New tax rules came into force at the start of this month that will change the make-up of company car fleets forever.

Whether a company leases or buys its cars it will be affected, although the impact on fleets where all or the majority of their cars have low CO2 emissions will be minimal.

The new capital allowance system is aimed at rewarding fleets running cars that produce CO2 emissions under a 161g/km benchmark by allowing them to write down more of the depreciation cost against tax.

It also penalises those that run vehicles with emissions above that benchmark, although an anomaly has made some high-polluting cars cheaper to rent (Fleet News, April 2).

From now, expenditure on cars above 161g/km will attract a 10% writing down allowance (WDA) and expenditure on cars of 161g/km or below will attract the normal 20% WDA.

The 100% first year capital allowances remain for cars emitting 111g/km CO2 or less.

Existing cars – purchased or leased – will remain under previous rules for up to five years.

“The impact depends on a number of factors, but for a typical fleet vehicle emitting below
161g/km and more than 111g/km this means it will take 10 years to claim 95% of the available capital allowances, but for a vehicle emitting more than 161g/km this rises to more than 25 years,” explains Robert Kingdom, head of marketing at Masterlease.

Outright purchase fleets will suffer more, although leasing companies will be affected too (the rules apply to anyone who has a vehicle on their balance sheet), so customers may see rental increases, particularly for higher-emitting vehicles.

It is estimated that an average sub-161g/km car could be up to £30 a month cheaper than a similar car over the benchmark.

“All fleets need to review their acquisition method. There used to be a tipping point of around £20,000, with most tax advisers recommending that companies should buy or contract purchase cars costing more than this figure,” explained John Lewis, BVRLA chief executive.

“Now, leasing is expected to be the most tax-efficient acquisition method in nearly all cases.”

This view is shared by the majority of commentators.

“The new regime makes contract hire cheaper than outright purchase or contract purchase for cars below 161g/km,” agreed Mark Sinclair, Alphabet director.

The main losers are low-priced cars that emit more than 161g/km.

“The new rules make such cars a price trap, even when heavily discounted,” he added.

For sub-161g/km leased cars costing less than £12,000 there will be no change – 100% of any rental payments will be tax allowable, and for any leased sub-161g/km car costing more than £12,000 all of the rentals will also be allowable.

But for leased cars over 161g/km and costing less than £17,000 there will be a reduced level of tax relief.

“However, it is important to note that the monthly rentals charged by the leasing company for these cars are likely to increase as they pass on the impact of the delays in receiving writing down allowances,” said John Kelly, GE Capital Solutions key solutions leader.

“For the majority of cars, the amount of tax relief on the lease payments will increase.”

While an agreement exists that leasing is the way forward for most, the waters are far
from clear.

“There is not yet a consensus ont how lease rates are responding to the tax changes – and how they are changing because of big fluctuations in residuals and funding costs,” said Stewart Whyte, managing director of Fleet Audits.

“In reality, these are likely to swamp any changes because of the tax rules.”

Others agree. “We do not know how the leasing providers are going to modify their pricing to cover their capital allowance cost increases,” explained Dan Rees, Deloitte business car consultant.

“Lessors would most likely be looking to pass on any increase in their costs. However, we are increasingly seeing examples of pricing where lessors are taking different views on their cost models, the motivations of this being subject to speculation,” added Rees.

“The difficulty for the industry is ensuring the potential extra costs incurred by the tax changes are covered by the pricing, but with commercial pressures to be competitive, not to price themselves out of the market.

“It seems reasonable to expect a period of rental consolidation as competitors examine each others’ positions, possibly creeping up in price through the year”

The situation “may take months to settle down”, said Rees.

The disadvantages with outright purchase of cars exceeding the 160g/km benchmark are clearer.

“This is where the new measures will have the biggest impact, which is ultimately the Treas-ury’s intention,” explained Kelly.

“At the point of disposal a large portion of the depreciation will remain in the pool and will take many years to feed through the corporation tax computations. The delay in receiving that tax relief has a cost to the owner.”

The Government’s intention to drive change by modifying company car tax is not without precedent.

“The rapid adoption of the diesel company car (following the change to CO2-based personal benefit taxation) is evidence that appropriately targeted taxation can alter the behaviours and choices of companies and their employees alike,” concluded Kingdom.


 

Tax checklist

  • Carry out a comprehensive fleet acquisition assessment now.
  • Build a car choice policy around the new tax rules.
  • Introduce a 160g/km emissions cap. There are more than 3,000 models to choose from.
  • Pay particular attention to cars with emissions just under 111g/km or 160g/km. The addition of some accessories – alloy wheels or roof rails – can easily push a vehicle
  • over the emissions threshold figure and dramatically increase its wholelife cost.
  • Be aware that the only emission figure that counts is that on the V5 registration document.
  • If you must have high-emitters as a significant part of the fleet, do the sums carefully looking at all factors.
  • Consider the balance between changing acquisition methods and any actual savings to be made.
  • Always use wholelife cost calculations to set fleet policy.
  • Pay attention to tax implications of a particular vehicle.
  • If you really want to future-proof your policy cap CO2 emissions to 140g/km or below as the Government plans regular reviews of tax thresholds in line with emissions.

If you....

Lease cars over 161g/km

Vehicles costing about £21,000 or less will be more expensive.

But vehicles costing above £21,000 will cost less after tax.

Outright purchase cars over 161g/km

These will generally cost more because writing down allowances are restricted to 10% per annum.

For cars costing more than £12,000 there is no individual balancing allowance/charge at disposal – instead the allowance/charge is left in the pool and amortises to perpetuity.

Lease or buy sub-111g/km cars

The cost of ownership reduces significantly for these cars. The impact will vary, but rental rates will decrease by up to 5% on 36-month contracts.