PracticeConsultingDistribution – Wheels of fortune

Distribution - Wheels of fortune

Taxes will soon be a bigger headache than traffic jams for the distribution industry, says Sarah Perrin.

Lorries: nasty, polluting, road-clogging symbols of environmental destruction, or vital, efficient carriers of goods to feed British industry and the world’s consumers? Road haulage operators face an increasingly tough job promoting their virtues, with new challenges from two sides, a Labour government keen to appear environmentally friendly and an ever increasingly green European Commission.

Operators fear tax policy could play a part in these campaigns and they are gearing up to protect themselves.

Last August the government published its consultation paper, Developing an Integrated Transport Policy, its key aim being to achieve ‘more efficient and environmentally sustainable freight transport’. It expressed a desire for lower levels of harmful emissions from cars, vans and lorries and asked specific questions that hinted it wanted to introduce a combination of sticks and carrots aimed at getting more freight off the road and onto the railways and waterways.

It also asked ‘how can we ensure, for example through the taxation system, that prices faced by transport users more accurately reflect the wider environmental and social cost?’ The paper triggered more than 6,500 written responses and a follow-up White Paper is due in spring.

The next Budget is also expected to have a green tinge and concern is mounting that the chancellor could wield tax as the key weapon in the battle to reduce the amount of freight travelling by road.

Gordon Brown has already shown that he likes to mix combinations of incentives and penalties. His July 1997 Budget cut road tax by up to #500 for lorries and buses meeting low emission standards. That failed to impress many industry insiders as most haulage operators would only be able to qualify for the relief by fitting lorries with particulate traps, at a potential cost of #4,000 a time.

Meanwhile, Brown hit transport operators with higher fuel duties; a 6% rise in the cost of diesel, excluding VAT. The Road Haulage Association estimates that duty now accounts for more than 75% of the #25,000 annual fuel bill for a large truck – in other words around #18,000.

That means British trucks cost more in vehicle tax and fuel duty than any others in Europe. Sweden, Italy and Eire are the next most expensive countries, with annual truck tax costs between #12,000 and #13,000.

Assuming the government pushes ahead with its intention of encouraging freight off the roads it has a number of options. It can boost financial incentives for freight transported by rail or water. It can introduce an axle-weight tax or a truck-distance tax, as has been tried in Sweden.

Or it can continue to increase vehicle and fuel duties.

The freight industry is fighting hard against the introduction of any new taxes or further increases in duties. The Freight Transport Association recently warned that road transport costs would spiral ahead of inflation in 1998 due to a combination of rising fuel costs and driver shortages.

The FTA predicts that total costs for a 38 tonne articulated lorry will increase by 4.7%, compared with a forecast RPI for 1998 of 3.8%.

If fuel duty rises by an expected minimum of 4 pence per litre in the spring 1998 Budget, the annual fuel cost of running a 38-tonne lorry will go up by some #1,600, or 2.1%.

‘The government’s policy of raising fuel duty to cut down on transport use, and ultimately emissions, is unsustainable for the road freight sector,’ says FTA manager Simon Chapman. ‘Competitiveness and environmental sustainability should go hand in hand, but penalising operators by arbitrary cost increases achieves neither. For many journeys, road transport represents the only practical solution. By itself, increasing fuel prices will not achieve the government’s goal of fewer freight movements or greater use of alternative modes.’ Fiscal incentives to encourage environmentally friendly practices would be better, he says.

Last summer the FTA issued a policy brief on ‘Cleaner Air’, calling for rewards for best practice, through tax benefits for new and cleaner vehicles and encouragement for use of alternative means of transport. Far from increasing taxes, the FTA has even called for the UK government to give international operators a rebate on their vehicle tax equivalent to the road charges paid abroad.

Distributors and UK businesses have been making positive noises and taking positive action in the light of environmental concerns. In October last year, Marks & Spencer and BOC Distribution Services, which has provided a distribution service for M&S for 25 years, launched the UK’s first fleet of 10 heavy goods vehicles powered by Liquefied Natural Gas (LNG).

Emissions from LNG vehicles are about one twenty-fifth of those from their diesel equivalents.

Announcing the new fleet, Keith Selwyn Bogg, divisional director of physical distribution at M&S, said the group was committed to replacing its diesel fleet with LNG vehicles eventually. He stressed, however: ‘The speed with which we are able to action this goal will be determined by the speed with which the UK government introduces more favourable tax conditions.’

Although natural gas is cheaper than diesel, LNG vehicles are 5%-20% less efficient than diesel lorries, creating a major disincentive for companies wanting to switch to LNG.

Peter Brinsden, BOCDS managing director, expressed his desire to see cleaner lorries, but added: ‘We have to be conscious, too, of the economics and so we will continue to ask the government to address the discrepancy in the tax levy that we still have, compared with the EU minimum.’

Brinsden is calling for the fuel excise on natural gas to be reduced to 10 pence per kilogram, down from the current rate of 21 pence per kilogram, with a commitment that it stay at that level for five years.

‘Such a cut would bring Britain closer to other European countries, which charge no more than the European Union minimum excise, equivalent to 8 pence per kilogram,’ he said.

This isn’t just a domestic issue. European policy is increasingly concerned with green issues. The EC Green Paper ‘Fair and efficient pricing in transport’ estimated that the annual cost of congestion and harmful effects due to transport totalled Ecu250bn (US$280bn), attributing 90% of that to road transport.

A proposed environmental tax, some form of carbon tax aimed at reducing carbon dioxide emissions, is still with the Council of Ministers.

Ernst & Young tax partner Tony Lynne believes that increasing existing fuel and vehicle duties would have a greater impact in getting lorries off the roads than would the introduction of any new environmental taxes, such as some general form of carbon tax. ‘Getting freight off the roads and onto the railways is not necessarily a matter for environmental taxes,’ he says. ‘A carbon tax would extend to coal and electricity and so would be more likely to affect the railways than vehicles. But increasing HGV or diesel duty significantly would be one way to get lorries off the roads.’

Much uncertainty remains over the future mix of taxes and incentives that UK and European policy setters are likely to promote. But the freight industry is resilient. Some road haulage companies are responding by developing combined transport provision, for example through rail joint ventures.

There is also an on-going campaign to allow the introduction of larger lorries, 44-tonne vehicles with six axles, which could cut the number of lorry journeys made.

Whatever happens, road hauliers will keep on trucking.


Logistics specialists are snapping up increasing amounts of business from companies keen to outsource the management of their imports. Apart from handling the physical flow of goods, specialists offer a full range of management facilities including hassle-free administration of VAT and import tariffs. Is this a threat to the traditional accountants’ market and what further changes are in line for the future of import administration?

Last October, Customs & Excise issued a paper titled ‘Customs Long Term Freight Policy’ which looked ahead to the next millennium. The paper noted: ‘There are a significant number of importers who use customs agents to complete customs formalities. These include not only occasional importers but also some medium and large companies who have made a commercial decision to concentrate on core activities and chosen to outsource their logistics options, including all their customs activities.’

One recipient of such business is New Wave Logistics, which provides secure warehousing, next day distribution, inventory control and material resources planning. New Wave has its own account with Customs – the company pays any duty, then sends the importer a bill, thus benefiting clients’ cash flow and potentially reducing interest costs. The company also has a direct computer link to the Customs network, which also makes it possible to offer full clearance facilities at major ports in the UK directly from its Milton Keynes base.

Ian Dudley, until recently a Customs official and now a manager in the customs and international trade group at Ernst & Young, believes the outsourcing of importation administration is on the increase. ‘Major companies are looking to concentrate on their core business,’ he says. Freight forwarders are also increasingly keen to take up a new system called Customs Freight Simplified Procedures (CFSP), essentially a means of sending periodic electronic declarations through to Customs, say once a month, rather than for each consignment. Before joining E&Y, Dudley ran the Customs team responsible for developing CFSP. The new system began trials last April with the three largest parcel operators, UPS, DHL and Federal Express, which between them account for 30% of all UK imports.

Though Hewlett-Packard has now adopted CFSP, most companies have been slow to do so. ‘Many are outsourcing their customs management function,’ says Michael Booth, director of the customs and international trade practice at Coopers & Lybrand. ‘So far, CFSP has had the most enthusiastic response from service providers, especially express carriers and freight forwarders.’

Even though the system will make life easier for logistics specialists, accountancy firms are not too threatened by the freight forwarders’ administration services. ‘Freight forwarders know most about the goods and physical storage, but they have limited experience in Customs’ affairs,’ says Dudley. ‘They are looking to create partnerships with Customs’ advisers-advisers such as E&Y, for example. The logistics specialists are turning to accountancy firms for advice to make sure they get the best deal for their clients.’

For example, the three main options for warehousing (clearance at the frontier, temporary storage, or Customs warehousing) each have different cashflow advantages. The best option will depend on a range of factors.

Freight forwarders have also been frustrated by Customs’ decision to continue auditing both traders and the freight forwarders. Logistics companies had been hoping they could bear the full audit scrutiny. ‘Freight forwarders were trying to say to clients, “We will relieve you of all the burdens of dealing with Customs”,’ explains Dudley.

On the positive side, Customs plans to simplify its procedures further.

In future, where goods cross several borders, it may be possible for importers to complete one set of standardised documentation that would be automatically forwarded to all authorities.

‘Within the next 10 to 20 years there will be an amazing series of changes through the world,’ says a Customs spokesman. ‘With the technology that’s available our goal is to try to reduce the amount of red tape and speed things up.’ Less red tape has to be good news for logistics specialists, their clients and accountants as well.

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