Buying a new breed of vehicle

Cost reduction remains fleet decision-makers’ agenda-topping issue so using whole life costs as the basis to select new vehicles versus existing models is a key parameter in the detailed analysis that must be undertaken alongside the wider business need.
    
Finance, especially for the public sector, remains under the microscope so procuring the most cost-effective vehicles is essential whilst also ensuring that they are fit for purpose in meeting the business requirement. Today’s range of vehicles available from motor manufacturers has never been wider with established internal combustion engine models – petrol and diesel fuelled – available alongside the new breed of hybrid, plug-in‑hybrid and pure electric zero-emission models.
    
The government has made millions of pounds available – and continues to support – the uptake of plug-in vehicles, but it remains ACFO’s belief that petrol and diesel power will form the bedrock of both public and private sector fleets for the foreseeable future.
    
Nevertheless, fleet decision-makers across the public sector should assess the business benefits of the new breed of ultra low and zero emission vehicles against both the cost and day-to-day operating criteria of their existing vehicles to see if there is a place for them within their transport operation.

Plug-in grants
The government has announced extensions of the existing plug-in car and vans grants giving up to £5,000 off the price of a car and £8,000 on a van. Additionally, the government is putting millions of pounds aside to fund a national network of recharging points. The Department for Transport says that demand for such vehicles is “rising sharply” with more than 25,000 plug-in car and van grants claimed since the scheme began five years ago.
    
Although data from the Society of Motor Manufacturers and Traders reveals that 6,697 pure electric cars were registered last year, up from 2,512 in 2013 (+166.6per cent), the figure represents a tiny percentage of the almost 2.5 million new cars registered in 2014. Registrations of electric vans totalled 673 last year (2013: 187) out of 321,686 units registered. However, many experts believe support for pure electric vehicles and hybrids from global car makers has now reached a crucial tipping point with models from mainstream manufacturers including Audi, BMW, Mitsubishi, Nissan, Renault, Toyota and Volkswagen helping to support credibility and drive interest in the sector. What’s more, manufacturers are launching an ever expanding range of zero-emission electric and ultra low emission plug-in hybrid models.

Department figures show that 25 car models and seven van models are currently eligible for grant aid with a further 40 expected to come to market over the next three years.

Greening public sector fleets
The government is also putting its money where its mouth is – and is encouraging public sector fleets to do the same – by ensuring that zero and ultra low emission models feature on their fleets.
    
Fifteen government departments have launched reviews of their fleets and, as a result, this year around 140 plug-in vehicles, such as the British-built all-electric Nissan Leaf, will enter service with the likes of the Foreign and Commonwealth Office, Ministry of Defence, Home Office and the Government Car Service, which provides cars for ministers.

Transport Minister Baroness Kramer, who described the move as an important step, said: “These cars will save taxpayers money on running costs and will bring low emissions benefits to our fleet.”
    
To encourage the wider public sector – including the police, fire service, local authorities and NHS – to follow suit the government has also made £5 million available to enable 35 organisations to add more than 200 plug-in vehicles to their fleets.

The government’s vision is for almost every car, van and bus in the UK to be an ultra low emission vehicle by 2050 and Baroness Kramer said she wanted to see “the public sector lead by example” on the drive to introduce electric vehicles to fleets with running costs from 2p a mile.

The right use
Fleet managers are typically risk adverse, but operating plug-in vehicles requires a change of mindset. Finding the right use for the right vehicle is key in all fleet operations and that is no different with electric and plug-in hybrid models. Put to the right use and they can cost no more than a standard diesel vehicle and in some cases less, it is claimed.
    
However, it is critical to calculate the whole life costs of all vehicles over their fleet lifecycle. The list price of plug-in vehicles, notwithstanding the government subsidy, is significantly higher when compared with petrol and diesel models.
    
However, supporters of the ultra low and zero emission vehicles point to fuel savings when compared with the price of petrol and diesel as critical in the lifetime cost savings.

While government subsidies are available to help offset the upfront cost of zero-emission cars and other fiscal incentives include zero road tax, exemption from the London Congestion Charge and 100 per cent first year capital allowances, scheduled increases in company car benefit-in-kind tax could hit demand.

A question of tax
Zero and other low emission vehicles (50g/km and below) have been 0 per cent rated for benefit-in-kind tax, but in 2015-16 they move into the five per cent bracket, rising to seven per cent in 2016-17, nine per cent in 2017-18, 13 per cent in 2018-19 and 16 per cent in 2019-20.
    
Meanwhile, company cars with CO2 emissions of 51-75g/km will gradually rise from nine per cent of their P11D value in 2015‑16 to 19 per cent in 2019-20; those with emissions of 76-94g/km will increase from 13 per cent to 22 per cent over the same period to a maximum of 37 per cent at 165g/km and above.
    
Therefore, the most significant increases in company car benefit‑in‑kind tax are in the very sector of the market that the government is trying to encourage. However, it could have been worse. In the recent March Budget, Chancellor of the Exchequer George Osborne said: “To encourage a new generation of low emission vehicles we will increase their company car tax more slowly than previously planned, while increasing other rates by three per cent in 2019-20.”
    
That comment was, initially, perplexing. However, a look back to Budget 2014 and the Chancellor announced that it was his intention that in 2019-20 there would be a two percentage point differential between the 0-50g/km and 51-75g/km and the 51-75g/km and 76-94g/km bands.
    
That would have resulted in the 0-50g/km band increasing by five percentage points in 2019-20 to 18 per cent and the 51-75g/km band increasing by four percentage points to 20 per cent. The impact of the increasing the two band rates more slowly – by three percentage points – means the 2019-20 rates for 0-50g/km cars is 16 per cent and for 51-75g/km is 19 per cent.
    
Therefore, the Chancellor can claim that through the company car benefit-in-kind tax system he is encouraging demand for ultra low emission vehicles.
    
Nevertheless, tax rates for company cars with emissions of 50g/km or less will still increase by 1,600 per cent (0-16 per cent over the five years to 2019-20 compared with a rise of nine percentage points for cars with emissions of 76 g/km or more.

Other implications
Such rises will clearly increase costs for businesses – Class 1A National Insurance at 13.8 per cent must be paid on all benefit-in-kind – and their employees.
    
ACFO is therefore disappointed that benefit-in-kind tax rates on ultra low emission vehicles are increasing. Given the government’s focus on encouraging demand for electric and plug-in cars through a range of incentives, notably grants but also capital allowances, ACFO would have expected the Chancellor to reduce company car benefit-in-kind tax rates, not increase them, on these vehicles.
    
Additionally, ACFO believes it would potentially encourage company car drivers to increasingly turn to ultra low emission vehicles if they paid benefit-in-kind tax on the P11D value of the vehicle after taking into account the plug-in-grant Under present rules company car drivers receive no benefit from choosing a car that is subject to a plug-in-grant, which only benefits the vehicle owner. It is something that ACFO continues to raise in its discussions with HM Treasury and HM Revenue and Customs.
    
However, the marketplace is changing so electric vehicles have to be a factor on fleet managers’ radar. ACFO believes electric vehicles will always be a niche within fleet operations, although they will be a large niche rather than a small niche.

Is petrol back in favour?
With the average price of petrol currently around 6p per litre lower than the average price of diesel, the time has perhaps come for more fleets to consider petrol models if they fit into their whole life cost profile.
    
The fuel efficiency of petrol engine models has increased significantly in recent years compared with only ‘moderate’ improvements on diesel models, which typically carry a price premium.
    
Therefore, for public sector fleet with the ‘right’ mileage profile now could be the time when diesel power’s dominance of the fleet sector starts to be reined in. For a particular group of drivers, petrol power may deliver much sought after cash savings in fuel and this year benefit-in-kind tax – all-be-in that in 2016-17 the existing three per cent tax surcharge on diesel models is dropped.
    
Meanwhile, confirmation from Transport for London (TfL) and Boris Johnson that the world’s first ultra low emission zone will be introduced in the centre of London on 7th September 2020 requires fleet manager working in the capital to focus as they make their vehicle choices.
    
TfL and Boris Johnson have given fleets
a five-year warning to prepare for the introduction of the zone, which will cover the same central area of the capital as the existing congestion charge, or pay a daily charge.

Designed to improve air quality in the capital with a specific focus on cutting nitrogen oxide (NOx) and particulate matter (PM10) from vehicle exhausts, fleets must operate Euro 6 emission diesel cars and vans or Euro4 petrol equivalents to escape the £12.50 daily charge.

Whatever an organisation’s fleet procurement strategy is currently, the future is clearly signposted. Fleet operators must drive down the green road or else they will find their under the spotlight budgets accelerating out of control.

Further information
www.acfo.org