Fleet turns over a new leaf

MT Fleet Car Special: Faced with CO2-based taxation, fleet has cut costs by ditching the gas-guzzlers in favour of smaller engined, low emissions models. But now, it's starting to look as if the Government may respond with new taxes to top up its revenue.

by Ian Wylie
Last Updated: 09 Oct 2013

Denis Keenan, the chief executive of a successful data provider to the banking, finance and automotive industries, is about to be chauffeured from KeeResources HQ in High Wycombe to Heathrow for a flight to Rome. He'll be whisked almost silently to the airport in one of the company's fleet of 20 Nissan LEAFs - small electric hatchbacks that travel up to 100 miles on a single charge.

'If you're going to drive 150 miles, you wouldn't use the LEAF,' admits Keenan, 'and small electric vehicles couldn't be the only vehicle in a fleet. But in the right context, it's very cost effective. The car is just such a joy to drive that everyone wants to use it.'

The LEAF is small and eco-friendly and no milk-float either. But it is also a long way from the sleek and large-engined saloons that have traditionally dominated the executive end of the company car park. The CO2 policies of successive governments have successfully encouraged companies to choose greener vehicles for their fleets. And from next April, the UK will become the first country to make it compulsory for its biggest companies to include emissions data for their entire organisation, including cars and vans, in their annual reports.

Initially, the new legislation will affect only 1,000 businesses listed on the main market of the London Stock Exchange, but it could be extended to all large companies from 2016.

It's leading some within the company car sector to worry that the government might realise its policy has been too successful - and plot new ways of extracting tax revenues from fleets.

'Company car drivers have been downsizing to smaller and more economical cars for some time, due to the emissions-based company car tax regime introduced in 2002,' explains Toby Poston, spokesman for the British Vehicle Rental and Leasing Association (BVRLA).

This regime incentivised drivers and employers to opt for cars with better CO2 emissions by offering them lower tax bills - via company car benefit-in-kind tax, vehicle excise duty and increased capital allowances. And since lower emissions have a direct correlation with fuel efficiency, smaller, lower emission cars became a no-brainer for companies and employees seeking to reduce their motoring costs.

Most larger companies have a fleet policy that enables them to set thresholds for the company cars they allow their drivers to use. They might set this threshold according to the list price of the car (eg, maximum price of £25,000), monthly rental price (eg, £400 per month), size of engine (eg, 2.0 litres) or, most likely, the car's emissions (eg, under 160g of CO2/km).

According to Poston, BVRLA members account for a fleet of around 1.7 million business cars and the average CO2 emissions for new cars added to that fleet last year was 130 g/km - down from 150 g/km in 2008. The average for all new cars sold last year, including non-fleet, was 138.1 g/km. 'The image of the "corporate gas-guzzler" is out of date,' he maintains.

But, of course, company cars have to be fit for purpose. A sales rep clocking up 50,000 motorway miles a year is unlikely to be happy, or able to do his or her job properly, in a tiny-engined supermini suited to zipping around town. 'The good news is that, across the sector, manufacturers have done a tremendous job in reducing emissions,' reckons Poston, 'which means that chief executives can keep their highly efficient diesel-engined Mercedes, Jaguar or BMW.'

Likewise, employees driving frequent but short urban journeys are no longer confined to big saloons that are difficult to park and expensive to refuel. Figures from the Society of Motor Manufacturers and Traders (SMMT) show that the proportion of superminis within the fleet sector has increased from 23% in 2002 to more than 27% last year.

Yet Julie Jenner, chair of the Association of Car Fleet Operators (ACFO), cautions against overstating the trend towards downsizing.

'I don't think fleets are consciously making decisions to downsize from, for example, Ford Mondeos to Ford Focuses,' she says, 'but they are more aware of how lower CO2 emission vehicles enjoy higher mpg and therefore lower fuel costs.

'So employees are still climbing into the cars they want to drive, whether that's an Audi A4, BMW 3 Series or whatever - but they are choosing the greener version. They are doing that not necessarily because it's the right thing to do, but in these difficult times companies and employees are more cost conscious.'

And the size of company car you drive remains a potent status symbol, says Martin Brown, managing director of Fleet Alliance, which manages more than 10,000 vehicles. 'People will look at more economic engines, but they still like the bigger car. There's still a status element to their choice. For example, the 3 Series remains BMW's most prominent car. It has created a wider and more diverse product range, including the successful 1 Series, but employees still want a bigger or sexier vehicle in the car park than the person below them.'

Fiat's fleet operations manager, Gerry Southerington, admits that within the fleet segment, the car-maker's dinky but popular 500 model appeals mostly to public sector organisations and salary sacrifice drivers - those able to take advantage of schemes that allow them to buy cars out of their pre-tax earnings. 'Rather than finding its way into the general corporate fleet, it's most popular with user-chooser cash customers,' he says. 'My team is finding that CO2 is important to fleet buyers - cars are being chosen primarily according to economy and emissions criteria - but that doesn't mean physical downsizing.'

However, new technology, such as Fiat's TwinAir engine, means that diesel is no longer the only route to low emissions. While about two-thirds of company cars are currently diesel, Brown says he detects a return to petrol. 'In recent years, many businesses have operated a diesel-only policy, with perhaps exceptions for company directors. But as these new petrol engines come in, I see the diesel numbers dropping over the next five to 10 years.'

There's just one downside to this good news of greener, more efficient company cars: falling tax revenues. In these times of austerity, is there a chance that government might seek to extract more from the fleet sector?

'We have supported the green agenda, which the government wanted us to do,' claims ACFO's Jenner. 'The worry now is that the government has been so successful that it needs to start clawing back revenue again. If every driver is choosing a lower-emitting vehicle, the government may have to hit them with something else.'

'Purely in carbon terms, the government has done a fantastic job,' agrees Brown at Fleet Alliance. 'The fleet market and drivers have responded more quickly than the policy-makers would have imagined. But the books won't balance if fleets become too green. We're not seeing any hints yet of how policy might change, but I think it will come in five years.'

Paul Everitt, chief executive of the SMMT, says car manufacturers recognise the pressure on government to raise revenue, but are hoping for a considered response. 'We want a process that leads to a managed set of changes, rather than an unexpected and unwelcome spike in taxes,' he says. 'We expect some ratcheting down of incentives, but those would need to be well signposted.'

And yet the company car has proved itself to be remarkably resilient. Some predicted that salary sacrifice and cash-for-car schemes would consign company fleets, and their managers, to the scrapheap. But while salary sacrifice has enjoyed modest growth, a GE Capital Company Car Trends survey published last year suggested that the percentage of companies offering a cash payment instead of a company car had fallen from 36% to 25% in the previous two years. One factor has been new duty-of-care legislation on company cars, forcing fleet managers to take on health and safety liability for their 'grey fleet' - employees using their own vehicles for business purposes.

'I think we will see more people coming back into company cars,' maintains Jenner. 'A company car is easier for businesses to control, because they know it's been taxed and insured. They know it's a certain age and mileage, that it's fit for purpose and portrays the correct image.

'I also think that a lot of employees have forgotten how cheap it can be to run a company car, You can drive a 3 Series for £70 a month if you are a 20% taxpayer, thanks to low-emissions engines, and that figure will improve further once the 3% benefit in kind surcharge on diesels is abolished in 2015.'

The best company car policy offers a mix of options, says Brown. 'Salary sacrifice is increasing, but it's a niche product and will only work for certain types of business,' he argues. 'The company car is strong and we don't see much that will challenge that in the long run. People still like the comfort and convenience of the company car.'

Back on the road to Heathrow, Keenan says he believes fleets should also consider electric vehicles as part of that mix. KeeResources, which employs 50 people, has invested in a dedicated charging facility at its High Wycombe head office and is running the pool of Nissan LEAFs at a cost of just 2.8p per mile - a third of the cost of a comparable diesel company car.

Drivers of 100% electric vehicles are exempt from paying vehicle excise duty and the congestion charge when travelling into London. Employers and employees are exempt from paying national insurance contributions, and a zero benefit in kind rate (until 2015/16) means employees can run an electric vehicle free of tax for private usage.

'Taking on the LEAF was a big decision for us, but it works where most of our journeys are into London or to our other offices in Bicester, Blackthorn and Basingstoke,' he says.

However, ACFO's Jenner says she remains to be convinced about electric vehicles. 'The current vehicle choice does not yet suit most fleet drivers,' she says.

'I have no doubt that electric cars will play a part, but it will be at least 10 years before they become truly viable. A range of just 50 or 100 miles a day on a single charge is not enough for a true fleet driver like me doing 28,000 miles a year. The infrastructure isn't in place yet, leasing companies don't know how to price electric vehicles yet, and purchase prices are still too high.

'And the government needs to truly support electric vehicles by committing to subsidies and grants for the long term,' she adds.

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