Finance Bil (No.2)

Memorandum submitted by BVRLA (FB 02)

 

Finance Bill (No.2) 2013 – Briefing Paper from the BVRLA

 

Clause 67 - Cars with low carbon dioxide emissions

(1) In section 45D of CAA 2001 (first year qualifying expenditure on cars with low carbon dioxide emissions)-

(a) in subsection (1)(a), for "2013" substitute "2015", and

(b) in subsection (4), for "110" substitute "95".

(2) In section 46 of that Act (general exclusions), in subsection (5) omit "section 45D,".

Amendment to delete Clause 67(2)

Market Impact

New clause 67(2) will exclude UK firms leasing or renting cars from claiming the 100% first year allowances (FYAs) for low emitting cars (LECs).

Clause 67(2) is not only discriminatory towards UK leasing and rental firms, but will have the following impact on the UK market:-

· reduction in the number of LECs purchased by a rental or leasing firms in the UK through customers switching to lower cost, high polluting alternatives

· diluting the UK Government’s environmental goal as it relates to encouraging the take up of LECs

· reducing the funding options for UK SMEs in accessing LECs. SMEs rely on leasing as a source, especially as purchasing LECs is not a realistic financial alternative under the credit constrained environment

· negative impact on part of the UK economy connected to the sale of LECs. UKs global competitiveness position of being the centre of excellence for ultra-green cars will be eroded

· dramatic slowdown on the development and infrastructure growth for LECs

Reduction in Ultra Green cars in the UK

UK leasing and rental firms have passed on the benefits of the 100% FYAs for LECs since 2002 to their customers through lower rental payments. Over this period, this sector has been a catalyst for the take up and use of LECs in both the new and second-hand marketplace in the UK.

In 2011, UK leasing firms purchased 274,457 LECs - this take up can be largely attributed to the availability of 100% FYA. Clause 67(2) will, if not deleted, reduce the purchase of LECs.

Given that the government has set an ambitious vision for almost every car and van to be a zero emission vehicle by 2050 and that the Office of Low Emission Vehicles is positioning the UK at the global forefront of ultra-low emission vehicle (ULEV) development, manufacture and use [1] this clause does not help the Government with this vision.

The graph contained in Annex A illustrates how UK rental and leasing firms have utilised the 100% FYAs for LECs since 2002 and our estimates on how Clause 67(2) will dramatic slowdown the purchase LECs.

The removal of FYAs for leased cars will therefore create a finan cing and pricing distortion between outright purchase and leasing.

If clause 67(2) is not deleted, then it will have the impact of reversing the take up of LECs within the leased and rental sector as a direct consequence availability of affordable greener cars in the second-hand market will diminish.

Even when allowing for lower fuel costs, at typical annual mileages, this offset is unlikely to narrow the cost gap between a LEC and a higher polluting car.

Annex B provides an example which shows that without leasing companies being able to access FYAs, the premium paid over the course of a typical lease term for a LEC to a petrol variant of the same car will rise from 12% to 17%. The pricing impact of this cost rise will push customer leasing cars to opt for higher polluting cars. This impact has already been signalled in the marketplace.

The Institute of Public Policy Research found that in their research for "Leading the Charge – Can Britain develop a global advantage in Ultra-Low-Emission Vehicles" that the changes made in the 2012 budget, which removed the availability of enhanced capital allowances for LECs to leasing and rental companies, have had a serious impact on the fiscal incentives available to support LEC uptake, particularly by public sector bodies. They recommended that amendments in the 2012 budget which removed the availability of enhanced capital allowances to leasing and rental companies should be reversed immediately. [2]

In addition, the Committee of Climate Change in their report Meeting the Carbon Budgets – 2012 Progress Report to Parliament called on the Government to reverse their decision to support the market for electric vehicles. [3]

In the current financial environment SMEs are more likely to be credit constrained and therefore less likely to have the option of accessing FYAs through the purchase of LECs.

Thus, even when there is a strong motivation on the part of a SME business to minimise their environmental impacts, the removal of FYAs may mean that they are forced to lease less environmentally efficient cars than they would prefer.

Discriminatory to leasing

The European Commission guidance to Member States on Financial Incentives for Clean and Energy Efficient Vehicles [1] one of the principles within this document states:-

"Incentives must be non-discriminatory with regard to the origin of the product concerned. They should avoid favouring only the sale of vehicles of domestic manufacturers and should not include vehicle characteristics which could discriminate against similar vehicles coming from other Member State(s) than the one, where the incentives are applicable."

We believe that by not allowing leasing companies to access the 100% FYAs the Government is discriminating against a category of UK business and is contravening the EU mandatory principles that were adopted by all Members States on 28 February 2013.

HM Treasury Reasoning for Clause 67(2)

HM Treasury (HMT) has justified clause 67(2) on the grounds of protecting the Exchequer from perceived threats of cross border leasing – this is where a UK leasing firm could lease a LECs purchased in the UK to a customer outside the UK. While there is no evidence of such a threat existing today, HMT remains concerned with such activity occurring in the future.

In absence of any evidence to support or even substantiate the policy to exclude leased cars, HMT officials have informed the BVRLA that the announcement to remove FYAs from leased cars has largely been taken out of a theoretical fear that this cross border leasing threat may occur in the future and that necessary arrangements will have to be in place to help protect the Exchequer.

To help address these hypothetical concerns, BVRLA put forward a number of suggestions such as allowing the FYA to be claimed in the place it has been put to use, similar to VAT laws, there are "use and enjoyment" provisions which help to establish the country in which VAT is payable.

In addition, we suggested that the policy concern could be addressed by reviewing the expenditure rules of section 5 of the Capital Allowances Act 2001, so that expenditure incurred can only be applicable to LECs that are registered in the UK, for example, a copy of the Vehicle Registration Document (V5) as issued by the DVLA, could help ensure that the FYAs were not passed through to vehicles that were registered for permanent use outside the UK. There are currently EU rules in place which do not permit permanent use of vehicles outside the country of registration.

The vehicle leasing and rental sector

The BVRLA is the trade body for companies engaged in the leasing and rental of cars and commercial vehicles. Its members provide rental, leasing and fleet management services to corporate users and consumers. They operate a combined fleet of 2.75 million cars, vans and trucks, buying nearly half of all new vehicles sold in the UK.

The total contribution of the full-service vehicle leasing and rental sector is the sum of the individual impacts of the operations of the industry itself, the UK-made vehicles it purchases, the use of UK-made engines, the activity in dealerships, and its impact on the used-car market.

In total, the sector is estimated to have contributed almost £14.3 billion in value added to UK GDP in 2011. This was equivalent to £1 in every £90 generated in the UK, as much as the cities of Bristol and Bath combined.

This value-added contribution supported over 183,000 jobs, 70,000 more than found in the City of York.

Research by Oxford Economics has found that two-thirds of BVRLA leasing member’s business customers were SMEs. In particular, young businesses with only a short track record and small and medium sized enterprises (SMEs) often find leasing an attractive solution, particularly for the flexibility it offers, the competitive costs on offer relative to other forms of financing, and because leasing allows financing of 100% of the price of an asset without the need to post additional collateral.

May 2013

Annex A

Annex B

Lease costs of LEVs and equivalent traditionally powered cars without FYAs

In the Vauxhall Corsa example shown in the table below, with an absence of FYAs the premium paid over the course of the lease for the LEV variant to the petrol version of the same car rises from 12% to 17%.

Vehicle Model	CO2 emissions	CO2 emissions increase	List Price	3-year lease cost including FYAs	3-year lease cost excluding FYAs (£)
Corsa 1.3cdti 95 Exclusiv	94 g/km		£15,355	£12,348 Increase 12%	£12,888 Increase 17%
Corsa 1.3cdti 110 Exclusiv	110 g/km	16%	£14,075	£11,484 Increase 5%	£11,988 Increase 9%
Corsa 1.4 petrol Exclusiv	129 g/km	36%	£13,015	£10,980	£10,980

Even after allowing for fuel-savings offsets, the premium faced by a lessee of an LEV driving a typical mileage of 7,000 business miles each year stands at nearly 14% for the variant that meets the new 95 g/km threshold and nearly 6% for the 110 g/km variant.