Clock is ticking on major car tax reform

Businesses must review their business car policy now if they want to take full advantage of April’s new emissions-based tax regime.

With a major transformation in business car tax just six months away, the British Vehicle Rental and Leasing Association is urging businesses to review their car policy in order to benefit from the changes.

It has launched a new business car tax section on its website at bvrla.co.uk, which provides a plain English guide to the new Corporation Tax system and includes advice from business car experts at Deloitte & Touche.

The message is simple. Whether they have a fleet of thousands of vehicles or just a few, companies that act now and prepare for the new legislation being introduced on 1 April 2009 could save hundreds of pounds per car in lower tax charges.

Based on CO2 emissions thresholds, the new corporation tax regime will have a major affect on the tax relief firms can claim each year for the depreciation of their vehicles. There is also a major shift in how companies can offset the cost of leasing cars against their tax bill.

“Any company that runs business cars or is thinking of doing so needs to act now if it wants to be in a position to take full advantage of the changes next April,” says John Lewis, director general of the BVRLA.

“The fact that corporation tax relief is now based on a car’s emissions and not its price means that people need to look again at what vehicles they allow on to their fleet and whether they buy them outright or lease them.”

Calculating fleet costs
Currently, the tax advice given to most businesses is that there is a ‘tipping point’ of around £20,000 - beyond which purchasing becomes more favourable than leasing.

But this will change from next April, with tax advisers predicting a major change in vehicle acquisition methods.

“From a purely financial standpoint it looks as if leasing could become the dominant method of funding for most cars,” says Dan Rees, business car consultant at Deloitte & Touche.

Illustration
If we take two popular executive cars, with a list price of just over £30,000. Both of them are available on contract hire terms at a monthly rental rate of £390.

Over the three-year term of the lease, a company would pay £14,040 in rental charges for either car.

Under the current car price-based corporation tax regime, a company would be able to claim tax relief on just 70% of the rental cost of either vehicle against its tax bill - £9,828 over the three years.

From next April, the situation changes dramatically.

One of the cars has CO2 emissions of under 160g/km, meaning that the full £14,040 cost of its rental can be claimed against a tax bill.

The other car has CO2 emissions of over 160 g/km, meaning that only 85%, or £11,934 of its rental can be claimed as tax relief.

This means that, for a company paying corporation tax at 28%, the lower emission car is £590 cheaper to lease over the three year contract period. If fuel costs and benefit-in-kind tax cost are included, the total savings would be even greater.

The message is clear. Company fleet managers need to start looking at the whole-life costs of their vehicles, concentrating on emissions and not list-price.