Tighter tax rules driving emissions down

A reduction in the level of tax relief that can be claimed by leasing companies and fleets is fuelling a downward trend in emissions, figures suggest.

The Chancellor, George Osborne, announced a tightening of the rules in the 2012 Budget, which finally came into force in April – just five months ago.

However, figures from the contract hire and leasing industry suggest that fleets have heeded warnings issued prior to the tax changes taking effect.

Hitachi Capital Vehicle Solutions told Fleet News that its current order bank of almost 2,300 vehicles has average CO2 emissions of just 115g/km.

“That is much lower than it used to be,” said Mike Belcher, head of sales.

“And only 360 – or 15% of these vehicles – are over 130g/km, another distinct movement from a year ago.”

The average emissions figure for cars registered to fleets in 2012 was 132g/km, according to the Society of Motor Manufacturers and Traders (SMMT).

If Hitachi’s current average emissions figure was reflected across the board, it would represent a remarkable 13% fall in just 12 months and a reduction three times the size of the 5g/km fall seen from 2011 to 2012.

Government tax policy has been the major driver behind the downward trend in CO2 emissions and the introduction of changes to the tax regime in April appears to be fuelling the fall even further.

Chief among Osborne’s changes was a tweaking of the rules affecting capital allowances. These let companies offset a proportion of the value of a vehicle against their tax bill each year to reduce business costs.

Thresholds cut

The emissions rate that determines the threshold for these allowances was reduced in April, from 160g/km to 130g/km. Above this level, fleets and leasing companies can write down just 8% against profits. But if they choose a car with emissions below that figure, they can write down 18%.

Osborne also changed the terms of the first-year allowance (FYA), electing to stop leasing companies from writing down 100% of the cost of buying a car against profits in the first year.

Instead, they may write down 18% of the cost, as long as the car is below 130g/km.

Fleets, however, were still able to take advantage of the 100% FYA, although the threshold at which this became eligible fell from 110g/km to 95g/km.

The lease rental restrictions threshold for companies that lease vehicles was also reduced from 160g/km to 130g/km.

Business can only deduct the full cost of finance rentals from taxable profits for vehicles up to 130g/km. Above 130g/km, there is a flat rate disallowance (called the Lease Rental Restriction) of 15% of the finance rental, meaning the  company can reclaim only 85%.

Increase in costs

Leasing companies have had to factor these increased costs into their calculations and fleets have adapted their vehicle order strategy to reflect the new emissions limit.

Belcher said: “The cost of leasing a car between the 130g/km and 160g/km CO2 threshold has increased for both leasing companies and the end customer.

“The straightforward lease rental has increased as we have to depreciate these vehicles in a different way and unfortunately we’ve had to apply an increased cost to the customer. On a three-year and 60,000-mile contract, the average impact of this increase was £16 a month.”

Fleets were warned about potential price rises, before the tax changes took place. Alphabet wrote to its customers to tell them the changes in the capital allowance regime had triggered “a slight increase” in the monthly lease rental with the rise “effective immediately”.

Strong incentives

“The overall effect is that customers are now strongly incentivised to choose a car beneath 130g/km of CO2, otherwise they will be hit with these two extra costs,” explained Belcher.

Lex Autolease told Fleet News that more than 80% of its new car deliveries to corporate customers are now below 130g/km.

Andrew Hogsden, senior manager of strategic fleet consultancy at Lex Autolease, said: “Businesses’ appetite for lower-emitting cars is being driven by a need to realise lesser wholelife costs for their fleets and an increasingly wide range of desirable low-emitting cars.”

The share of sub-130g/km CO2 new cars has risen from just 10.6% in 2007 to more than 55% in 2012, according to the SMMT.

And carmakers are continuing to find further efficiencies, with traditional gas-guzzlers the latest to receive the carbon dioxide cutting treatment.

But it is tax policy that is driving improved environmental performance. In companies with 100 or more employees, 67% said tax policy directly encourages better environmental performance, according to the 2013 Corporate Vehicle Observatory.

Mike Waters, senior insight and consultancy manager at Arval, said: “I think it is fair to say that the improvement in fleet CO2 efficiency is ultimately driven by regulation, but that vehicle manufacturers and fleet operators have responded extremely well to the carrots and sticks employed.

“It pays to drive an efficient vehicle and the manufacturers have done a great job of ensuring that you can do so without having to compromise on quality or performance.”