The changes to the capital allowance thresholds announced in the 2012 Budget could change fleet acquisition methods for the lowest CO2 emitting cars.

Outright purchase or blended funding options are likely to rise in popularity after the Chancellor elected to stop leasing companies from being able to write-down 100% of the cost of buying the car against profits in the first year.

Instead, they will now only be able to write down 18% of the cost, as long as the car is below 130g/km. Consequently, the cost of leasing these vehicles is expected to rise.

Fleets, however, are still able to take advantage of the 100% first-year allowance (FYA), although the threshold at which this becomes eligible will fall in April 2013 from 110g/km to 95g/km. This could make buying low emissions vehicles more attractive than leasing them on conventional contract hire agreement.

Also in 2013, the main rates of capital allowance will fall, from 160g/km to 130g/km. Above this threshold, fleets and leasing companies will be able to write down just 8% against profits; choose a car below that figure and they can write-down 18%.

Blended funding

Julie Jenner, ACFO chairman and key solutions manager at GE Capital, said: “The biggest question mark will be over cars that fall at or below the 95g/km threshold.

“Outright purchase might be more appealing, but proactive leasing companies will offer their customers a blended funding solution which includes contract purchase for these cars. That way, the fleet will still be able to take advantage of the full 100% first-year allowance.”

Deloitte Car Consulting director Mike Moore agrees this may lead to blended funding approach, which he says could include contract purchase, contract hire and employee car ownership.

He said: “Businesses should assess what funding method works best for them, with the possibility that a variety of funding methods within the same fleet may become popular.

“For low emission cars contract purchase may become popular, allowing the employer to benefit from FYA while paying a regular monthly amount to their fleet provider over the term of the car similar to contract hire arrangements.”

John Lewis, BVRLA chief executive, said the association would be lobbying for the Government to reserve its FYA decision.

“The 100% first-year allowance has been a major success, helping to further encourage the uptake of low-emission vehicles,” he said.

“We can see no sensible justification for discriminating against the rental and leasing industry by removing this incentive and we will be lobbying the Treasury to reverse its decision.

“If introduced, this measure could increase costs for thousands of businesses that rely on lease finance for their fleets. It could also push up daily rental prices for fuel-efficient city cars – the sort of vehicles that politicians want to see more use of in our urban spaces.”

Companies that lease vehicles will still be able to take advantage of the lease rental restrictions, but the threshold for these will fall from 160g/km to 130g/km. Up to 130g/km the business can deduct the full cost of finance rentals from taxable profits. Above 130g/km and there is a flat rate disallowance (called the Lease Rental Restriction) of 15% of the finance rental; the company can only reclaim 85%.

David Rawlings, director of fleet consultancy firm Business Car Finance (BCF) Wessex, said: “We have seen clients already adopt emission ceilings in of 130 or even 120 g/km as they realised that generally the lower the emission the better value for all concerned, we predict this trend to continue as smart employers will always look forward.”

Under the older rules, the cost to a company of leasing a car just above 160g/km CO2 compared to one just below was estimated at £20-30 per month. Some leasing companies opted to absorb this cost.

Leasing companies have yet to do the modelling to assess the difference in cost between vehicles up to 130g/km versus those above. However, it’s likely they would have to pass some of the additional expense onto the fleet.

Moore told Fleet News that the reduction of the threshold from 160g/km to 130g/km “will add cost to the contract hire rental charged by fleet providers and add cost to their client”.

“Again employers may look to the direct purchasing options available to them, though the capital allowance changes and loss of VAT recovery make this less attractive.”

As an alternative, Moore believes they may consider introducing an employee car ownership scheme for those drivers with high business mileage.

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