Insight: U-turn over 3% diesel tax set to cost fleet £1.36bn

The fleet industry has reacted angrily after being hit with a £1.36 billion bill, thanks to a Government U-turn on company car tax.

Fleet operators and company car drivers had expected the 3% diesel differential to be ditched from April 2016.

However, more than three years after making that pledge, the Chancellor of the Exchequer announced in last month’s autumn statement that he had changed his mind.

Instead, it will now be removed in April 2021 – five years later than originally planned. 

The move has been met with dismay by an industry which relies on certainty over future tax rates.

Company car choice lists, based on wholelife costs, now face being overhauled, while company car drivers who picked cars in good faith will be penalised.

George Osborne blamed his change in direction on the “slower-than-expected introduction of more rigorous EU emissions testing”.

But with the measure worth almost an additional £1.4bn in tax over the next five years, some have questioned whether air quality concerns were the main motivating factor.

Matthew Walters, head of consultancy services at LeasePlan UK, said: “What is more cynical is that the Chancellor used the fig leaf of EU emissions as a rationale to enact  this change.

“Our industry has sought certainty about future tax year liabilities – which Government has provided – yet this has been done with no advance notification, and with no grandfathering for those affected individuals who have already made what they thought was an informed choice based on future years.”

Both the British Vehicle Rental and Leasing Association (BVRLA) and fleet representative body ACFO said they were “disappointed” by the Government’s decision to retain the diesel supplement until 2021.

Like LeasePlan they also expected certainty about future tax liabilities.

ACFO chairman John Pryor said: “ACFO has been consistent in its call for clarity and long-term decision-making, so that fleets and company car drivers could plan for the future in full knowledge of what the tax burden will be.

“This Government U-turn does not assist that process.”

Gerry Keaney, chief executive of the BVRLA, added: “What is especially frustrating is that many of these motorists are being penalised for driving some of the latest, safest, most fuel-efficient vehicles on UK roads.”

The Treasury has estimated that the delay in removing the supplement will be worth an additional £280 million in 2016/17, £275m in 2017/18 and 2018/19 and £265m in 2019/20 and 2020/21. 

The lion’s share – some 60% – will be paid by company  car drivers through additional benefit-in-kind (BIK) tax,  while the remaining 40% will be picked up by employers through increased Class 1A national insurance contrib-utions (NIC).

Lex Autolease estimates that it could potentially affect four out of five company car drivers which, based on the latest figures from HM Revenue and Customs (HMRC), would equate to some 750,000 employees.

Walters told Fleet News: “Employers will find themselves suffering unexpected NIC increases, while employees, who will have taken the tax cost into consideration when choosing their vehicle, will now find themselves saddled with a tax cost much higher than expected.”

Comparing costs on the Fleet News car tax calculator, the driver of a Ford Mondeo will pay an additional £150 per year in BIK tax and the driver of a Vauxhall Astra just over £100. In terms of the employer, that would equate to an increase of £106 in NIC on the Mondeo and an extra £79 for the Astra.

Tony Greenidge, sales and marketing director at Fleet Operations, labelled the impact to business from increased NIC as “significant” and one “that should not be ignored”.

He said: “Many organisations now base their choice lists on wholelife costs and forward thinking fleets may have already factored in the benefit of the diesel supplement being removed in 2016.

“This is particularly relevant given that employers are keen to find ways to enhance company car policy as this plays a vital role in the attraction and retention of key staff. 

“With this announcement, fleet stakeholders spread across many functions such as HR and procurement now face the dilemma of either absorbing this unexpected cost or amending choice lists to take the extended supplement into consideration.”