Fleet manager decision-making

With cost reduction high on the agenda for public sector fleet managers, ACFO director Jullie Jenner talks us through the implications of tax changes in the Chancellor’s 2014 budget

New car sales are acknowledged as a barometer of the health of the UK economy, so it is good news that there is firm evidence to show organisations are replacing vehicles at levels not seen since before the 2007 recession.
    
Fleet registrations are up 9.6 per cent year‑on-year in the first four months of 2014 with business sales – registrations to employers running fewer than 25 vehicles – up 19.2 per cent over a similar period, according to official figures from the Society of Motor Manufacturers and Traders (SMMT).
    
What’s more, the SMMT is so confident that the upward curve will continue that it has increased its 2014 new car sales forecast and is predicting that registrations this year will be 6.1 per cent up on last year at 2.403 million units.
    
That is undoubtedly excellent news for motor manufacturers and franchise dealers, but cash and credit remain tight for many organisations. As public sector budgets continue to be under the spotlight so fleet manager decision-making is a balancing act of tightrope proportions.
    
So, do fleet operators continue to manage existing vehicles despite the ageing process meaning service, maintenance and repair costs are likely to escalate, or do they invest in new vehicles powered by the very latest fuel efficient, emissions-busting engine technology and featuring the very latest safety equipment and other gizmos?

Benefit-in-kind taxes
As ever it is a tough call and each fleet will have a different solution, but one issue that is critical in the company car decision-making process is future benefit-in-kind taxation rates.
    
Cost reduction remains the number one priority for all fleet decision-makers so using whole life costs as the basis to select new vehicles versus existing models is a key parameter in the detailed analysis that must be undertaken alongside the wider business need.
    
ACFO was therefore delighted that Chancellor of the Exchequer George Osborne responded in the March Budget to our requests for company car benefit-in-kind tax rates to be announced well into the future.
    
Historically, only rates for three years, and occasionally four years in advance have been known. At meetings with HM Treasury and HM Revenue and Customs officials, ACFO repeatedly asked for benefit-in-kind tax rates to be known for what, in the vast majority of cases, will be the entire operating cycle of a vehicle.
    
Through the recession years since 2008, businesses have moved to longer replacement cycles with company cars driven into a fourth and even a fifth year in some cases, which has left employees and businesses in the dark as to what their benefit-in-kind tax bills will be in their final year or two.

Back to the drawing board
The Chancellor’s announcement of tax rates to the end of 2018/19 further aids fleet managers and company car drivers’ decision making as vehicle selection can be based on the clear knowledge of what benefit‑in‑kind tax bills for drivers and Class 1A National Insurance liability for employers will be for the lifetime of a vehicle.
    
However, fleet managers must return to the drawing board in compiling company car choice lists if benefit-in-kind tax increases over the next five years are to be kept to an absolute minimum for employees with some facing a tripling in their liability due to increases in the percentage rates linked to CO2 emissions and those currently at the wheel of a zero emission electric car will see a massive 1,300 per cent increase.
    
Company car benefit-in-kind tax changes    announced in this year’s Budget have sent confusing signals to fleet decision-makers and drivers with those at the wheel of lower emission cars (120g/km and below) facing the highest tax increases over the next five years.

Increasing rates
While Chancellor of the Exchequer George Osborne said in his Budget statement that he was using the company car tax system to “increase the discount” for ultra low emission vehicles – defined by the Government as models with CO2 emissions of 75g/km and below – the reality is that benefit-in-kind rates for those vehicles will increase at a significantly faster rate over the next five years than for higher emission cars (see table below).
    
For example, an employee choosing a pure electric Nissan Leaf (0g/km) will have nought per cent tax liability in 2014/15 rising to paying 13 per cent of the model’s P11D value over the next five financial years. Meanwhile, an employee choosing a Toyota Plug-in hybrid (49g/km) will see their tax charge rise from five per cent in 2014/15 to 13 per cent in 2018/19 – an eight percentage point increase and a 160 per cent increase in their tax liability.

An employee selecting a vehicle with emissions of 51‑75g/km (the Government’s Vehicle Certification Agency currently lists just one vehicle as being on sale in that emissions bracket, the Porsche Panamera Hybrid  at 71g/km) will see the percentage of car P11D value taxed rising from five per cent in 2014/15 to 16 per cent in 2018/19, which represents a 220 per cent increase.
    
Move up a further tax band threshold and the driver of a Lexus CT200 Hybrid (87g/km) will see the tax charged moving from the 11 per cent bracket to the 19 per cent bracket over the next five years – a 73 per cent increase.
    
That eight percentage point rise for the Lexus driver is identical to the rise for the employee at the wheel of a Ford Fiesta 1.0 Zetec (99g/km) and for other drivers choosing cars with emissions up to 185g/km as above that level the percentage increase tails off due to the P11D value tax ceiling at 37 per cent.

However, because the Government has chosen to abolish the diesel tax surcharge in 2016/17 the tax ‘winners’ will be employees at the wheel of diesel models. An employee choosing a BMW 116d Efficient Dynamics (99g/km) will see the tax charge rising from 15 per cent to 20 per cent, a 33 per cent increase over the next five years having actually reduced in 2016/17 compared with 2015/16.

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 more than 6p 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 Mazda3 1.5 100 SE is available with emissions of 119g/km and combined cycle fuel economy of 55.4mpg. Additionally, the Toyota Yaris delivers emissions of 111 g/km and fuel economy of 58.9 mpg. Move up the company car hierarchy and a BMW 320i is available with emissions of 124 g/km and combined cycle fuel economy of 53.3 mpg.

Electric
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-in-kind tax and fuel.
    
The Government recently announced that it would be spending £500 million to boost the ultra low emission vehicle industry and help drivers both afford and feel confident using electric and plug-in hybrid vehicles.
    
That cash includes further support for the Plug In Car Grant that gives fleets up to £5,000 off the cost of an electric vehicle and backing for the Plug In Van Grant that gives a discount of up to £8,000.
    
Notwithstanding that cash support, ACFO continues to believe that for many fleet chiefs, particularly with the requirement for microscopic cost analysis, such technology is an expensive step into the unknown.
    
ACFO’s recent and highly successful Electric Vehicle Seminar demonstrated that there was huge interest from the fleet community in such technology, but it also highlighted that any utilisation was likely to be niche amid concerns around high list prices, operational costs and future tax rises for such models.
    
With cost management the number one priority across the public and private sectors, many organisations in the private sector have recognised that employees driving their own cars on business trips – the so-called ‘grey fleet’ – is a huge financial, as well as duty of care, burden.
    
Employee mileage
It is time that the public sector also looks at why it relies so heavily on employees driving their own cars on business trips.
    
Taking the financial argument first: HM Revenue and Customs’ tax‑free mileage rate for an employee using their own car on business is 45p a mile for the first 10,000 miles and 25p a mile thereafter.
    
The figures – the tax-free Approved Mileage Allowance Payment – are fully audited based on a matrix of costs. Why, therefore do many public sector organisations pay a significantly higher mileage reimbursement rate? Although, a number of public sector employers have cut their mileage rates given the overriding requirement to cut costs.
    
However, it is not sufficient for public sector organisations to consider mileage allowance levels; they should also focus on their compliance with duty of care legislation as to whether from a health and safety viewpoint they can ‘afford’ to allow a member of staff to drive their own vehicle on business.
    
If employees, whether in the public or private sectors, are allowed to drive their own cars on business then it is essential that their employers have a comprehensive document-related audit trail in place.

That involves, for example, checking driving licence validation regularly; ensuring any driving offences resulting in points or a ban are immediately reported; checking the correct insurance cover is in place as well as valid road fund licences (Vehicle Excise Duty), and that the vehicle is serviced and maintained in accordance with manufacturer recommendations and a valid MoT is in place if the vehicle is more than three years old.
    
Safety
Recently, the Health and Safety Executive published an updated version of its long established managing work-related road safety best practice guide, ‘Driving at work: managing work‑related road safety’, which was first published more than a decade ago. This is the definitive guide for any organisation with employees who drive for work in helping them prevent needless crashes and casualties and drive down costs.
    
The cost of compliance and the financial cost of reimbursing staff are two of the key reasons why many private sector organisations are doing the maths and calculating that actually it is better value, and safer from a duty of care perspective, to axe the ‘grey fleet’.
    
They have conducted studies and concluded that providing a company car, utilising vehicle rental for business trips, encouraging the uptake of public transport or utilising video/tele conference facilities are, all round, far more astute options.
    
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.