CO2 tax to change company fleets

Martyn Phillips of Towers Perrin, a contributor to Vehicle Leasing’s ‘FAQs’ report, said low mileage users may even re-enter the fleet market, whilst high-mileage users will be forced into ‘greener’ cars due to their dependency on road transport.

From next April, company car tax will be based on a percentage of the car’s list price determined by the level of its carbon dioxide emissions.

The tax levy rises from 15% of the list price in one per cent steps for every 5g/km of CO2 emitted to a maximum of 35%. This means that the average 18,000+ mileage car used for business purposes could attract a 24% tax rate compared with 15% at present. Diesel cars pay a further 3% on top due to the higher level of overall pollutants in the fuel.

The new system will apply to all company cars registered from 1998 onwards, not just new vehicles. The government’s aim is reduce the overall level of harmful emissions by rewarding cleaner and more fuel-efficient cars via lower taxation.

New tax to bring drivers back into fleet fold
Phillips predicts a shift in the structure of the UK company car fleet in the wake of the proposed tax changes as low-mileage users return to the fold.

Employees that complete less than 2,500 business miles annually have traditionally been the most likely to accept a cash alternative to car provision but may soon be ‘reversing their choice and re-enlisting for a company provided car’, according to Phillips.

He adds that although the winners and losers in the 2,500-18,000 business-mileage range will depend on the car they drive, ‘The losers will be heavy users of company cars (such as sales representatives), who will lose their mileage related discounts.’

Phillips’ appraisal of the mid-mileage market is supported by Gary Jennison, Business to Business Director at Lex Vehicle Leasing: ‘There are significant variances in CO2 emissions by make and model. Savings to companies and individuals will be available to those who take time to inform themselves.’

Phillips expects that drivers in the high mileage category will have little choice but to bow to the government’s will by choosing more environmentally-friendly vehicles: ‘These drivers are unlikely to be allowed to opt out of the company car scheme, as their cars are “needs” based.’

Phillips adds that although companies may decide to share the additional tax burden with the driver for life of his or her current company car, this support will be an interim measure and that drivers must bear the tax implications of future company car choices alone.

Hidden costs of fleet acquisition alternatives
Whilst Phillips predicts a shift in the balance of the UK fleet toward smaller, ‘greener’ vehicles, he does not believe that the new CO2-based tax regime will force high-mileage drivers out of company provided cars ‘due to the nature of their job’.

However, anecdotal evidence suggests that some fleet operators are now reassessing the most appropriate means of providing vehicles to employees, taking a closer look at alternatives such as Employer Sponsored Personal Contract Purchase (PCP) and Employee Car Ownership Plans (ECOPs). Under PCP, the employee takes a cash allowance from the employer and uses it to leverage the superior buying power of the PCP scheme operator, i.e. a leasing firm or large financial institution.

Moreover, the driver typically benefits from fixed cost motoring as most PCP schemes offer include the provision of maintenance and servicing. Companies operating an ECOP pay a net monthly cash allowance via their payroll system based on a benchmark rental cost which takes into account the tax saved from no longer using a company car as well as business mileage reimbursements.

But companies looking at alternative methods of supplying company cars are uncovering a number of new issues. Maintenance, insurance costs and accident liability issues are not always fully covered via PCP and ECOP schemes, potentially resulting in hidden costs for the employer and employee.

FAQs, published by Lex Vehicle Leasing in June, fields the most frequently asked questions posed by fleet managers to a range of fleet specialists. According to the report, the seven questions most commonly asked by fleet managers, HR managers and finance directors in relation to fleet matters are as follows:

  • Why bother providing a company car to employees?
  • What are the alternatives to company cars?
  • What are the market norms for provision of car-related benefits?
  • What is the best way of acquiring and financing company cars?
  • What is the best way of managing a fleet of cars?
  • Which are the best cars to have on the fleet from an employer’s perspective?
  • Which are the best cars to have on the fleet from a driver’s perspective?

As well as Lex’s own experts, contributors include accountants KPMG, RAC Business Services, human resources consultants Towers Perrin, and Monks Partnership, a leader in surveys on pay and benefits.

For some guidance on the best cars to drive within the fleet spectrum, the contract hire and fleet management firm also turned to Matthew Prior, road test editor of Channel 4’s Driven programme and its sister website Lex Vehicle Leasing is jointly owned by Lex Service Plc and Halifax, the mortgage bank, and operates a fleet of nearly 100,000 cars and light commercial vehicles.

Related reading