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How a regulatory change could raise company vehicle tax by 30%

  Friday, 9 May 2014

A new regulatory change could lead to businesses having to increase their vehicle tax budgets by up to 30 per cent, if the latest reports are to be believed.  Today, we’re going to take a look at the changes that are being slowly put in place, and the impact that they could potentially have.

What are the changes?

The plan is to introduce a new vehicle emissions test dubbed the Worldwide Harmonised Light-duty Test Procedures (WLTP).  It’s believed that the current New European Driving Cycle (NEDC) has been failing to provide a realistic picture of fuel consumption, and the new measures could help to increase the accuracy of the data.

Why has the NEDC been failing?

It’s believed that a number of factors have been contributing towards an ever-growing gap between the official figures and the real world of motoring:

  • During the process, the test car very rarely reaches motorway speed. What’s more, fuel consuming resources such as lights and air-conditioning aren’t turned on during the test.  The figures in the lab simply aren’t an accurate portrayal of modern driving patterns.
  • Flexibilities and tolerances within the test procedure can actually be exploited in order to reach lower consumption figures.  For instance, speed within the specified corridor for the test but kept at a level just below the target speed will result in lower fuel consumption than speeds just above.
  • The inertia load applied to the rolling road (designed to simulate real world vehicle inertia and aerodynamic drag) can be varied only in subtle steps.
  • Small reductions in weight – such as removing the standard spare wheel – can be enough to get the car onto the next lowest inertia load band.  As a result, a car can be moved into the next lowest inertia load band, and experienced lower loads in the test than when on the road in the real world.  Indeed, International Council on Clean Transportation (ICCT) research indicates that a car is five times more likely to be just under the inertia limit than just over.

The Society of Motor Manufacturers and Traders (SMMT) has already acknowledged that the current regime is failing, with previous chief executive Paul Everitt noting that figures at the moment are based on “an average, of an average of the worst possible average”.

What effects could the changes have?

If WLTP was officially introduced, the impact could be substantial.  Though existing cars would not be re-tested – the tax would apply only to new models – company car drivers and employers, who currently pay tax according to a vehicle’s own CO2 emissions, could see their tax liabilities rocket by as much as 35%.  Drivers would be faced with the choice of trying to find the extra cash to pay the tax bills, downsizing or simply finding an alternatively fuelled vehicle. 

It’s also possible that employers might choose to ditch company car provision completely, and instead offer their employees a cash equivalent.  Figures from Fleet News indicate that that 64.4 per cent of fleets would completely forgo real-world figures if not doing so meant a substantial increase in tax.

The other potential consequence is that it could lead to a two tiered tax system, with employers having to pay significantly more in both Class 1A NIC and VED and employees being forced into a significantly higher benefit-in-kind tax bracket should they choose to continue to drive the same car.

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The opposition

Currently, the most ardent opposition to the changes has come from the car industry itself.  A report in the Financial Times, for instance, has suggested that the European Automobile Manufacturers Association (ACEA) is currently lobbying for a 2021 implementation date at the very earliest. 

The group’s secretary-general Erik Jonnaert said:

“Looking at the scale of the task required, ACEA believes 2017 is incredibly ambitious.”

It seems likely that the changes could end up proving very costly for carmakers.  Currently, the EU has set a pan-European sales weighted average new car CO2 emissions target of 95g/km by 2020.  Those manufacturers who miss the target are currently facing penalties of up to 95 Euros per g/km of CO2 over target for each car registered.

As well as this, the ACEA has also recognised the tax implications of the WLTP, saying:

“Managing the change to the WLTP must be addressed. This includes the labelling of vehicles, how to deal with old test cycle and WLTP CO2 and fuel consumption test figures without confusing customers, how to apply the WLTP for the purpose of the legal monitoring against a future CO2 fleet average figure, and how governments will ensure that any CO2-based taxation scheme fairly addresses vehicles between the periods when the old test cycle is phased-out and WLTP is brought in.”

What is the future?

The WLTP was given the green light by the UNECE in March, with the latter organisation saying:

“WLTP better simulates real driving conditions, with more modern and realistic driving scenarios and considers other widely used factors such as air conditioning and seat heaters that drive fuel consumption upwards.

“It also closes many of the loopholes that existed in the current test method in order to create accurate, consistent and repeatable results on fuel consumption which are thus more difficult to manipulate.”

Currently, UNECE estimates that the figures for fuel consumption under the WLTP would be between 10 and 20 per cent higher than those under the currently test cycle.  The ICCT, meanwhile, suggested that it could be up to 30 per cent higher.

This useful table (put together by the guys at Fleet News) gives some indication as to how the new regulations could impact you financially:

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