Fleet operators need to ensure they are assessing the cost of cars to their company on an after-tax basis rather than on monthly rental charges in the wake of April’s budget, a leading tax expert has warned.

The potential pitfall, which could cost fleets thousands of pounds, surrounds company car choice lists based on monthly rental rates instead of CO2 emissions with the 160g/km threshold key, according to George Tonks, a partner in the specialist leasing and finance consultancy Invigors.

“I think fleet managers have got used to the fact that cars with a lower list price are not necessarily cheaper on rentals, most typically because of the residual value and maintenance.

“But then two cars with the same rental do not necessarily have the same cost to the company,” explained Tonks at a Finance and Leasing Association (FLA) tax seminar.

Previously, the logical approach for fleet managers choosing cars for employee grades would have been based on monthly rental costs.

For example, a grade ‘D’ employee may have been allowed a car at £400 per month rental, while grade ‘E’ was at £360 and so on.

But now, with the new writing down allowances regime (which allows companies to write down more of a car’s depreciation against tax if it emits below 160g/km of CO2), two employees at grade ‘D’ could choose different cars - one with emissions over 160g/km and the other sub-160g/km, with a cost differential to the employer of 5.8% because emissions are not being taken into account.

“The 5.8% differential is the increased after-tax cost to the lessee if the lease rental restriction applies,” added Tonks.

The cost to the fleet manager of having a leased car greater than 160g/km is 15% disallowance of rental for tax, meaning tax relief is worth 23.8% not 28% and the after tax cost rises by 5.8%.

“Logically the fleet manager should say grade ‘D’ gets a sub-160g/km car with a rental of £400 or a vehicle over 160g/km car with a rental of £376.80,” explained Tonks.

And what then happens with an employee wants to trade up?

“The after-tax cost of a sub-160g/km car at £400 per month is £288 ; the after tax cost of a car with emissions greater than 160g/km at £420 per month is £320, so to maintain the employer’s position he should charge the employee £44.50, not the £20 differential in the rentals,” warned Tonks.
 

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