Emergency budget and what it means for fleet operators
23 June 2010
New Chancellor of the Exchequer George Osborne delivered an austerity Budget in a bid to tackle the country’s £155 billion deficit and, in measures affecting fleet operators, announced a rise in VAT to 20%, confirmation of the increases in NIC and fuel duty announced previously, a reduction in capital allowances from 20% to 18% and a tightening of the company car tax regime.
Mr Osborne laid out a five-year programme to eliminate the hole in the public finances, which he said was essential to protect Britain from the debt crisis sweeping Europe and to rebuild the British economy.
The measures that will impact most on the operation of company vehicles are as follows:
Value Added Tax
As widely anticipated the Government will increase the standard rate of Value Added Tax (VAT) to 20% from 17.5% from January 4, 2011. The Society of Motor Manufacturers and Traders has calculated that the move will add around £300 to the price of the average new car.
For fleet operators that outright purchase their vehicles the move effectively adds 2.5% to their acquisition costs as the VAT cannot be reclaimed. And with the reduction in capital allowances from 20% to 18% (see below), outright purchase looks less attractive than before the Chancellor’s announcement as they will have the administrative and financial burden of carrying these depreciating assets on their balance sheets.
However, the moves could increase the attractiveness of contract hire versus outright purchase because fleet operators who use this funding method can reclaim 50% of the VAT on the finance element of their monthly rentals and 100% of any maintenance element. The British Vehicle and Rental Leasing Association is lobbying Government to increase recoverability of VAT to 70% as being a fairer representation of business use.
National Insurance
Employee and employer National Insurance (NI) rates will increase by 1% from April 6, 2011 as announced in the March Budget by the previous Labour Government. As a result employee rates will increase from 11% to 12% and employer rates from 12.8% to 13.8%.
However, to help offset the 1% rise in employer NI, the Chancellor announced that the level at which employers start to pay their contributions would increase by £21 per week above indexation from April 2011.The Chancellor said that the negative effect of the employer rate rise - the so-called ‘tax on jobs’ - would be largely reversed by increasing the threshold.
Corporation Tax
A reduction in the main rate of corporation tax from 28% to 24% will take place in 1% cuts over the course of four financial years starting on April 1, 2011.
The Chancellor also announced a reduction in the small profits rate of corporation tax from 21% to 20% from April 1, 2011 rather than rising to 22% as inherited by the previous Government.
Capital allowances
A reduction in the main rate of capital allowances on plant and machinery, which includes vans and cars, from 20% to18% for cars emitting 160g/km of CO2 or less, and the special rate from 10% to 8% for cars emitting more than 160g/km from April 2012.
Insurance Premium Tax
The Government will increase the standard rate of Insurance Premium Tax (IPT) to 6% from 5% and the higher rate to 20% from 17.5% from January 4, 2011. The measures will raise £455m in the first year.
But experts say that the increases could have been worse and noted that British IPT still remains low by European standards, where the tax is frequently equal to VAT. The current UK rates are 5 per cent and 17.5 per cent.
Comment
Fleet Alliance managing director Martin Brown said: “The above tax changes will impact on the optimum funding mechanism chosen by businesses to fund their vehicles.
“The rise in VAT will clearly trigger increases in vehicle list price, fuel prices and servicing, maintenance and repair costs, and we expect to see contract hire assume increased popularity as a funding method as a result of these changes, because of the level of VAT recoverability involved.
“The effect of all the other tax changes will to some degree impact on whether organisations buy or lease their company cars and vans, provide staff with a cash allowance or opt to introduce a salary sacrifice scheme.
“Consequently, over the coming months many organisations will be consulting with their fleet management suppliers and conducting wide-ranging reviews of their current fleet funding routes to ensure that both they and their employees, who will also be affected by changes in personal allowances, do not lose out financially from the changes.
“We also now expect that that new vehicle registrations will be higher than previously expected in the final months of this year as fleets and private motorists look to beat the VAT increase on January 4, 2011.”
Other Budget announcements
Fuel duty
The Chancellor said that there would be no new increases in fuel duties over and above those already announced by the previous administration in the March 2010 Budget.
Therefore, there will be a 1p a litre rise in duty on October 1 and a further 0.76p a litre rise on January 1, 2011.
The Chancellor also reiterated that fuel duty would increase by 1p a litre above inflation in for the next four years.
Meanwhile, the Chancellor has asked the Office for Budget Responsibility to undertake an assessment over the summer of the effect of oil price fluctuations on the public finances. Informed by this assessment, the Government will examine options for the design of what it calls a ‘fair fuel stabiliser’.
The stabiliser would ensure that when oil prices went up, tax on fuel would reduce; and when oil prices dropped, taxes would rise. It is claimed that such a policy would keep prices at the pumps more consistent and would ensure that businesses and the whole British economy were less exposed to volatile oil markets.
Company car tax
The Chancellor said that the Government would reform company tax so that it continued to provide an incentive to businesses to purchase the lowest emitting vehicles on the market.
As a result, the coalition Government intends to press ahead with the company car benefit-in-kind tax threshold changes that it inherited from the previous administration.
From April 2011, the basic threshold for the 15% band of company car tax will therefore be reduced by 5 g/km of CO2, so that the band applies to cars emitting between 121 and 129 g/km. The percentage of list price subject to tax will then continue to increase by one percentage point with every 5 g/km increase in emissions, to a maximum of 35% (see table below).
The £80,000 cap on car list prices used to calculate the taxable benefit arising from company cars will also be abolished on April 6, 2011, as will discounts on higher-emitting hybrid cars and alternatively fuelled company cars.
From April 2012, the 10% band for cars emitting 120 g/km of CO2 or less will be removed, as already announced, and the benefit-in-kind tax system of bands will be extended so that they increase by one percentage point with every 5 g/km of C02 increase in emissions, from 10% . The 10% band will apply to cars that emit 99 g/km of CO2 or less.
Add 3% for diesels up to a maximum of 35% (2012/13 unconfirmed)
Capital allowances for zero-carbon goods vehicles
The Chancellor confirmed that legislation would be in the Finance Bill in the autumn for an enhanced capital allowance for zero-carbon goods vehicles. It will apply to vehicles purchased from April 2010, and will be in place for five years as announced by the previous administration in the March 2010 Budget.
“This was an emergency Budget designed to tackle Britain’s debt mountain, and many of the measures announced will undoubtedly have the effect of increasing cost pressures on businesses. This will increase the need for careful fleet planning and prudent cost management,” added Martin Brown.
23 June 2010
New Chancellor of the Exchequer George Osborne delivered an austerity Budget in a bid to tackle the country’s £155 billion deficit and, in measures affecting fleet operators, announced a rise in VAT to 20%, confirmation of the increases in NIC and fuel duty announced previously, a reduction in capital allowances from 20% to 18% and a tightening of the company car tax regime.
Mr Osborne laid out a five-year programme to eliminate the hole in the public finances, which he said was essential to protect Britain from the debt crisis sweeping Europe and to rebuild the British economy.
The measures that will impact most on the operation of company vehicles are as follows:
Value Added Tax
As widely anticipated the Government will increase the standard rate of Value Added Tax (VAT) to 20% from 17.5% from January 4, 2011. The Society of Motor Manufacturers and Traders has calculated that the move will add around £300 to the price of the average new car.
For fleet operators that outright purchase their vehicles the move effectively adds 2.5% to their acquisition costs as the VAT cannot be reclaimed. And with the reduction in capital allowances from 20% to 18% (see below), outright purchase looks less attractive than before the Chancellor’s announcement as they will have the administrative and financial burden of carrying these depreciating assets on their balance sheets.
However, the moves could increase the attractiveness of contract hire versus outright purchase because fleet operators who use this funding method can reclaim 50% of the VAT on the finance element of their monthly rentals and 100% of any maintenance element. The British Vehicle and Rental Leasing Association is lobbying Government to increase recoverability of VAT to 70% as being a fairer representation of business use.
National Insurance
Employee and employer National Insurance (NI) rates will increase by 1% from April 6, 2011 as announced in the March Budget by the previous Labour Government. As a result employee rates will increase from 11% to 12% and employer rates from 12.8% to 13.8%.
However, to help offset the 1% rise in employer NI, the Chancellor announced that the level at which employers start to pay their contributions would increase by £21 per week above indexation from April 2011.The Chancellor said that the negative effect of the employer rate rise - the so-called ‘tax on jobs’ - would be largely reversed by increasing the threshold.
Corporation Tax
A reduction in the main rate of corporation tax from 28% to 24% will take place in 1% cuts over the course of four financial years starting on April 1, 2011.
The Chancellor also announced a reduction in the small profits rate of corporation tax from 21% to 20% from April 1, 2011 rather than rising to 22% as inherited by the previous Government.
Capital allowances
A reduction in the main rate of capital allowances on plant and machinery, which includes vans and cars, from 20% to18% for cars emitting 160g/km of CO2 or less, and the special rate from 10% to 8% for cars emitting more than 160g/km from April 2012.
Insurance Premium Tax
The Government will increase the standard rate of Insurance Premium Tax (IPT) to 6% from 5% and the higher rate to 20% from 17.5% from January 4, 2011. The measures will raise £455m in the first year.
But experts say that the increases could have been worse and noted that British IPT still remains low by European standards, where the tax is frequently equal to VAT. The current UK rates are 5 per cent and 17.5 per cent.
Comment
Fleet Alliance managing director Martin Brown said: “The above tax changes will impact on the optimum funding mechanism chosen by businesses to fund their vehicles.
“The rise in VAT will clearly trigger increases in vehicle list price, fuel prices and servicing, maintenance and repair costs, and we expect to see contract hire assume increased popularity as a funding method as a result of these changes, because of the level of VAT recoverability involved.
“The effect of all the other tax changes will to some degree impact on whether organisations buy or lease their company cars and vans, provide staff with a cash allowance or opt to introduce a salary sacrifice scheme.
“Consequently, over the coming months many organisations will be consulting with their fleet management suppliers and conducting wide-ranging reviews of their current fleet funding routes to ensure that both they and their employees, who will also be affected by changes in personal allowances, do not lose out financially from the changes.
“We also now expect that that new vehicle registrations will be higher than previously expected in the final months of this year as fleets and private motorists look to beat the VAT increase on January 4, 2011.”
Other Budget announcements
Fuel duty
The Chancellor said that there would be no new increases in fuel duties over and above those already announced by the previous administration in the March 2010 Budget.
Therefore, there will be a 1p a litre rise in duty on October 1 and a further 0.76p a litre rise on January 1, 2011.
The Chancellor also reiterated that fuel duty would increase by 1p a litre above inflation in for the next four years.
Meanwhile, the Chancellor has asked the Office for Budget Responsibility to undertake an assessment over the summer of the effect of oil price fluctuations on the public finances. Informed by this assessment, the Government will examine options for the design of what it calls a ‘fair fuel stabiliser’.
The stabiliser would ensure that when oil prices went up, tax on fuel would reduce; and when oil prices dropped, taxes would rise. It is claimed that such a policy would keep prices at the pumps more consistent and would ensure that businesses and the whole British economy were less exposed to volatile oil markets.
Company car tax
The Chancellor said that the Government would reform company tax so that it continued to provide an incentive to businesses to purchase the lowest emitting vehicles on the market.
As a result, the coalition Government intends to press ahead with the company car benefit-in-kind tax threshold changes that it inherited from the previous administration.
From April 2011, the basic threshold for the 15% band of company car tax will therefore be reduced by 5 g/km of CO2, so that the band applies to cars emitting between 121 and 129 g/km. The percentage of list price subject to tax will then continue to increase by one percentage point with every 5 g/km increase in emissions, to a maximum of 35% (see table below).
The £80,000 cap on car list prices used to calculate the taxable benefit arising from company cars will also be abolished on April 6, 2011, as will discounts on higher-emitting hybrid cars and alternatively fuelled company cars.
From April 2012, the 10% band for cars emitting 120 g/km of CO2 or less will be removed, as already announced, and the benefit-in-kind tax system of bands will be extended so that they increase by one percentage point with every 5 g/km of C02 increase in emissions, from 10% . The 10% band will apply to cars that emit 99 g/km of CO2 or less.
| g/km of CO2 | % of list price |
||
| 2010/11 | 2011/12 | 2012/13 | |
| 120 | 120 | up to 99 | 10 |
| N/A | N/A | 100 | 11 |
| N/A | N/A | 105 | 12 |
| N/A | N/A | 110 | 13 |
| N/A | N/A | 115 | 14 |
| 130 | 125 | 120 | 15 |
| 135 | 130 | 125 | 16 |
| 140 | 135 | 130 | 17 |
| 145 | 140 | 135 | 18 |
| 150 | 145 | 140 | 19 |
| 155 | 150 | 145 | 20 |
| 160 | 155 | 150 | 21 |
| 165 | 160 | 155 | 22 |
| 170 | 165 | 160 | 23 |
| 175 | 170 | 165 | 24 |
| 180 | 175 | 170 | 25 |
| 185 | 180 | 175 | 26 |
| 190 | 185 | 180 | 27 |
| 195 | 190 | 185 | 28 |
| 200 | 195 | 190 | 29 |
| 205 | 200 | 195 | 30 |
| 210 | 205 | 200 | 31 |
| 215 | 210 | 205 | 32 |
| 220 | 215 | 210 | 33 |
| 225 | 220 | 215 | 34 |
| 230 | 225 | 220 | 35 |
Add 3% for diesels up to a maximum of 35% (2012/13 unconfirmed)
Capital allowances for zero-carbon goods vehicles
The Chancellor confirmed that legislation would be in the Finance Bill in the autumn for an enhanced capital allowance for zero-carbon goods vehicles. It will apply to vehicles purchased from April 2010, and will be in place for five years as announced by the previous administration in the March 2010 Budget.
“This was an emergency Budget designed to tackle Britain’s debt mountain, and many of the measures announced will undoubtedly have the effect of increasing cost pressures on businesses. This will increase the need for careful fleet planning and prudent cost management,” added Martin Brown.
Phone: 0845 601 8407 | Email: info@fleetalliance.co.uk | Legal information |
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