Bearing in mind the bottom line

In calculating optimum fleet replacement cycles, there is no right answer. However, fleet operators must look into evolving vehicle technology and tax implications, advises ACFO’s Julie Jenner

Economic evidence would suggest that UK Plc is slowly moving out of recession and, while increasing fleet activity would appear to support that view, cost remains the single biggest issue facing managers.

The recovery in the UK was gathering steam, said the influential Organisation for Economic Co-operation & Development recently, pointing to growth in the last four months – allbeit slow expansion since the country officially exited recession in the third quarter of 2012.

Following the race to extend fleet vehicle replacement cycles in the depths of recession, we are now witnessing a return to shorter operating cycles in some cases as new contracts are written.

This trend will, ACFO believes, continue into 2013 if economic recovery is maintained but, as with so many things in life and in fleet, it is a balancing act for managers to get right financially.

Fleet replacement cycles
Replacing vehicles at less than four years old potentially avoids the prospect of expensive maintenance costs. Meanwhile, with longer service intervals – 20,000 miles being the norm – it means that if vehicles are replaced at less than 60,000 miles perhaps only two major services may be required (depending also on vehicle age).

In calculating optimum fleet replacement cycles there is no right or wrong with every operation and business different. However, fleet operators must also take into account evolving vehicle technology and tax implications.

Budget 2012 signposted the way ahead for the forseeable future for fleet managers in terms of both benefit-in-kind tax for drivers and corporation tax for businesses. Put simply the future is low emission cars with HM Treasury further ratching down emission thresholds.

Motor manufacturers are introducing ever lower emission petrol and diesel engined cars to the market and that means lower tax bills for drivers and businesses. Holding on to ‘old’ vehicles undoubtedly means higher tax bills for both.

Additionally, the HR angle should not be ignored. Company cars continue to be highly prized by most employees. Staff driving a four or five-year old vehicle may not look after it as well as they would a new vehicle.

Providing a new car to an employee undoubtedly ticks the HR box but it should perhaps be accompanied with instructions – supported by documentation signed by drivers – that they must take responsibility for keeping the vehicle in good condition.

Historically, many fleets have been fairly relaxed about drivers almost ignoring vehicle condition but this is something that is changing. With economic conditions remaining challenging, delivery of a new vehicle may just be the right time to educate drivers, tighten driver policy in this area and possibly recharge drivers for some or all of the amounts that their carelessness costs their employer.

Tax talks
As already mentioned, benefit-in-kind tax thresholds will tighten from April 6, 2013 by a further 5 g/km – with a similar increase due in 2014/15 and a tightening of 10 g/km in 2015/16 and 2016/17.

Meanwhile, also from April next year, the government will extend the 100 per cent first year allowance for businesses purchasing low emissions cars for a further two years to March 31, 2015. But, simultaneously the carbon dioxide emissions threshold below which cars are eligible for the first year allowance will be cut from 110 g/km to
95 g/km, and leased business cars will no longer be eligible for the first year allowance.

Additionally, the carbon dioxide emissions threshold for the main rate of capital allowances for business cars will reduce from 160 g/km to 130 g/km. The threshold above which the lease rental restriction applies will also reduce from 160 g/km to 130 g/km.

That all further encourages the take-up of low emission company cars. But the government must be careful in its approach to vehicle-related taxes.

Caution on the horizon
As ACFO has frequently highlighted, measures by the government to encourage the take-up of low emission vehicles mean less money going into the HM Treasury coffers.

The government is known to be studying how it can reform Vehicle Excise Duty to fill a multi-million pound black hole in its finances caused by lower emission cars attracting reduced rates of road tax.

ACFO remains fearful that the government may look to fill its VED black hole by targeting owners of vehicles – including companies – that have already made ‘green’ choices influenced by politically-led policies.

The government already has a track record in this regard having increased benefit‑in‑kind tax in 2012/13 to 15 per cent from 10 per cent for drivers of company cars with emissions of 120 g/km. Additionally, drivers at the wheel of company cars emitting 115-119 g/km saw their benefit-in-kind tax bills rise almost 50 per cent with vehicles catapulted into the 14 per cent tax bracket from the 10 per cent threshold and those at the wheel of vehicles with emissions of 100 g/km to 114 g/km moved into the 11-13 per cent tax thresholds.

That astronomical tax increase of up to 50 per cent for drivers and related rises in Class 1A National Insurance contributions by employers  – penalised for making the right low emission decision – must not be repeated as the government shapes its future vehicle‑related tax policy.

Instead, ACFO would suggest that the government should look at the rates it applies for higher emission cars in respect of taxes it collects – both in terms of benefit‑in-kind tax and Vehicle Excise Duty.

While highlighting tax issues, ACFO would stress to the government that although its bank account may be lower than usual businesses and consumers are continuing to feel the pinch.

Future fuel rises
Indications from the government in November that the planned January 1, 2013 3p a litre rise in fuel duty may not occur are to be welcomed.

However, ACFO would go further. Fuel prices are at or close to record levels and, as has been highlighted by the lobby of protest over the next scheduled rise, the UK is in no mood to stomach a further increase. Instead of simply deferring the fuel duty rise, the government should make it clear that it will not increase fuel duty any further in 2013 thus easing corporate, and consumer, budget‑bashing fears.

Finally, motor manufacturers should be applauded for technological advances that have driven down CO2 emissions and improved MPG to extraordinary levels in recent years.

But, with the average price of petrol now almost 7p per litre lower than the average price of diesel, according to website petrolprices.com, the time has perhaps come for more fleets to consider petrol models if they fit into their whole life cost profile.

For example, the petrol-engined BMW
320i is available with emissions of
124 g/km and combined cycle fuel economy of 53.3 mpg thanks to the manufacturer’s EfficientDynamics technology. Additionally, the new Mazda6 due to launch in January will be available with petrol power returning 129 g/km and fuel economy of 51.4 mpg.

For a fleet with the ‘right’ mileage profile, now could be the time when diesel power’s dominance of the fleet sector starts to be reined in. For a particular group of drivers, petrol power may deliver much sought after cash savings in benefit-kind tax and fuel and tax and fuel savings for business.

The fleet industry is forever throwing up new challenges and opportunities, but some things never change. Cost will always be the decisive decision-making factor.

Further information
www.acfo.org