2010 Budget Increases Fleet Costs

In the Conservative-Liberal Government’s emergency budget in June this year, the VAT rate was increased from 17.5% to 20% coming into effect on the 4th January 2011. This is bad news for companies who are already struggling under the pressure of the economic downturn, as the news has an effect on the amount it costs to run your fleet.

The impact will be felt by companies that purchase their company vehicles outright and ones that lease their vehicles on a monthly basis. Leasing customers can claim 50% of the VAT back on the finance element of their deal, clearly this amount will be 2.5% less than if VAT was at 17.5%, meaning that companies need to find on average £315 more when replacing a car (if the value was £15K).

Businesses that allow their employees to use company vehicles for private use, as many do, will be unable to recover any of the additional costs, because this annuls the 50% VAT on finance rebate offer. It is doubly frustrating for fleet managers because VAT on maintenance deals are included in the total VAT figure but is not eligible for a VAT rebate. The BVRLA is campaigning to get the Government to increase the VAT rebate to 70%, a notion that will have the support of all fleet managers, especially as VAT has become even more important since the emergency budget.

Fleets nationwide are likely to react by reviewing their company car purchase policies, with a large number pushing forward car purchases planned for next year to avoid the increase in VAT on vehicles. However, this can cause more issues than it solves as it directly affects a company’s cash flow. Many people feel as though the Government are putting them in a difficult position, which is not of their own making. Interestingly though, it is not anticipated that the VAT rise will significantly change the proportion of companies that opt for each type of car financing option; the changes are expected to be marginal, and in line with each companies individual requirements.

The June 2010 budget also affected Capital Gains Tax. The percentage at which companies can claim money back on the purchase of a company car has been reduced from 20% to 18%, but this is only for cars that omit less than a set benchmark amount of CO2 emissions (160g/km of co2). Companies that buy cars that omit more than this benchmark could only see a return of 8%. This impacts leasing companies, who buy vehicles outright, so vehicle leasing customers need to be aware that prices could rise. Although this sounds like dire news, it has been suggested that the reductions in Corporation Tax may help companies to afford this difference. It is also expected to make leasing a vehicle more attractive for many companies.

Drivers nationwide were given a mixed package on fuel charges. Whilst George Osborne did not increase fuel duty, the VAT rise will add more to the cost of filling up your car. This is coupled with the already planned increases in fuel duty due in October and January. The only glimmer of hope was the suggestion that the chancellor is looking into ways of stabilising fuel prices, although it is doubtful that anything will be done until the next budget in 2011.

Fleet insurance premiums are another worry for fleet managers because there has just been a further 1% added to the insurance premium tax, bringing the total tax for fleet insurance premiums up to 6%. The AA is concerned that this will lead to an increase in the number of uninsured drivers.

The recent budget has increased pressure on many businesses to reduce their fleet operating costs. However, reducing fleet operating costs can be a massive challenge. For many businesses, installing a vehicle tracking system can provide the cost saving they need, by reducing fuel costs, overtime claims, timesheet inaccuracies and encouraging drivers to be more productive, to assure the future.