Review vehicle policies now after Budget hints at diesel tax rise

Fleets are being warned to prepare for tax changes to diesel vehicles by the end of the year as part of the Government’s efforts to tackle air quality concerns.

In Chancellor Philip Hammond’s first, and last, spring Budget, there were no big announcements affecting the fleet industry.

The Autumn Statement had already signalled another freeze in fuel duty and paved the way for the forthcoming changes to salary sacrifice. 

However, tucked away in the small print of the Budget papers was a promise to improve air quality, with a consultation on a detailed draft plan getting underway in a matter of weeks.

Alongside this, the Government says it will look at the tax treatment of diesel vehicles before announcing any changes in its first Autumn Budget later this year.

Paul Hollick, chairman of the ICFM (Institute of Car Fleet Management) and managing director of The Miles Consultancy (TMC), believes forward-thinking fleet operators should start to review current policies and plan for a future that is less dependent on diesel.

“The writing is on the wall for fleet reliance on diesel vehicles – and diesel company cars specifically,” he said. “With the Government’s focus on improving air quality, the introduction of Clean Air Zones and cities globally introducing diesel car bans, it is clear that fleets must reduce their dependence on diesel power and develop a strategy that focuses on plug-in vehicles and ultra-low emission vehicles. A failure to do so will almost inevitably trigger an increase in the wholelife cost of operating diesel models.”

The latest figures from the Society of Motor Manufacturers and Traders (SMMT) suggest that concerns about the fuel type are already affecting market share.

Diesel new car registrations accounted for just 44.5% of the market in February, the lowest for many years (see graph). Petrol registrations experienced an increase – rising 5.8% to 42,826 units – while demand for diesel cars fell by 9.2% compared to the same month in 2016.

However, the British Vehicle Rental and Leasing Association (BVRLA) argues that diesel vehicles remain a vital part of the fleet mix, as diesel engines are the most energy-efficient internal combustion engines.

Gerry Keaney, chief executive of the BVRLA, explained: “It is often the most appropriate powertrain for long distance journeys and non-urban freight transportation, and the latest Euro 6 diesel engines have made some major gains in reducing harmful NOx emissions.”

In fact, the SMMT believes getting more Euro 6 diesels on the road can play a vital role in addressing air quality concerns and meeting climate change targets. It also says that measures announced in the Budget to reduce congestion and develop battery technology will also help.

The Chancellor allocated £90 million and £20m for the North and Midlands respectively, from a £220m fund to tackle pinch-points on the Strategic Road Network. This is supplemented by a wider £690m fund which local authorities will compete for to help them tackle urban congestion.

However, it is now clear the Chancellor wants to tackle the issue at source by making diesel a less attractive option to both the fleet industry and private motorists.

The Government had already delayed the removal of the 3% diesel supplement on company car tax from April 2016 to April 2021, in the wake of the Volkswagen emissions scandal.

Hollick told Fleet News the Government may consider an even higher surcharge on diesels – above the current 3% – alongside an additional higher first-year Vehicle Excise Duty (VED).

But, a diesel scrappage scheme aimed at older, more polluting vehicles, championed by the Mayor of London, Sadiq Khan, appears to have fallen on deaf ears.

One clue from the Budget papers is that the Treasury expects revenues from fuel duty to rise by £2 billion to £30bn a year by 2021.

Hollick said: “If it wanted to be radical, it could float the idea of a higher rate of duty on diesel fuel compared with petrol. Of course that would be very unpopular with motorists, who already believe they were misled into preferring diesels.

“However from the air pollution perspective, the effects would be felt everywhere, not just in selected cities as is the case with the proposed low emission zones. There would also be very strong push-back from LGV and LCV operators, many of which are SMEs, where the Government is nervous about appearing to hold back business, especially post-Brexit.”

Many believe the Chancellor sullied the Government’s environmental credentials in not heeding the fleet industry’s calls for a more effective approach to company car tax and VED.

Keaney said: “We are now left with company car tax and VED regimes that do little to support the Government’s green agenda or tackle the growing air quality crisis.”

At the moment, a 20% taxpayer choosing between a zero-emission electric BMW i3 and a 41g/km hybrid Mitsubishi Outlander – both of which have similar P11D values and sit in the same tax band – will pay the same company car tax over the next three years.

From 2020/21, new bands and rates will be introduced, with the i3 attracting benefit-in-kind (BIK) of 2% and the Outlander 12%.

David Hosking, CEO of Tusker, was disappointed that the Chancellor didn’t take the opportunity to bring forward the new 2% BIK tax rate.

“Instead, we need to wait until 2020 for this valuable incentive to kick in, by which time many thousands of new cars will be on the roads,” he said. “A much higher proportion of these new cars would surely have been zero emission vehicles if Hammond had reversed the appalling decision to delay the change in BIK for another three years.”

The Chancellor also chose not to defer next month’s introduction of new VED rates.

Cars registered on or after April 1, 2017, will have a first-year rate according to the vehicle’s CO2 emissions, but will also be split into three bands for the subsequent standard rate: zero emission, standard (cars up to £40,000) and premium (priced above £40,000).

For example, a Volkswagen Tiguan 2.0 TDI SE Navigation which sits just under the 130g/km threshold at 127g/km will cost £580 over four years, rather than £330 under the previous system. But, the premium Tesla Model S which has zero emissions and would have attracted no VED over four years will now cost £930 to tax over four years.

Keaney concluded: “The sector purchases around 324,000 cars each year, but this number is now likely to fall as our members lengthen their operating cycles in an attempt to reduce the cost impact of the new VED regime.”