New tax regulation changes could accelerate green vehicle growth

Utilities need to be aware of, and act on, changes to vehicle tax changes

From record-breaking winter storms and fending off competition from tech giants, to attracting investment and managing capacity, businesses across the utility sector have faced some significant challenges over the last few years. As tackling these takes precedence, setting aside the time to plan for the impact of regulatory changes on company vehicles can easily slip down the priority list.

However, given that many firms across the industry maintain large vehicle fleets with a high proportion of traditionally-fuelled cars and Light Commercial Vehicles (LCVs), one key change businesses must understand is the new taxation rules surrounding Benefit in Kind (BiK) that came into play on 6 April. In particular, the changes to company car and salary sacrifice schemes.

Drivers of cars and LCVs supplied through a salary sacrifice or traditional company car scheme, with the exception of ultra-low emission vehicles (ULEVs) with CO2 emissions of 75g/km or lower, could potentially see an increase in the tax they pay on that vehicle as a result of the changes. For salary sacrifice schemes, employees will pay tax on the higher of BiK on the car (calculated by taking the P11D list price multiplied by the appropriate company car tax percentage) or the gross salary sacrificed. For company cars, it is more complicated. The employees will pay tax on the higher of the BiK on the car (calculated as before) or on the cash alternative they have chosen to forego. This is a significant change and one that both utility providers and their employees need to understand when choosing their next vehicles. (deleted as mentioned below)

How will the changes impact utility providers?

Despite early concerns, the impact of the new regulations will be limited for most organisations. Vehicles in a lease agreement that were ordered before the 6th April, even if they were delivered afterwards, won’t be affected by the changes until the end of their current lease or April 2021, whichever comes first.

Not every vehicle has been impacted either. ULEVs with CO2 emissions of 75g/km or lower will continue to be taxed using the same BiK methodology that was used before 6 April and ULEVs on salary sacrifice schemes continue to benefit from tax and national insurance savings.

There is a clear desire from the current Government to move towards greater adoption of low emission vehicles. In addition to being exempt from the current changes, the original Finance Bill included eleven new tax bands that were due to come in to effect in 2020 for ULEVs and zero emission vehicles. These included new bands for emissions between 1-50 g/km, depending on what range a car can travel in electric mode on a single charge. These were removed from the Finance Bill as it passed through parliament in April so we will have to wait to see if these do become a part of future legislation.

The watch-out for employers is that, in the short term, tax on ULEVs is actually rising over the next few years. For example, a plug-in hybrid with CO2 emissions of 0-50 g/km is currently taxed at nine per cent for the 2017/18 tax year, rising to 16 per cent in 2019/20. If the new bandings had remained in the Finance Bill, it would have meant that in 2020/21, the same vehicle with a range of more than 130 miles in zero emission mode would be taxed at two per cent, offering a significant saving, but we can only wait to see if the new bandings are resurrected following the General Election.

Planning for a greener future

While modelling current vehicle choices based on the changes will be key to understanding any cost rises, it’s clear the new regulations that have been adopted, and the impetus behind the proposed 15 new tax bands, signal a government desire to shift towards a lower emission strategy. The utility sector is no stranger to green technology and has long been a frontrunner when it comes to adoption, but despite recent growth, the overall proportion of ULEVs in utility fleets remains low.

The demand for greater sustainability is growing. According to the latest PwC Power and Utilities survey, air pollution and CO2 are among the top concerns for three quarters of businesses in the sector. Coupled with the Government’s commitment to strengthen electric vehicle charging infrastructure and the opportunity to reduce tax costs, this could see ULEV take-up accelerate considerably at the end of this decade.

The reduction in the CO2 threshold for the lease rental restriction to 110 g/km from April 2018 (currently 130g/km) is another indicator of the current government looking to encourage take up of lower emission vehicles.

However, it’s important that companies across the sector take time to consider what is best for their business before diving in and simply boosting the number of electric vehicles. While many utility firms have ULEVs in operation across their fleets, most are still dominated by traditionally-fuelled vehicles and in the short term these will undoubtedly remain the most appropriate option for the majority. Senior management teams must look at where they see their businesses in five to ten years’ time, taking a view on what type of driving their employees will be doing on a daily basis and what new technology may break through. For example, pure electric cars and LCVs are best suited to urban driving with low mileage, whereas a plug-in hybrid could be better suited for longer distances, as long as the charging infrastructure is available to regularly charge the vehicle. For drivers doing more than 100 miles a day, Euro 6 diesel vehicles will most likely be the most suitable vehicle until electric vehicle ranges improve.

Importantly, business leaders must provide hybrid and ULEV-focused driver training and educate employees about the new regulations so they can make informed decisions when it comes to choosing a company vehicle. Although the impact of the changes will be negligible for many organisations, they do offer a significant future opportunity not only to reduce costs, but to further improve environmental sustainability. Planning will be key.