THERE’S a significant opportunity for small businesses to cut their business car costs by adopting a greener company car policy along with contract hire. Brian Rogerson reports.BUSINESS Car Manager recently reported that HSBC Vehicle Finance, one of the oldest established UK leasing companies, has pulled out of the contract hire market – HSBC ends contract hire offering for small businesses.
The news can only be considered another blow to small UK businesses whose ability to buy and extend their company cars in recent months has been severely hit by the recession – and also by the general illiquidity in the lending markets.
HSBC’s decision to withdraw from contract hire was one of several such cases recently as bank-owned leasing companies pull out of certain markets that they now consider to be “non core”. History shows that such decisions are often regretted in the medium term as bank bosses review their business portfolios when trade uplifts.
What such lenders forget, or overlook, is that a revolution is taking place in the company car sector. The market is being shaken up as environmental issues increasingly become a factor in an employee selecting a company car. By pulling out of the market now they seriously jeopardise their chances of successfully re-entering the market when the “good times” return.
Roddy Graham, commercial director of leasing company LeasedriveVelo, explained that with car manufacturers required to achieve average CO2 car emissions of 130g/km or less by 2015, the environmental impact of a company’s business cars will become more critical to the directors of a small business. Additionally, the UK government is committed to reducing CO2 emissions by 30% by 2020.
Leasing disallowances
The big win for small businesses has been the introduction of changed leasing disallowances under a new emission-based system introduced in April 2009. New cars with CO2 emissions of 160g/km or less are eligible for 100% of their lease payments to be offset against corporation tax – this replaces the previous system of the expensive car leasing allowance.
Even those business cars with emissions above 160g/km only have the restriction limited to 15%, so contract hire has become much more tax-efficient.
The other big win for contract hire, which business car managers should be aware of, is the changed corporation tax rules. Again this makes business car contract hire more attractive. Under the new capital allowance system, a car with emissions of 111g/km-160g/km can be written down at 20%. Cars above 160g/km can only be written down at 10%. And there is no ‘balancing allowance’.
It effectively means if your business owns a car, particularly a high-emission car, you could be accounting for it in your books for years – possibly 20 years after you have sold it.
Contract hire, on the other hand, is off-balance sheet, so there are no writing down allowances to be accounted for.
More flexible contract hire
As company car drivers increasingly select lower emission business cars, Graham predicts that demand for contract hire will grow and evolve to meet the demand. “We may see,” he stressed, “the advent of more flexible contracts, starting at 18 months and offering an opt-out option on a rising monthly basis up to 48 months.”
Peter Cooke, KPMG professor of Automotive Management at the University of Buckingham, confirmed that it is no longer acceptable for companies to use emissions-unfriendly vehicles. “A small business,” he said, “which uses a hybrid or a diesel, or some other form of green asset, can score immediate goodwill points for the company.”
A chance to save with new VED rates
Despite contract hire rental costs increasing over a typical three-year term by almost L600 for those cars in the highest category for CO2 emissions, the new Vehicle Excise Duty (VED) rates, to be introduced in April, may actually present small business with the chance to save large quantities of funding on their business cars, according to Lombard Vehicle Management (Lombard) – ironically a company that has pulled away from funding vehicles for small businesses.
By switching from one model to a similar but lower-emitting alternative within the same class, businesses can save up to L330 per vehicle over three years.
Paul Connor, head of portfolio management at Lombard said: “Although the effect of the new VED regime on the monthly rentals for most cars will only be between around 50p and L5, the effect over the lease term, even for many small fleets, will be substantial. Especially given the ongoing economic uncertainty.”
So what should a small business do?
The conclusion is clear: on every front CO2 emissions are driving the decision-making process on company cars. Ignore this fact by choosing a company car with higher emissions, and both driver and business will pay more tax. Choose a lower emission car, however, and the amount of tax can be minimised – especially funded through contract hire.
Fleet Alliance comment on the leasing opportunities for small businesses with a green company car policy
Martin Brown, managing director of business car solutions provider, Fleet Alliance, comments:
“The green company car message is here to stay. The government is completely committed to driving down emissions and businesses and company car drivers alike must take heed.
“The beauty of this green drive is that all vehicle related taxation is geared around the government’s policy – so opting for green is not simply an environmental issue, but will crucially save money for businesses and drivers alike.
“Today 160g/km is the cap that many people are applying for company cars – we must look beyond this and aim for as low C02 output as you possibly can. Do it for the bottom line, not just the environment.
“All small businesses should ensure that they have a professional business car provider to guide them through this green world, and avoid the ‘deal today gone tomorrow websites/providers’ who simply focus on monthly rental alone.
“Fleet Alliance has been driving down the emission levels of its client base for a number of years, falling 13% since 2005 to an average C02 in 2009 of 147g/km. I would expect this to fall below 140g/km in 2010.”
Further information
We have a useful downloadable factsheet on the changed rules regarding business car taxation. Click the link to download The big TAX change.
