Special Feature - Fleet: Rules of the road - complying with ever-changing fleet legislation

As in all walks of financial life, legislation shapes markets, but the vehicles sector seems prone to even more shifts in policy than most. The government just can’t seem to leave it alone, because vehicles and travel provide targets to subjects dear to its heart: tax, health and safety and the environment.

This year is no different, with a raft of changes, the most high-profile for fleets being the way capital allowances are worked out for company cars, brought into line with other areas of government thinking on vehicles and their taxation in April. It is aimed at getting people buying and driving lower-polluting cars through fiscal punishment and incentive.

Under the new system, companies buying cars for themselves, or leasing companies purchasing vehicles to lease on to customers, need to place cars emitting more than 110g/km of CO2 and up to, and including 160g/km, in a 20% writing-down allowance pool, while those over 160g/km go into a 10% pool.

Depreciating assets
The issue for fleet managers is that many of the cars above 160g/km are more expensive and, especially in the current market, depreciate more heavily in their first few years. This means that after their disposal there is still a lot of tax relief on depreciation to be claimed back and as a result, it could take a very long time to see them worked off the balance sheet.

In terms of cashflow, the new rules mean capital is tied up in these depreciating assets for many years and, in the case of higher emitting cars, for much longer than under the previous regime ­ years, even. For many cars in the 20% pool, the allowances claimed will leave a balance of around 20% of the original cost new for an average car, once disposal proceeds are removed from the pool. It will take around 11 years to claim 90% of this balance against tax.

This is still an improvement on the situation for those using higher emitting cars. First, cars below 160g/km are often cheaper and depreciate less in cash terms. As a result, it will take half the time to claim back the allowances as for the cars over 160g/km.

According to leasing company Alphabet, the difference between the old capital allowances regime and the new CO2-based system ­ discounted back to today’s values - will be as much as £2,000 for the largest executive cars. For leasing companies, it is likely they will have to increase rentals to mitigate against the extra time and money it will now take to claw back the depreciation, but, for the most part, the change to the rules makes leasing more attractive for companies managing fleets rather than outright purchase.

“Considering the VAT advantages of leasing remain untouched, many suggest that cars with CO2 emissions of less than 160g/km should be leased and cars above 160g/km should be considered on a case-by-case basis,” says David Rawlings, a consultant at fleet cost and environmental advisory Business Car Finance.

Sliding scale
The legislation is now in line with company car tax and Vehicle Excise Duty (VED), which, since 2002, has been related to the CO2 emissions produced by each car based on a sliding scale, with the highest emitting cars ultimately incurring more tax relative to their cost new. Currently, the tax take goes from 10% to 35% of the car’s taxable P11D value ­ a car’s basic cost plus the cost of delivery and accessories, but not including the first registration fee. The taxable percentage works on a scale that goes in steps of 5g/km of CO2, from 120g/km up to a maximum of 225g/km. Above that, all cars are taxed at the maximum possible percentage of 35% irrespective of emissions.

Until recently, the lowest a car powered by traditional means could be taxed at was 15% for petrol and 18% for diesel. Since April 2007, there has been a 10% rate designed to incentivise drivers toward the lowest emitting cars on the market. Any driver choosing a company car with CO2 emissions of 120g/km or less qualifies for the 10% rate.