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Energy Savings Trust
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Whole life costs
Whole Life Cost Modelling – time well spent!
To calculate the whole life cost (WLC) of any particular vehicle some research will be needed and this will inevitably take time. However, it really isn’t sensible to cut corners and simply compare the best purchase or lease deal currently available. For a start, the taxation system and fuel costs are exerting more and more pressure on organisations to move to more fuel efficient and therefore lower emitting vehicles and all of these factors need to be taken into account.
Whole Life Costs - what needs to be included?
Purchase, insurance, funding and fuel costs
If you purchase your cars and vans then the price you buy the vehicles for is obviously the starting point. The resale value (Residual Value or RV) is also a component which should be taken into account. Different makes and even different models of the same vehicle can vary quite markedly in their resale value, so the cheapest to buy may not necessarily be “best deal” in the long run.
Servicing, maintenance and repair costs (SMR) vary by make and model too and consideration should also be given to the location of the manufacturer’s service outlets, a long drive there and back and no courtesy vehicle adds up to more time, fuel and money.
Residual values and maintenance budgets can be tricky to estimate and we will suggest some sources later in the briefing. One way many organisations “fix” these is by contract hiring their vehicles with the maintenance included. There will be an element of profit made by the leasing company, however they negotiate the purchase price and maintenance costs of the vehicle and take on the residual value risk. The lease also includes the vehicle funding, which helps preserve capital in your business or bank facilities. Capital which may be better utilised in your core business activities. If you don’t lease, the impact of funding the vehicle should still be included in your calculations, although this is of less importance when you use WLC analysis to compare similarly priced vehicles.
Finally when considering different makes and models, don’t forget insurance and accidental damage costs. The actual impact of different vehicles will depend on your particular policy, but even if higher performance vehicles don’t increase your premiums significantly, punctures or damaged wheel costs will be greater where high performance tyres are fitted.
Petrol and diesel costs continue to rise due to the combined effects of increasing oil prices and fuel duty. Even if you have considered fuel costs when making vehicle comparisons in the past it is worthwhile checking the figures in the light of current prices. Remember, the more fuel your fleet uses, the bigger its carbon footprint.
Taxation
Vehicle Excise Duty (VED) needs to be taken into account (a contract hire agreement should also include VED) and, following the introduction of the first-year rate in April 2010, has become a more significant component in the WLC calculation particularly for the highest emitting vehicles. View the current VED rates here (as of May 2010).
Do you take class 1A National Insurance payments into account when setting car policy or choosing vehicles for your fleet? The employer cost is directly related to the P11D price of the car (list price plus options including delivery costs and VAT, excluding first registration fee and VED) and the vehicle’s CO2 emissions. The cost is significant particularly for higher value, higher emitting cars; for full details check HMRC guidance CA33.
If you lease your vehicles you will pay VAT on the rentals. In the case of vans you will normally (if VAT registered) be able to reclaim all the VAT paid on the rentals. However, in the case of cars where there is any private use, only half the VAT paid on the finance portion of the rental may be reclaimed, the services portion of the rental remaining 100% reclaimable. This “Non-recoverable VAT” of course should be built into the whole life cost calculation.
From April 2009 the capital allowances treatment of business cars for both corporation tax (for incorporated businesses) and income tax (for the self employed) changed to a system where the capital allowances that may be claimed depend on the vehicle’s CO2 emissions.
The calculations for this are complex and depend on the financial position of individual organisations. However, buying or leasing vehicles with lower CO2 emissions will help contain your overall costs, as illustrated below:
Pool Rate of allowances Period over which allowance given
Cars emitting 110g/km CO2 or less 100% First Year
Cars emitting between 111 and 160g/km CO2 20% Per annum on a reducing balance basis
Cars emitting more than 160g/km CO2 10% Per annum on a reducing balance basis
A 100% first-year allowance may be claimed on cars with the lowest CO2 emissions. Otherwise expenditure on the acquisition of a car is allocated to either the main or special rate capital allowances pool depending on the car’s emissions and will attract writing down allowances at either 20% or 10%. Unless a car is used partly for non-business purposes (and is therefore in a single asset capital allowances pool) there will generally be no balancing adjustment made when the car is sold. It is only cars owned by unincorporated businesses that are likely to be in a single asset pool because of non-business use.
For leased vehicles, broadly, a business can now deduct 100% of their lease rentals when calculating their taxable profit as long as the cars emit no more than 160g CO2 per kilometre driven but are restricted to a deduction of 85% of the rentals if the emissions exceed this threshold.
Can a more expensive car with lower emissions work out cheaper in the long run?
The implication of fuel and class 1A National Insurance costs
The following example demonstrates the potential impact of fuel, NI and Vehicle Excise Duty savings available by choosing a lower emission variant of a diesel family car. It uses the P11D price as the vehicle cost and assumes an equal residual value. A real life comparison should be based on actual purchase and forecast resale values.
Vehicle Vauxhall Insignia Exclusive hatch 2.0 CDTi 16v (160ps) ecoFLEX Vauxhall Insignia Exclusive hatch 2.0CDTi 16v (160ps) ecoFLEX Cost Advantage
P11D Price £21,205 £20,665 -540
CO2 136 154
MPG Combined 54.3 48.7
Fuel Consumption over 45,000 miles adjusted for real world driving (+15%) 953 gallons 1063 gallons
Fuel at £1.05 (exc VAT) pence /litre (£4.78/gallon) +VAT £4,555 £5081 £526
Benefit in Kind percentage 19% in 2010-11
20% in 2011-12
21% in 2012-13 22% in 2010-11
23% in 2011-12
24% in 2012-13
National Insurance cost 3 years £1629 £1825 £196
Vehicle Excise Duty 3 years £330 £465 £135
Total saving £317
Where to find help?
Through our telephone advice service we can help fleets of up to 50 vehicles consider the alternatives when choosing vehicles. Our consultants can be contacted on 0845 6021425 or by email.
For general running cost data Fleet News have both car and van whole life cost charts which may be a good starting point for you.
For fuel consumption, the VCA websites for cars and vans are good starting points as are the Comcar and Van Chooser webtools.
If you lease your vehicles then your leasing provider should be able to offer further support and guidance.
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| Date: |
28-May-2010
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