Article published in Fleet World

Tax isn’t the most fascinating of subjects for most people. However, as a fleet manager a knowledge of tax is unavoidable because every decision you make – including whether you offer company cars or a cash allowance, which cars to put on your fleet, how to finance them, how to pay for maintenance costs, etc – has a tax consequence.

In this article we will look at two taxes that are about to increase sharply and discuss ways you might reduce these.

The first tax is vehicle excise duty. The system is due change from 1 April and there is still time (just) for you to take steps to make some savings.

This chart shows the old and the new VED rates:

*£10 discount for non-electric cars emitting any CO2

#Alternative fuel includes hybrids, bio-ethanol and LPG

There is an additional £310 payable for five years after the first 12 months for cars costing over £40,000 that were first registered on or after 1 April 2017.

After 5 years, the standard annual rate is payable, depending on which fuel the vehicle uses.

We now have a system that is more complicated than before. The first thing to notice is that VED is now going to be payable for the first time on cars emitting less than 101g/km of CO2. Quite a lot of VED, in fact: £680 over four years for a diesel car emitting 91-100g/km (first year rate plus standard rate). You can add another £930 to that if the list price exceeds £40,000. This will annoy fleet managers who made a conscious effort to move their employees into low emission cars.

According to the Department of Transport, the national average emission level for all new cars is 120.8g/km.

The latest BVRLA figures show that new cars added to their members’ fleets in Q4 2016 emitted an average of 110.9g/km. This falls by about 2g/km each year, so we can deduce that the average fleet car will probably be emitting just below 110g/km very soon. VED is currently £20 per pa for those cars or £80 over a four year life, but for cars registered from 1 April that £80 will become a whopping £700 (£1,630 if they cost over £40,000). That’s a hefty increase that won’t have been accounted for in most fleet managers’ budgets.

There is a very small window of opportunity left for you to save that extra amount – order new cars now and have them registered before 1 April. In fact, if you can get any new sub-120g/km car on the road before 1 April you’ll save hundreds of pounds in VED.

The other way you can save VED for a short while after 1 April is by buying (or leasing) a nearly new car, because it’s the vehicle registration date that determines the VED treatment rather than the date you take it onto your fleet. There are always lots of pre-registered cars in the market. Now might be the time to ask your dealer or leasing company if they can get hold of one for you. The lease rental will be quite a bit lower too.

The other tax to be aware of at the moment is benefit in kind (BIK) tax on company cars.

The general rule is that BIK tax is calculated by multiplying the list price of the car by the employee’s marginal tax rate and the ‘appropriate percentage’ shown in this chart.

APPROPRIATE PERCENTAGES FOR CAR BENEFIT CALCULATIONS

The appropriate percentages will rise substantially over the next few years, particularly for drivers of lower-emission cars. Whilst the actual tax paid by these employees will still be relatively low, the annual percentage increases will be high. So, for example, an employee currently driving a car emitting 99g/km will see their appropriate percentage rise from 16% to 23% in just over three years’ time, a whopping 43.75% more than they are paying today.

So what can you do when these employees start grumbling about this steep increase?

One option would be to see whether there are cars that emit lower levels of CO2 that might be suitable to put onto your fleet list.

Another interesting option would be to check to see whether there are savings to be made from encouraging employees to lease their own vehicles direct from your leasing company using a personal contract hire agreement. You would pay them a cash allowance and they could claim for business mileage at the HMRC approved rates. It is important – really important – that you don’t let this become a free-for-all with employees going off and doing their own thing, because very soon you’d find yourself doing more work to ensure that these cars are being taxed, insured and serviced on time.

Yet another option would be to look at setting up an Employee Car Ownership Scheme (ECOS). These have fallen out of fashion but it seems there may be a resurgence afoot, and at least one leasing company has just started offering these to relatively small fleets.

If you want the best possible solution – total control, lowest cost – you could opt for a hybrid ECOS/contract hire scheme. These represent the gold standard in cost-optimisation. They aren’t for the feint hearted but they really do tick a lot of boxes.

Every ECO scheme gets HMRC approval but there was some ambiguity around the treatment of AMAPs in the wording of the draft finance bill relating to salary sacrifice and cash allowances.  This should be resolved within the next few weeks so we won’t go into details here. However, if you decide to explore changes in your funding method, make sure you get professional tax advice.

Professor Colin Tourick

In this article we will be looking at some macroeconomic indicators and the reasons they should be of interest to fleet managers.

I am grateful to Dr. Eleftherios Filippiadis of University of Buckingham Business School, whose recent lecture inspired me to write this article and who provided much of the background data.

There are many macroeconomic indicators affecting UK business. The main ones we will discuss are:

• GDP growth
• Interest rates
• Consumer confidence and
• The budget deficits

There is a strong correlation between GDP growth and UK car registrations. When GDP is increasing businesses are confident to take on more staff and business vehicles, and consumers feel secure enough to buy new cars. The government is forecasting a GDP growth rate of 2% p.a. from 2016 to 2020 (source: Office for Budget Responsibility), which is lower than the 2.9% in 2014 and 2.2% in 2015.

When productivity declines (strikes, failure by businesses to invest in new technology) this reduces the willingness of businesses to invest, and if real wages do not grow (inflation rises faster than incomes or there is an increase in zero hours’ contracts) this reduces disposable income in the hands of consumers. Either will threaten the projected GDP growth rate, making it less likely that employers will increase headcount or add to their vehicle fleets.

A possible Brexit would also threaten the GDP growth rate, as so little is known about what might happen if the UK voted to leave the EU. Markets hate uncertainty and if the electorate votes to Leave the economy might stand still whilst employers wait to find out what’s going to happen next. We would be in uncharted waters.

The official Bank Rate has remained at 0.5% for seven years, significantly reducing costs for UK businesses. There is no expectation of a rise in interest rates this year, though when it does come it will hit companies’ bottom lines and dampen demand in the economy (though savers will rejoice).

Consumer confidence is a key determinant of the state of the economy. If consumers are confident they will go out and spend, keeping the economy buoyant. The Consumer Confidence Index is currently high though it has fallen slightly since the peak in 2014.

The UK government has announced its intention to deliver a surplus on public sector net borrowing by the end of 2019-20 and in each subsequent year. If it fails to balance the books it will need to raise taxes (income tax, corporate tax, indirect tax or all three) which could slow down GDP. This is because higher taxes on companies discourage investment in, and by, businesses, and higher personal taxes reduce consumers’ disposable income.

So, as a fleet manager, what might these macroeconomic indicators mean to you? How might you respond if one of these numbers rose or fell?

Every company is different. Whilst most do well when GDP rises, others fare better when it falls.  Some businesses will do well from Brexit whilst others won’t. There are no rules that work for every company, so from this point on we’ll generalise.

If you see an increase in GDP growth and consumer confidence, things are looking up for the economy. You might expect business to grow. Your company may well expand. More cars, more responsibility, more issues to control. Could this be the time to outsource your fleet management or to invest in some fleet software to help streamline your fleet administration?

If the economy is growing there will be more competition for new recruits. Is it time to review your fleet policy to ensure the cars on offer will be attractive to job applicants?

Conversely, when GDP growth or consumer confidence fall, you may find your company is less willing to invest. This might be the time to think about getting more from your existing assets. Do you need as many company cars? Would you save money if you took on a few pool cars rather than allowing your employees to use their private cars for business mileage? How can you get more out of your fleet budget? Is it time to take more control over mileage claims, perhaps by introducing mileage claim auditing or telematics? Telematics might also reduce your insurance claims and help keep down your premiums.

If productivity in your business were to fall, you may find your fleet budget being cut. You may have to deliver the same amount of corporate mobility and the same number of cars for less. Could this be time to ask your leasing company to come up with a fleet list of attractive cars that staff will like and that will do the job but which will cost less to run? Here we are talking about fuel cost and Class 1A NIC as well as maintenance costs and the monthly lease rental.

At some stage, interest rates are going to rise. If the market expects the Bank Rate to rise, actual market rates may creep up more quickly than the Bank Rate. This will be reflected in the cost of three and four year leases, because leasing companies’ own borrowing costs will rise. It is worthwhile monitoring Bank Rate and leasing company cost of funds (they will generally tell you if you ask).

If you currently fund your cars from working capital, bank overdraft or variable rate finance deals (such as variable rate lease purchase, finance lease or HP) at some stage you will need to decide whether to move to a fixed interest rate funding method (fixed rate HP, fixed rate finance lease or contract hire) to lock in low interest rates for 3-4 years before prices rise.

Keep an eye on the budget deficit. If it doesn’t fall as fast as the government wants they may be tempted to increase taxes. There are no votes in company car tax and taxes on business vehicles. It seems that the best way to protect your business would be to keep on driving down the average CO2 emissions of your fleet. Low CO2 cars tend to be smaller and more efficient, and they cost less to buy, maintain and run than higher-CO2 cars. Zero CO2 cars are still relatively expensive to buy, though for some drivers the fuel cost saving makes the extra cost worthwhile. In any event by moving to lower-CO2 or zero-CO2 cars you’re likely to be protecting yourself and your employees from sudden increases in car-related taxes.

Fleet managers and economics. Four words you don’t often hear mentioned in the same sentence. But economics provides the background for all business decisions and can therefore drive fleet decisions too.

Professor Colin Tourick

University of Buckingham Business School

The International Accounting Standards Board has published a new set of rules – an “accounting standard” – setting how companies should account for leases in their books. This standard has been nearly a decade in the making, though the need to change lease accounting has actually been on the radar of investment companies and academics for more than thirty years.

The business and trade press has been full of articles discussing how these new rules will affect companies’ reported results and the overall attractiveness of leasing.

In this article we will take a rather simpler approach and try to answer the question; At the most basic level, what’s this all about?

All companies publish two key documents annually: a profit and loss account and a balance sheet. The profit and loss account shows revenues, expenses and the difference between them – profits. The balance sheet shows assets and liabilities and the difference between them – shareholders’ funds (or ‘net worth’).

If a company buys a car it shows this on its balance sheet as an asset. In the old days, thirty or so years ago, if a company leased a car it didn’t disclose it on its balance sheet. It simply showed the lease rentals as an expense in its profit and loss account.

There are two types of leases; finance leases and operating leases. A finance lease is one where the risks and rewards of ownership are taken by the lessee (the hirer). The key risk we are interested in here is the risk in the residual value of the car – what it will be worth at the end of the contract. If the lessee bears this risk it’s a finance lease and if the lessor (the leasing company) bears this risk it’s an operating lease.

In the 1980s there was a debate between academics, investment companies and the leasing industry about the nature of finance leases. The academics and investment companies said that a finance lease was effectively a type of a loan that should be disclosed on the balance sheet as a liability, rather than the company just showing the rentals in the profit and loss account. The asset should be shown on the balance sheet as if the company had bought it and used a loan to finance it. The leasing companies said this was wrong and that balance sheets should only show the assets that companies actually owned. The leasing industry lost this argument and the accounting rules were changed in the UK (Statement of Standard Accounting Practice 21) and then internationally (International Accounting Standard 17), putting finance leases onto companies’ balance sheets for the first time.

Finance and operating leases have been treated differently ever since. As well as showing finance leases ‘on balance sheet’, companies also have to disclose details of their operating lease obligations in notes to the accounts.

But the investment companies were still not happy. They pointed out that the distinction between finance leases and operating leases was not particularly helpful to them. They wanted to know what assets were being used in the company, regardless of how these were being financed, so they were manually adjusting companies’ reported results.

Their argument went something like this. Imagine two identical companies that operate in the same market and use the same assets acquired at the same time. Company A buys its assets and funds them by borrowing money from the bank. It makes monthly loan repayments and then repays a lump sum after a few years when it sells the assets. Company B leases its assets from a leasing company, makes monthly payments and then hands back the assets at the end of the lease. The cash flows of these two companies could in fact be identical, but under the current rules Company A shows these assets on its balance sheet and Company B doesn’t. If an investment analyst wants to see which company is making best use of its assets they calculate ‘return on assets’. Company B will have fewer assets on its balance sheet so its return will look higher. So to get a realistic picture the analyst will have to trawl through the notes and try to work out a value for the assets.

There has been another protracted series of discussions about lease accounting lasting nearly a decade, and the academics and investment companies have once again prevailed. The result is a new set of accounting rules called “International Financial Reporting Standard 16, Leases”, which replaces IAS17. Listed companies, banks and some other ‘public interest’ businesses have to comply with IFRS16 for accounting periods commending on or after 1 January 2019 but many will need to change their systems to comply with the new rules well before that in order to be able to show 2018 comparative figures in their 2019 accounts. The vast majority of businesses won’t be affected unless we see a further change in the rules.

Under the new rules the distinction between finance leases and operating leases disappears. The standard-setters have said that even when a company leases an asset under an operating lease, can never own that asset and doesn’t do anything other than pay rentals then hand the asset back at the end of the contract, the lessee still does have an asset; the right to use the asset. It is this which has to be shown on the lessee’s balance sheet (where it will need to be depreciated) and there will be a corresponding liability on the other side of the balance sheet.  Lessees’ profit and loss accounts will have to include depreciation and interest cost on these assets and not the rental charge. As interest cost is always higher in the earlier stages of finance agreements than later on, lessees will now report greater costs in the early years of a new lease than before.

Short-term or low value leases are exempt from the new rules.

The review of lease accounting was a joint exercise between American and international standard-setters, but they could not agree on some points so it is likely that once the US Financial Accounting Standards Board publishes its new standard this will differ from the international standard, adding a degree of complexity for international groups quoted on multiple stock exchanges.

We will have to wait to see whether the European Commission approves of the use of IFRS 16 in Europe, and how (and whether) the tax rules will change following these accounting changes.

As it currently stands, most commentators don’t believe that these changes will have a significant impact on the attractiveness of operating leases (such as contract hire), because the vast majority of companies have chosen operating leases because they are a great form of financing rather than because of any accounting considerations.

Nonetheless, these changes will have a dramatic affect. The IASB believes that affected businesses have US$3.3 trillion of lease commitments, over 85 per cent of which do not appear on their balance sheets.

Professor Colin Tourick

Grant Thornton Professor, University of Buckingham