The-new-tax-rules-for-cars-emitting-less-than-120gmkm-and-up-to-

							   The new tax rules for cars emitting less than 120g/km and up to 160g/km

April 2009 saw the start of a new regime on the treatment of company purchased
cars. Now whether a company buys or leases its cars it will be affected, although the
impact on fleets where all or the majority of their cars are in the low emission bracket
will be minimal.

The new capital allowance system is aimed at encouraging fleets to run cars that
produce CO2 emissions under a 160g/km benchmark.

It also penalises those that run vehicles with emissions over that benchmark,
although an anomaly has made some high-polluting cars cheaper to hire.

From April 2009 expenditure on cars above 160g/km will attract a 10% writing down
allowance (WDA) and expenditure on cars of 160g/km or below will attract the normal
20% WDA. It is important to note that the 100% first year capital allowances remains
for cars emitting 110g/km CO2 or less.

Existing cars, whether purchased or leased, will remain under previous rules for up to
five years.

“The impact on fleet operators depends on a number of factors, but for a typical fleet
vehicle emitting under 160g/km and over 110g/km this means it will take 10 years to
claim 95% of the available capital allowances, but for a vehicle emitting over 160g/km
this rises to more than 25 years.

The effect of this will be that outright purchase fleets will suffer more, although
leasing companies will be affected too, so customers may see rental increases,
particularly for higher emitting vehicles. The leasing industry estimates that an
average sub-160g/km car could be up to £30 a month cheaper than a similar car over
the benchmark.

The message is clear and that is that all fleets need to review their acquisition
method. However under the new regime, leasing is expected to be the most tax-
efficient acquisition method in nearly all cases.”

 “The new regime makes contract hire cheaper than outright purchase for cars below
160g/km but the main losers are low-priced cars that emit more than 160g/km.The
new rules make such cars a price trap, even when heavily discounted.

For sub-160g/km leased cars costing less than £12,000 there will be no change –
100% of any rental payments will be tax allowable, and for any leased sub-160g/km
car costing more than £12,000 all of the rentals will also be allowable.

However, for leased cars over 160g/km and costing less than £17,000 there will be a
reduced level of tax relief. Clearly it is important to note that the monthly rentals
charged by the leasing company for these cars are likely to increase as they pass on
the impact of the delays in receiving writing down allowances.

The important message coming from the leasing industry is that for the majority of
cars, the amount of tax relief on the lease payments will increase. However for cars
with CO2 emissions over 160g/km, any benefit is likely to be eroded by the fact that
the leasing company is likely to increase the rental costs for these vehicles.”

Whilst a consensus exists that leasing is the way forward for most, there are still
doubts about the future cost of leasing rentals. Industry commentators advise that
nobody knows how the leasing companies are going to modify their pricing to cover
their capital allowance cost increases.

“Clearly they would most likely be looking to pass on any increase in their costs.

The difficulty for the industry is to ensure that the potential extra costs incurred by the
tax changes are covered by the pricing, but with commercial pressures to be
competitive, not to price themselves out of the market.

It seems reasonable to expect a period of rental consolidation as competitors
examine each others‟ positions, possibly creeping up in price through the year”

The position with respect to the new disadvantages with outright purchase of cars
exceeding the 160g/km benchmark is clearer.

This is where the new measures will have the biggest impact, which is the Treasury‟s
aim. This is because at the point of disposal a large portion of the depreciation will
remain in the pool and will take many years to feed through the corporation tax
computations - the delay in receiving that tax relief has a cost to the owner.”

The Government‟s intention to drive change by modifying company car tax is clear
and present and has been used very effectively in the recent past.

The switch to diesel company cars (following the change to CO2 based personal
benefit taxation) is evidence that appropriately targeted taxation can alter the
behaviours and choices of companies and their employees alike.

This new tax system will result in a similar refocusing of the business cars fleets.

Immediate steps

      Carry out a comprehensive fleet acquisition and funding assessment now
      Construct a car choice policy around the new tax rules
      Introduce a 160g/km emissions cap.
      Pay particular attention to cars with emissions just under 110g/km or
       160g/km.
      The addition of some accessories - alloy wheels or roof rails - can easily push
       a vehicle over the emissions threshold figure and dramatically increase its
       whole-life cost so be careful
      Be aware that it is the emission figure on the V5 registration document, not
       what is printed in the brochure that counts
      If you must have high-emission vehicles as part of the fleet, do the sums
       carefully looking at all the factors.
      Consider the balance between changing acquisition methods and any actual
       savings to be made
        Always use whole life cost calculations to set fleet policy and pay particular
         attention to tax implications of a particular vehicle
        If you really want to future-proof your policy it might be worth capping CO2
         emissions to 140g/km or below as it is the Governments intention to regularly
         review tax thresholds in line with CO2 emissions.

Positive points

        Sub-110g/km cars offer substantial savings because of the 100% first-year
         writing down allowance, low VED rates and low BiK rates
        Leased sub-160g/km cars priced above £17,000 will benefit most from the
         new tax regime

Negative points

        Lower priced cars just exceeding the 160g/km threshold
        Outright purchase cars over 160g/km

If you

Lease cars over 160g/km

        Vehicles costing approximately £21,000 or less will be more expensive.
        But vehicles costing over approximately £21,000 will cost less after tax.

Outright purchase cars over 160g/km

        These will generally cost more because writing down allowances are
         restricted to 10% per annum.
        For cars costing over £12,000 there is no individual balancing
         allowance/charge at disposal – instead the allowance/charge is left in the pool
         and amortises to perpetuity.

Lease or buy sub-111g/km cars

        The cost of ownership reduces significantly for these cars.
        The impact will vary, but rental rates will decrease by up to 5% on these cars
         on 36-month contracts.

Fleet examples

A fleet of 100 cars between 161 and 200g/km CO2

        will cost £67,900 more to outright purchase
        will cost £58,080 more to lease
         (Assumptions: capital cost £18,000, residual value £5,400, 3-year change
         cycle)
A fleet of 10 high-polluting (over 220g/km) vehicles over £65k

      will cost £14,280 more to outright purchase
      will cost £19,296 LESS to outright purchase
       (Assumptions: Capital cost £70,000, residual value £28,000, 3-year change
       cycle)

The common sense approach is

      Select lower-emitting (160 g/km CO2 or less) wherever possible
      If you have to select higher-emitters as a significant part of the fleet, do the
       sums carefully looking at all the factors. Consider the balance between
       changing acquisition methods and any actual savings to be made

Outright purchased vehicles

It has always been the case that companies can offset all of the depreciation incurred
when owning vehicles against tax and it is still so. However, the timing of tax relief
will change for vehicles purchased after 1 April 2009.

Vehicles purchased prior to this date will continue to attract tax relief in the previous
fashion.

For vehicles purchased prior to 1 April 2009, writing down allowances can continue to
be claimed at 20% per annum of the reducing balance up to a maximum of £3,000 in
any year.

When the vehicle is sold, any unclaimed depreciation can be claimed in the year of
disposal.

Vehicles with CO2 emissions of 110g/km or below enjoy 100% first year allowances.

For vehicles purchased after 1 April 2009, the rules for writing down allowances will
change.

Writing down allowances will still be claimed on a reducing balance basis.

For cars with CO2 emission between 111g/km up to 160g/km the writing down
allowance will remain at 20% and for cars with higher emissions writing down
allowances will be available at only 10% per annum. The current £3,000 annual cap
will also be removed.

The most significant difference however will be that there will be no balancing
allowance for unclaimed depreciation when the vehicle is sold – any surplus will
remain in the pool and continue to attract writing down relief on a reducing balance.

Outright purchased vehicles: 111g/km to 160g/km

The combined effect of the removal of the £3,000 cap and the balancing allowance
will have a negligible impact on the overall timing of tax relief.
There will therefore be an insignificant impact on the after-tax cost of purchasing
these vehicles.

Outright purchased vehicles: Over 160g/km

This is where the new measures will have the biggest impact, which is in line with the
Treasury‟s intention.

The reduced annual writing down allowance of 10% per annum and the removal of
the balancing allowance means that at the point of disposal a large portion of the
depreciation will remain in the pool and will take many years to feed through the
corporation tax computations.

Although ultimately full tax relief will be available, the delay in receiving that tax relief
has a cost to the owner.

Outright purchased vehicles: Summary

It can be seen clearly that the tax relief available for cars with CO2 emissions of
160g/km or below will not be significantly impacted after April.

However, cars with CO2 emissions over 160g/km will have significantly reduced tax
relief if they are purchased after 1 April.

Companies should be aware of this additional cost when designing their car policies.

Leased vehicles:

The tax reforms are not restricted to companies that purchase vehicles outright.
There are also changes relating to the tax relief that companies can claim when they
lease cars.

Prior to 1 April 2009, the Expensive Car Leasing Disallowance (ECLD) governed the
proportion of rental payments that a company could offset against tax.

This mechanism was founded around a £12,000 price point.

For vehicles costing less than £12,000, full tax relief was available.

For vehicles costing more than £12,000 only a proportion of the rental payments
were available for relief.

This proportion got progressively less as the cost of the vehicle increased.

From 1 April 2009 the Expensive Car Leasing Disallowance was replaced with a new
CO2 based mechanism.

Again 160g/km is the pivotal number.

Companies are now able to claim full tax relief on rental payments where the car has
emissions less than or equal to this level.
For cars with higher emissions, 85% of the rental payments will be available for tax
relief.

Leased vehicles: 160g/km and below

For cars costing less than £12,000 there will be no change – 100% of any rental
payments will be tax allowable.

For any car costing more than £12,000 all of the rentals will also be allowable.

The removal of ECLD will mean therefore that cars delivered after 1 April 2009 will
cost less to lease than cars delivered prior to that date.

For a car costing £20,000 this increase in tax relief equates to more than £300 per
annum, rising to £500 for a car costing £25,000.

Leased vehicles over 160g/km

For cars costing less than £17,000 there will be a reduced level of tax relief. For all
other cars there will be an increased level of tax relief.

It may appear perverse to think that high emitting cars will cost less to lease after 1
April.

However, it is important to note that the monthly rentals charged by the leasing
company for these cars are likely to increase as they pass on the impact of the
delays in receiving writing down allowances.

Leased vehicles: Summary

For the majority of cars, the amount of tax relief on the lease payments will increase.

For cars with CO2 emissions over 160g/km, any benefit is likely to be eroded by the
fact that the leasing company is likely to increase the rental costs for these vehicles.

The way forward

The Treasury‟s intention is to encourage the ongoing reduction in greenhouse
emissions from cars used by businesses.

It seems clear that the reforms will indeed provide the required incentives for
companies to select more environmentally sound vehicles for their fleet.

It should be noted that the improved tax relief available for leased cars will increase
the appeal of leasing more generally when compared with purchasing.

Companies that currently purchase vehicles should revisit this decision – it may be
that leasing now presents a lower overall cost.

There is considerable upward pressure on company car running costs at the moment
and fleets are open to ideas on how to make efficiencies.
Building a car choice policy around the new tax rules is perhaps the biggest single
move they can make.

By restricting car choice to sub-161g/km, companies will be able to make
considerable savings on every vehicle, every year. It is an excellent opportunity to
offset increases in lease rates that are inevitably starting to come into effect almost
across the board.

However, if you really want to future-proof your policy it might be worth capping CO2
emissions to 140g/km or below as it is the Governments clear intention to regularly
review tax thresholds in line with CO2 emissions.

Research that we have just carried out shows that general economic conditions and
cost concerns are the two biggest worries facing fleet decision makers in 2009, and
simple changes in car choice will play a large part in addressing these concerns.

Limiting car choice to sub-161g/km models involves very little compromise, with
models available in most classes that are attractive to employees.

Most mainstream model ranges provide a selection of models that fall easily into this
category but there are executive cars, MPVs and even 4x4s and sports cars that
qualify.

Of course, this is not just also a means to make your fleet cheaper to lease but also
cheaper to run through lower fuel costs and also much greener.

Drivers also potentially benefit through lower CO2-based benefit in kind taxation. It is
a situation in which everyone wins.

The implications of the new capital allowance scheme are such that fleets should be
basing their policies on the wholelife costs of ownership and paying particular
attention to the taxation impacts. Businesses will need to steer away from list price
based fleet policies and may need to become more prescriptive about the vehicle
choices on offer to their drivers.

This will ensure that an appropriate balance is maintained between cost, choice and
responsibility.

Examples

1. A fleet of 100 leased cars all of which produce over 165g/km but less than
200g/km

Rentals will increase for these cars.

The increase will depend fundamentally on the price of the purchase price of the
vehicle being leased.

For a fleet split 60:40 between essential user and perk cars this would typically
increase by around 3%.
This would increase monthly rentals typically by £10,000 to £15,000 per annum.
Because the writing down allowance on these vehicles reduce from 20% to 10% from
1 April.

2. A fleet of 100 outright purchased all of which produce over 165g/km but less than
200g/km

As with 1 above the increase will depend on the purchase price of the car, the rate at
which the company pays tax and the companies external borrowing rates (its
weighted average cost of capital) so it is difficult to be precise about the costs.

However for a fleet split 60:40 between essential user and perk cars, a company tax
rate of 28% and a weighted average cost of capital of 9% then these vehicles would
cost approximately £25,000 more per annum, an increase of around 7%.
Again this is because the writing down allowance on these vehicles reduce from 20%
to 10% from 1 April.

3. A fleet of 10 highly polluting (over 220g/km) over £65,000 cars

The new tax rules will increase rentals by approximately £3,000 per annum, an
increase of around 2%.

However, because of the impact of the fixed leased rental restriction the post tax
costs of leasing with the new tax rules will fall by around 6% i.e., by over £8,000 per
annum.

4. A fleet of 10 outright purchased high polluting (over 220g/km) over £65,000 cars

The post-tax cost of ownership will increase by around 4-6% ie by around £6,000 per
annum, because the writing down allowance on these vehicles reduce from 20% to
10% from 1 April.

In addition, there is no individual balancing allowance/charge at disposal.

What the changes mean to fleets that lease their cars

The impact can vary vehicle by vehicle but some high level results are:

Less than 160 (but greater than 111 g/km) emitters and below £12,000 list price

The impact is broadly neutral at both the pre and post tax level because these cars
continue to get writing down allowances at 20% per annum and they do not incur a
lease rental restriction in either the old or the new tax regime.

Less than 160g/km emitters and cost over £12,000 list price

These will be neutral at the pre tax (rental) level but after tax will be cheaper because
the user will not suffer any lease rental restriction

Over 160g/km emitters

Rentals will increase for these vehicles because of the reduction in writing down
allowances available.
Those vehicles up to approximately £21,000 will be more expensive after tax
because they will also suffer a higher or comparable lease rental restriction.

Vehicles over approximately £21,000 will cost less after tax because although the
writing down allowances available to the leasing company are lower the lease rental
restriction is a flat 15% from 1 April.

The tipping point of £21,000 is approximate and will vary on the financial
characteristics of the deal (cost, taxable list, rental).

What the changes mean for fleets that outright purchase their cars

Less than 160 emitters and below £12,000 cost are neutral because the company will
continue to attract writing down allowances at 20% per annum.

Less than 160 emitters and cost over £12,000 will generally cost more relative to
their cost under the old tax regime because writing down allowances are restricted to
10% and there is no individual balancing allowance/charge at disposal.
However, there maybe some instances where the post tax cost of ownership
decreases.

Over 160 emitters

These will generally cost more because writing down allowances are restricted to
10% per annum.

For cars costing over £12,000 there is no individual balancing allowance/charge at
disposal – instead the allowance/charge is left in the pool and amortises to
perpetuity.

Sub-111g/km cars

Companies can write the whole of the purchase price off against tax in the year of
acquisition.

This means that the cost of ownership reduces significantly for these cars. The
impact will depend on the financial characteristics of the car being leased/used but
rental rates will decrease by up to 5% on these cars for 36 month contracts.

This combined with a very low level of Road Fund License (no more than £35 up to
120g/km) and the benefit in kind rules mean that the tax advantages for very low
emitting cars can make for some very low cost motoring for company car users.

Benefit in kind rules already in force include a 10% band for the scale charge for cars
with a CO2 emissions figure of exactly 120g/km or lower.

These cars are called 'qualifying low emissions cars' in the legislation, QUALECs for
short. The 3% supplement for diesels continues to apply to QUALECs.

What’s changed?

For company cars acquired from 1st April 2009 there are two changes.
Existing company cars, whether purchased or leased, will remain under previous
rules for a period of up to five years – longer than the vast majority of replacement
fleet cycles.

Capital allowances

The significant change sees the removal of the „balancing allowance/charge‟ when
cars are sold.

Under the previous regime this meant – effectively – that capital allowances for the
depreciation of company cars could be claimed in full over the period of ownership.
Under the new rules any balance of unclaimed allowances remains in a „pool‟ which
continues to be written down over time.

For cars emitting more than 110g/km CO2 and up to 160 g/km capital allowances can
be claimed at 20% per annum.

For cars emitting over 160 g/km this falls to 10% per annum.

The impact depends on a number of factors, but for a typical fleet vehicle emitting
under 160 g/km (and over 110g/km) this means it will take 10 years to claim 95% of
the available capital allowances, but for a vehicle emitting over 160g/km this rises to
more than 25 years.

So for businesses buying their company cars the delayed tax allowances effectively
mean additional costs.

These changes will affect leasing companies too, so those customers may see rental
increases, particularly for higher emitting vehicles.

100% first year capital allowances remain available for cars emitting 110g/km CO2 or
less.

Lease rental restriction

In addition, the lease rental expensive car disallowance – which varies on a complex
formula currently according to the vehicle‟s price – has been replaced by a 15%
rental disallowance for cars emitting over 160 g/km CO2, below which there will be no
restriction.

Should I lease or buy?

To some extent this equation should still consider your individual business
circumstances, but these changes do swing the balance more towards leasing.

The impact of the capital allowances changes (for vehicles emitting over 110 g/km
CO2) will be felt regardless of acquisition method, either through the timing of capital
allowances you are able to claim, or increased lease rates.

However leasing companies continue to be able to recover the VAT on car
purchases and, despite the 50% VAT disallowance on the rental, this typically offers
the lowest cost of acquisition.
What does this mean for my fleet?

These changes mean that all fleets should probably take the opportunity to review
fleet policies.

Despite the apparent complexity what is clear is that choosing lower emitting vehicles
will result in lower fleet costs, not just as a result of these changes, but also through
reduced fuel and employers‟ National Insurance costs.

There are benefits for your driver too, with lower emitting vehicles attracting lower
benefit in kind costs, and reducing their own private fuel bills.

What’s changing?

From April 2009 the level of capital allowances that can be claimed for the purchase
of motor cars will be determined by the vehicles‟ CO2 emissions.
In addition, the lease rental expensive car disallowance – which varies currently
according to the vehicle‟s price – will be replaced by a 15% rental disallowance for
cars emitting over 160g/km CO2, below which there will be no restriction.

How does this affect my business?

The impacts on business will depend on the choice of vehicles, current funding
methods and individual circumstances.

In general, for most companies, the cost of running vehicles emitting over 160g/km
CO2 will increase, in line with the government‟s aim of using taxation to drive
environmentally „friendly‟ behavior.

However the position is not entirely straightforward.

For those companies that use contract hire to acquire their cars, those with lower
CO2 emissions that are priced above £17,000 are likely to benefit most.

What happens to my existing fleet?

The existing „expensive cars‟ regime will remain in place for a „transitional period‟ of
five years.

Any balance of unrelieved capital expenditure after that time will be added to the
general pool.

For further information please contact:

Website www.cars4biz.com

E-mail info@cars4biz.com

Telephone 0845 644 6844