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Jim Salkeld’s take on the June 2010 Emergency Budget

George Osborne’s emergency budget will affect the fleet industry in a number of different ways, but the retention of the emissions-based CCT regime will come as a relief to some pundits who had expected a new mechanism altogether.  The primary changes are:

1. An increase in the rate of VAT to 20% from next January – This will add cost to car purchases (including HP) and ECO cars, but will have a lesser effect on leased cars where currently 50% of the finance part of the rental can be reclaimed.  There are some calls from organisations like the BVRLA to increase this to 70% based on the average business mileage proportion, but this is unlikely given the need for HMG to retain revenue, and the EU belief that the level of reclaim should be based on the percentage of actual business to total mileage.  Whilst employee-funded ECO cars will be more expensive, the difference is not enough to make this a less attractive option.
2. An increase in National Insurance rates from April next year – Any hope that this new government would overturn the proposed increase in NI was dashed, although an uplift of £21 to the secondary threshold (for employer NI contributions) should mitigate this for employers.  The increases from 12.8% to 13.8% for employers and from 11% to 12% for employees (not forgetting that there will now be a continuous 2% employee contribution beyond the Upper Earnings Limit) will add to employer costs in respect of Class 1A NI for CCT and Fuel Benefit purposes, as well as increasing Cash Allowance and low-business mileage ECO costs.
3. Capital Allowance reductions – from 20% to 18% in the general pool and from 10% to 8% in the special pool.  Bearing in mind that Capital Allowances only recently changed and especially with reference to the way cars are treated, this is really just a tightening of the screw and again will not make a huge difference in real terms.  This will affect lessors and may lead to a slight increase in funding costs, but outright and funded purchases will be hardest hit, making leasing a more attractive option for car funding and especially where emissions are below the ‘special pool’ limit of 160g/km.
4. Corporation Tax reductions – A clever strategy to attract more global businesses into the UK, and to keep those already here.  The main rate of CT will reduce from 28% to 27% from next April 1st, and will drop a further 1% every year until it reaches 24% in 2014.  Small Profit CT reduces from 21% to 20% next year as well, instead of rising to 22% as announced by the previous government.  These reductions will help mitigate the additional costs of the Capital Allowance changes, but what is particularly clever is that carried forward losses (especially as a result of the recession) will be at the reduced rates.

Overall, the budget will not greatly affect the fleet market, although it is clearly increasingly important to run Whole Life Cost models like Opticalc, and preferably mix funding methodologies where possible.  Contract Hire will remain the best option for most businesses, and the ECO and tax-efficient cash options (such as Opticash) will remain key options.