Two-year leases answer to lack of tax clarity
13 December 2018
Author: Jack Carfrae
Despite high hopes for information in the latest Budget, fleets are still in the dark about company car taxation after 2021, but one management specialist thinks two-year leases are the answer
for now. Jack Carfrae reports.
Businesses are being urged to consider two-year lease contracts due to continued uncertainty around future taxation policy. Management specialist Fleet Operations claimed the lack of information in the Government's 29 October Budget and the prolonged absence of direction on company car tax after the 2020/21 financial year, meant operators could benefit from 24-month contracts, which would allow them to renew vehicles without fear of an unforeseen spike in costs.
Speaking to BusinessCar, Jayne Pett, Fleet Operations' sales and marketing director, said: "The Budget didn't bring us anything, and we do need to start moving; everything's stagnated.
"Where we are now is that we've got a window of about two years, and what we need to do is start looking at policies and start shortening them. For people that have had policies on a four-year cycle, perhaps they need to drop them back to two years so we can get the wheels rolling."
Pett added that the practice of extending contracts had become endemic across the industry, and that leasing companies would eventually start to insist on vehicles being returned due to the higher cost of operating older models. She said the adoption of shorter terms could lead to an increase in new orders.
"People have got to start ordering cars. We've got a lot of people that are in extended vehicles because we were waiting for news. From what we had out of the Budget, all we can say is that the next milestone is really 2021, so it is very, very hard for companies to future-proof at the minute. If you're taking a vehicle out over, say, four years, you don't know what the cost impact is going to be. It could be very, very costly. So I think you've got to scale back, as many people may have had a vehicle for four years already.
"You get to a point where the lease companies won't allow you to extend any further, because it becomes costly to keep the vehicle out there, and your maintenance starts to spiral, simply because an older car costs more money."
Pett claimed that moving drivers to short-term rental vehicles (which has been employed in previous periods of uncertainty, such as during the financial crisis) until further clarity around company car taxation emerged would be a potentially expensive gamble, likely to cost businesses more than if they were to opt for a shorter-than-average lease contract.
"If fleets do what we were doing before which was, to plug the gap, putting people into short-term hires until we got some news, thinking 'we'll have an answer in six months'. we still haven't got that answer, and if you leave someone in a short-term hire vehicle, the costs are huge; it's really, really expensive to maintain for a long period of time," she said.
Pett conceded that two-year contract hire would inevitably be pricier than more traditional three or four-year policies where tax policy was clearly signposted, but said the certainty around pre-2021 legislation would at least allow businesses to fix their costs for the period and procure vehicles with sufficient foresight.
"It's still going to be more, because we know a two-year lease is a lot more costly than a four-year lease," she said. "However, I believe we've got to find some momentum. We know where we are going to be, pretty much, for two years and the manufacturers need to sell cars, so I think they're going to come to the party to help with the residual value gap and start building some momentum."
She added that the move would likely be well received by employees, who would be offered a new company car at least a year earlier than usual, which could be especially welcome for company car drivers who have already have been in vehicles for longer than the original three or four-year term.
"The other benefit with taking a vehicle for two years, from a benefit and reward point of view, is that drivers love the fact that, in two years' time, they're going to get a brand new car, rather than being tied into something for four years that becomes extremely boring.
"It's quite exciting, from a driver's perspective, to think 'I'm going to have choices again in two years'."