IT’S NOW been a little over a year since new taxation rules were introduced affecting the acquisition method of company cars. In particular, explains car finance writer Brian Rogerson, contract hire became a much more attractive proposition. Here’s why.

IT’S BEEN a year now since the rules on car leasing were simplified. More to the point, the balance between whether it was better to buy your business car or to lease it swung in favour of the latter. Out went the complicated half the excess rule to be replaced by a simplified leasing disallowance formula based on CO2 emissions.

Little wonder, then, that company cars for small businesses are back in the news. Several motor leasing companies and manufacturers have recently expressed an interest in doing business in the small business sector in the wake of the recession.

For example, LeasePlan’s specialist small-business subsidiary, FleetLine, is pursuing hard its contract hire product for fleets from “one to 100 vehicles”.

At the same time, BMW, Kia, Renault and most recently Mazda have all inaugurated business strategies designed to improve their share of the crucial small-business company car market. Renault’s plan includes an agreed partnership with leasing company Arval to allow its UK network of dealers to quote improved contract hire rates to small fleets of company cars.

So the spotlight is once again on small businesses and their company cars. And as liquidity returns to the finance markets so contract hire becomes a more winning proposition for small businesses. Contract hire, indeed, has seemed far more attractive since the extreme volatility of the used car market in recent months has made the residual value of cash-bought company cars a risky exercise.

Similarly, tax changes that have influenced company cars in recent months have served to make car leasing a prospect much more viable than previously.

The tax treatment revolution

Changes to the tax treatment of company cars underwent a revolution last year. They proved to be more significant than any changes since company car tax was first linked to CO2 emissions in 2002. In essence, the new rules make it more tax efficient to lease (or buy) a company vehicle that emits 160g per kilometre of CO2, or less – and more expensive to lease one that emits 161g per kilometre or more.

Under the new rules, cars emitting 160g/km CO2, or less, are likely to be cheaper to lease (contract hire) for many businesses. Cars emitting 161g/km, or more, however, are more expensive to own, regardless of the method of funding. Indeed, two identically-priced cars may cost the same to purchase or lease, but, depending on emissions they could have a dramatically different after-tax cost, particularly as the corporation tax regime is now dependent on CO2 outputs.

Furthermore, many cars are now more attractive to lease than to buy due to the cost benefits offered by the recent lease rental restriction. In particular, cars that cost more than L12,000 and emit less than 160g/km CO2 will be cheaper to lease under the restriction.

How the rules work in practice

The British Vehicle Rental and Leasing Association (BVRLA) quotes an example of a popular business car, the BMW 320d Touring (184) ES 5dr, which has a list price of L27,055 and emissions well under 160g/km CO2. A typical monthly cost to lease this vehicle is L438 per month over 36 months – equivalent to L5,256 a year (source Fleet Alliance).

Because the car is below the 160g/km CO2 threshold, the company leasing this car can deduct the full L5,256 from its taxable profits. If corporation tax is 28% this means that the company would save L1,472 each year on the rental cost of that car. If you are a smaller business on the small profits rate, then corporation tax is 21% and you would save L1104.

Although in recent months the used car market has begun to show signs of improvement, the long-term effects of the recently closed Scrappage Scheme are far from clear and it is likely that there lies much uncertainty in the marketplace. With contract hire, the risk of re-selling lies with the leasing company because the cars are handed back at the end of the contract.

Car taxation favours low CO2

In the March Budget the UK chancellor announced a headline-grabbing move to cut benefit-in-kind tax on company cars that emit 75g/km CO2 or below to 5% (8% for diesels). With no such cars currently in showrooms it is likely to be at least 12-18 months before any driver can benefit from the move, which is when the first plug-in hybrids are expected to be launched.

Nevertheless, it reveals the current thinking that company cars – as with all private vehicles – are heading inexorably in a ‘green’ direction. Motor manufacturers are consequently adding new alternatively-fuelled models to their showrooms. But uncertainty over how these new-to-the-market cars will sell to the second hand trade remains to be seen. Their residual value is under great scrutiny from the retailing guide compilers. All the more reason, then, for smaller businesses to protect their cash flows and lease their company cars at the present time.

It’s a year since the leasing rules on contract hire changed – is your business up to speed on this yet?

Fleet Alliance comment on company car leasing and acquisition

Martin Brown, managing director of business car solutions provider, Fleet Alliance, comments: “Many of the larger players in the market (bank owned lease companies and manufacturers) are talking a lot about the SME market. Indeed some would say they have been talking about this for over 10 years – with debatable results.

“In the main, the solution for SMEs has been the dealer market – which is often limited for multi-marque fleets as no one point of contact is available, and professional vehicle finance brokers. Could there be a more complete answer?

“The last couple of years has evidenced the growth of ‘large corporate fleet solutions’ for the SME market – an example of this being our own suite of fleet solution products: funding analysis; green fleet reviews; online driver licence checks; fuel cards; and flexi-hire products. All these products are delivered via an online client management portal.

“Small fleets, as well as small businesses with the requirement for several company cars, differ less from their larger counterparts than some would have you believe.

“These people want professional fleet solutions and personal service levels to help them asses the correct way to fund their company cars, including contract hire.

“Will they find this with a large corporate partner?”