BUDGET ’07: The hidden business costs

The vast proportion of changes to taxes effecting business motoring were hidden in the Budget document and only now that the industry has had time to digest the Chancellor’s tome are they coming to light.

VED

Possibly the biggest direct cost to those running business cars was the increase in Vehicle Excise Duty. We’re not talking the headline-grabbing band G rise to £300 this year and £400 next year, but the £5 to £15 rises for all but the cleanest cars.

While there is a relatively small proportion of cars in the top emissions tax banding and companies can simply change a fleet policy to exclude these vehicles from entering their fleets, when you scale up a direct £5 to £15 rise per year for every vehicle this can be expensive.

Alison Chapman, tax partner at accounting firm Deloitte & Touche, also points out a greater impact of the VED rise.

“One element of the story has been overlooked,” she said. “While these measures may not change individual behaviour, there will be a much greater impact on company car fleets. Businesses with high emission vehicles face losing a significant amount from their resale value.

“Consumers buying a car in the second- or third-hand market will be much less willing, and perhaps less able, to pay the higher rate of VED. As such, demand for high emission cars in the second hand market will fall along with their value. When multiplied across an entire fleet, tens of thousands of pounds (and more for the larger fleets) could be wiped off the resale values. This will result in businesses being less likely to offer these type of vehicles to all of their employees.”

This view is backed by Alan Senior, editorial director, at used car price experts Trader Guide.

“The value of one- and two-year old so called ‘gas-guzzlers’ could fall by as much as £1000 over the next year,” he said. “This wipes millions of pounds from the asset value of leasing and finance institutions in one stroke.”

National Insurance

Chapman goes on to point out another area of increasing cost for business motoring. “Many people have also missed the point that employer’s national insurance, being based on the benefit-in-kind to the employee, increases as the CO2 emissions of the car increase. The NI cost of high emission cars can be substantial without companies even realising. This is largely because companies don’t factor tax into their whole-life costs.” Chapman believes business will need to change to include these costs.

Capital allowances

Tim Hudson, commercial director at LeasePlan, highlighted the final nail in the coffin for high emission company cars revealed in last week’s Budget.

“The Treasury also published a revised consultation paper on the capital allowances given to businesses that buy cars. The proposal to reduce the writing-down allowance on all vehicles that produce more than 165 g/km of CO2 will hit an awful lot of ‘standard’ company cars – particularly petrol-engined ones, few of which have emission ratings that low. It will further push employees into lower-emission vehicles such as diesels.”

Chapman pointed out what this meant for businesses: “If (or when) these proposals are introduced, the downside effect on cash flow will force many companies to consider whether they should continue making high emission cars available to their employees.”

“The upshot is that companies will need to seriously consider what type of cars they allow employees to drive as the increased cost of higher emission cars hits home. Smart companies will start to bring tax into the calculations of the whole-life cost of cars on their fleets.”

Going green

Although the overall theme of the Budget for the business car market was to force them to go green, as GE Fleet boss Rich Green pointed out, there was no advice on how best to go green.

Green commented: “The wider question that hasn’t been tackled by the Government is what structured action should employers take to ‘green’ their fleet? Thanks to the CO2-based company car taxation scheme, most have already dramatically reduced their emissions of greenhouse gases in recent years but what further steps can be taken?

“We expect this to be a subject of great debate over the coming months and indeed years, and we believe that for fleets to be have a true environmental fleet policy they will need start to undertake top to bottom reviews of their activities to understand how they can make improvements through a structured green policy similar to the risk management policies that they have adopted in recent years.

“Whilst the adoption of hybrid vehicles currently remains marginal in terms of their popularity, we believe that these audits need to ask more fundamental questions, such as asking which business journeys are really necessary and questioning how driver behaviour affects factors such as fuel usage and vehicle wear and tear.”