The Emergency Budget’s impact on fleets and company car drivers may be more significant than some early predictions. But there are moves fleets can make now to minimise some of the impacts.

The increase in the standard-rate of VAT to 20%, which will take effect from 4 January 2011 the first working day of the New Year, should spark fleets into action now.

Regardless of whether you outright purchase or lease your vehicles, the VAT rise will hit fleets.

“Fleet costs will increase for cars purchased after the rate change,” explains Gary Hull, company car tax expert and director of human resource services for PricewaterhouseCoopers.

“For the fleet user who is normally entitled to recover all its VAT, the cost of the 50% block on VAT paid on lease rentals will increase by over 14%, with an even greater increase in the amount of irrecoverable VAT for the partly exempt business.

“For those businesses purchasing company car fleets the cost of cars after 4 January will likewise increase by the additional VAT suffered. Whilst the VAT increase will also apply to maintenance and fuel costs, the VAT on this is in principle fully recoverable (subject to any partial exemption restriction), but this will still represent a cash-flow cost.”

The solution is to explore bringing New Year vehicle changes forward to avoid being hit by the increase.

Company drivers will also be hit in their wallets as the VAT hike means P11D values will also rise. The Benefit in Kind that company drivers pay on their vehicles is based on the P11D value.

"By January next year, VAT will have effectively increased by a third from the 15% rate enjoyed in 2009,” explains Andrew Hogsden, senior tax consultant, for Lex Autolease.

"We anticipate that firms will typically need to find an extra £3 to £4 per month, and company car drivers taking delivery of new vehicles from January 4, 2011 will see an extra £2 to £3 per month on their BIK charge.”

Despite this, he says leasing vehicles is still more cost effective than outright purchase.

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