"Most people will have seen the changes to Vehicle Excise Duty in this year's Budget, but one element of the story has been overlooked by most of the press. While these measures may not change individual behaviour, there will be a much greater impact on company car fleets. Businesses with high emission vehicles face losing a significant amount from their resale value.

Consumers buying a car in the second or third hand market will be much less willing, and perhaps less able, to pay the higher rate of VED. As such, demand for high emission cars in the second hand market will fall along with their value. When multiplied across an entire fleet, tens of thousands of pounds (and more for the larger fleets) could be wiped off the resale values. This will result in businesses being less likely to offer these type of vehicles to all of their employees.

Many people have also missed the point that employer's national insurance, being based on the benefit in kind to the employee, increases as the CO₂ emissions of the car increase. The NI cost of high emission cars can be substantial without companies even realising. This is largely because companies don't factor tax into their whole life costs. This will need to change.

To make the position for high emission cars even worse, there will be a change to the basis of taxation on the capital cost of company cars to a CO₂ emission basis. The Government's preferred option is as follows:

• Retain the existing 100% first year allowance for cars with CO₂ emissions up to 120g/km;
• Utilise the general plant and machinery capital allowances pool for cars with emissions between 121 and 165g/km; and
• Introduce a new pool with lower writing down allowances than that of the general plant and machinery pool for cars with emissions above 165g/km.

If (or when) these proposals are introduced, the downside effect on cash flow will force many companies to consider whether they should continue making high emission cars available to their employees.

Other potential changes affect the expensive car leasing disallowance (ECLD) and employee car ownership (ECO) schemes. The Government is considering abolishing the ECLD for cars with emissions of 165g/km or less and applying a uniform fixed percentage to cars of 166g/km or more. Until the rules are finalised we can't be clear whether the better option will be to lease or buy higher emission cars but we think the position for sub 165g/km cars is clear. If the rules are enacted along these lines, lower emission cars will still benefit from the VAT advantages of leasing without the corporation tax disadvantages of the ECLD. On the ECO front we expect some tinkering with the AMAP rates since we believe the Government wants drivers back into company cars. These changes will probably take effect from April 2008.

The upshot is that companies will need to seriously consider what type of cars they allow employees to drive as the increased cost of higher emission cars hits home. Smart companies will start to bring tax into the calculations of the whole life cost of cars on their fleets."

Alison Chapman
Tax Partner
Deloitte & Touche LLP