supply.

Consumers will still have restricted disposal income and buying confidence is unlikely to have been restored by that time.

In this frugal society, motoring costs will be scrutinised by the majority of used car buyers.

We fully expect that cars with low emissions and low fuel consumption will be at the top of buyers’ shopping lists – something for fleet decision-makers to bear in mind as they select their cars today.

It is worth noting that the residual value performance of three-year-old cars, based on market sector, currently shows that small/city cars and superminis, now occupy first and third positions in the Glass’s top 10 league table of the best-performing segments.

There is a general downward migration of residual values to cars with greater running costs and we expect this position to be reinforced in the years to come.

Of wider significance is our belief that the RV lows seen during the last quarter of 2008
will not return at any point during the next three years.

…but there could be a price to pay for fleets

By Mark Norman, operational development manager, CAP

Much has been written about the advantages of running a green fleet but the fact remains that there is no such thing as an environmentally-friendly car.

All cars pollute.

From their manufacture to distribution to use and maintenance, a car requires vast amounts of fossil fuel throughout its life.

But, while it’s impossible to have a truly green fleet, it is possible to have a greener fleet. However, this is not necessarily an easy task and often comes at a price.

There are currently a raft of new models being introduced that boast of their environmental credentials but these models often come with an extra cost attached.

Unfortunately this increased cost is likely to lead to increased depreciation, too. For instance, the additional £500 for a stop/start system on an Audi A4 is likely to diminish to around £150 when the car finally is sold three years down the line.

From a financial point of view, any increase in initial cost for an environmentally-friendlier car makes sense only if the additional costs are reflected in increased residual values when the car is eventually sold.

Unfortunately, for those wishing to decrease their carbon footprint while not increasing their financial footprint, things don’t look too promising.

The problem is the clear lack of financial reward for going green in the used markets.

That’s not to say that used car buyers aren’t worried about saving the planet, but that they are often more concerned about saving their cash.

The used market isn’t switched on to CO2 in the way that the fleet market is for two main reasons.

Firstly, the incentives that have been created to encourage fleet owners and drivers to migrate towards more CO2 efficient models do not apply in the used market.

Secondly, there is still a general lack of awareness about the massive strides forward that vehicle manufacturers have made regarding the fuel efficiency of larger cars. The recent downturn in used values clearly demonstrated that many people still believe that the only economical car is a small car.

Until used car buyers are financially encouraged to embrace more environmentally-friendly vehicles in a similar way to the company car fleets, there is little likelihood that residual values for such cars will increase over their mainstream counterparts.

So any fleet manager who wants to “save the planet” must also be prepared to dig deep into his pocket.