A fleet update for vehicles in the NHS

John Pryor of ACFO discusses fleet management, examining the different options available for fleet managers and how to reduce whole life costs for fleets in the NHS.

Fleets are leading the drive to cut vehicle emissions and Chancellor of the Exchequer George Osborne drove public and private sector transport operations further along the ‘green’ route in the government’s Spring Budget. Cost reduction remains fleet decision-makers’ agenda-topping issue and Osborne hopes his Budget measures will further drive the take-up of ultra-low emission cars - defined by the government as models with emissions of 75g/km of carbon dioxide (CO2) or below – and vans.

That includes encouraging demand for electric models with the government hoping that by 2040 every new car and van in the UK will be an ultra-low emission vehicle (ULEV). Whether running fleets in the public or private sectors, operating budgets are under the microscope and in principle cash can be saved by operating ULEVs. That’s because they attract the lowest taxes for both employers and employees.

However, it is critical when reviewing fleet choice lists that decisions should be based on whole life costs – as well as ensuring vehicles are fit-for-purpose – because they provide the best forward estimate of the real costs to an organisation, in delivering business mileage, over a replacement cycle.

Never has that been more important than in respect of ULEVs where electric cars may be cheaper to operate than petrol or diesel rivals. Whole life costs reflect all the projected, vehicle-specific costs associated with operating a vehicle over its fleet life irrespective of whether a vehicle is owned or leased. Fleets and small businesses are leading the charge for plug-in cars and vans as new vehicle registration figures surged to record levels in 2015, eclipsing the combined total of 21,486 plug-in vehicles sold between 2010 and 2014.

Data from Go Ultra Low reveals that plug-in car registrations accelerated rapidly last year to a record 28,188 units, surpassing 2014 volumes (14,532) by 94 per cent. Further analysis of the data reveals that the fleet sector is outpacing overall UK plug-in car growth. Within the national tally, the 18,250 corporate plug-in registrations total comfortably eclipsed the 2014 figure of 8,860 ULEVs.

Fuelling the demand is a greater choice of models and that trend will continue in 2016 and beyond as motor manufacturers continue to expand their range of ULEVs. Meanwhile, demand for plug-in vans increased more than a fifth (22 per cent) last year with registrations totalling 819 units versus 673 in 2014. Almost all those light commercial vehicles are being operated by fleets and small businesses. Currently 30 cars and nine vans – either pure electric, range-extended or plug-in hybrid vehicles – are categorised as ULEVs that meet the eligibility criteria for the government’s plug-in grant, which helps purchasers offset the higher cost of such vehicles.

Corporate choice will continue to increase further with an additional 40 models expected to come to the market over the next three years, according to the Department for Transport (DfT). Allied to fleet decision-makers searching for financial savings in their choices of company cars and vans is a desire to reduce their organisation’s carbon footprint as a policy of good corporate citizenship.

Two years ago, the coalition government announced that it was to lead by example as all of its car fleets were provided with millions of pounds worth of funding to introduce plug-in cars and vans and that was followed a few months later with a scheme to allow the wider public sector, including the NHS, councils and police forces, to introduce more plug-in vehicles.

In both cases, chargepoints would also be installed to provide infrastructure support for the new cars and vans. Cars and vans would, said the DfT, be recommended on a like-for-like basis and the reviews would consider the whole life cost of the vehicles to ensure that each replacement made economic sense.

It was against that background that Osborne announced in the March Budget that, following a review, the government had decided to continue to base company car benefit-in-kind tax on CO2 emissions from 2020/21. He also announced that, ahead of announcing rates for 2020/21, the government is to consult on reform of the bands for ultra‑low emission vehicles (below 75g/km of CO2) to refocus incentives on the cleanest cars such as zero emission and hybrid plug-in vehicles.

That suggests that rather than a single rate of tax for cars with emissions of 0-50g/km and for those with emissions of 51‑75g/km as currently, there could be a greater granularity for vehicles effectively mirroring the remaining ratings system by increasing exponentially the threshold per every 5g/km.

In recent years, the Chancellor has enabled fleet operators and company car drivers to forward plan by providing tax rates five years in advance of implementation. That has now reduced to four years and means that fleet and drivers running cars into a fifth year are left in the dark as to their tax liability. It is pleasing that the Chancellor has confirmed his intention to retain CO2 emissions as the basis for company car benefit-in-kind tax. It has become a well-established system that is straight-forward to understand and implement.

Meanwhile, April 1, 2017 will see reform of the Vehicle Excise Duty (VED) regime for newly registered cars from that date. First year rates of VED will vary according to the carbon dioxide (CO2) emissions of the vehicle – £0 for 100 per cent electric cars. A flat standard rate of £140 will apply in all subsequent years, except for zero-emission cars for which the standard rate will be £0. Cars with a list price above £40,000 will attract a supplement of £310 on the standard rate for the first five years in which the standard rate is paid.

In further Budget 2016 measures to encourage uptake of ULEV cars, the Chancellor announced: the 100 per cent First Year Allowance (FYA) for businesses purchasing low emission cars would be extended for a further three years to April 2021. The 100 per cent FYA had been due to end on March 31, 2018; that the main rate (18 per cent) threshold for capital allowances for business cars, currently set at 130g/km, will be reduced to 110g/km of CO2 and the FYA threshold to 50g/km from April 2018, to reflect falling vehicle emissions; that the CO2 threshold for the lease rental restriction is linked to the threshold for capital allowances for business cars, so the rate will be reduced from 130g/km to 110g/km from April 2018; and that the government would further review the case for the FYA and the appropriate business car emission thresholds from 2021 at Budget 2019.

Vans are widely used across the NHS and the Chancellor announced an extension of Van Benefit Charge support for zero-emission vans so that in 2016/17 and 2017/18 the charge will remain at 20 per cent of the main rate, and will then increase on a tapered basis to 5 April, 2022 – 40 per cent in 2018/19, 60 per cent in 2019/20, 80 per cent in 2020/21, 90 per cent in 2021/22 and then equalising with the standard charge in 2022/23 – a two-year extension from the original timetable. The government says it will review the impact of the incentive at Budget 2018 together with enhanced capital allowances for zero-emission vans.

In 2015/16 the rate for electric vans was 20 per cent of that applied to conventionally fuelled vans and the rate had been expected to rise to 40 per cent in 2016/17, 60 per cent in 2017/18, 80 per cent in 2018/19 and 90 per cent in 2019/20 with the rates equalised in 2020/21. Separately, many NHS organisations have been introducing car salary sacrifice schemes as part of an extension to employee benefit packages.

However, the government is becoming increasingly concerned that the popularity of salary sacrifice schemes is impacting on its tax take as they attract income tax and National Insurance contribution advantages over salary. In his Budget statement, Osborne said it was the government’s intention that pension saving, childcare and health‑related benefits such as cycle to work should continue to benefit from income tax and National Insurance relief when provided through salary sacrifice arrangements.

The Chancellor did not specifically mention car salary sacrifice schemes, but experts have suggested that as tax rules favour ULEVs the Chancellor was unlikely to take action that would outlaw schemes. However, he could decide to introduce an emissions cap that would limit employees to choosing only ULEVs, including electric models, within car salary sacrifice programmes. ACFO would advise NHS organisations to be aware of the government’s review announcement when investigating the introduction of salary sacrifice arrangements.

In conclusion, the government has laid the tax platform for encouraging further take-up of ULEVs including electric vehicles and manufacturers are responding to global demand for emission reductions with an ever-widening choice of such cars and vans. There is no doubt that ULEVs and electric vehicles have a role to play across NHS fleets, but it is essential that operating decisions are made on the basis of whole life costs.

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