Whole life cost is an important consideration for any fleet manager. As the term given to the overall cost of a fleet vehicle over the term of leasing or ownership, it’s an essential calculation for working out how much a vehicle is going to cost and this insight is going to help you manage fleet finance more effectively and save money, as well as understand the true cost of vehicle ownership and maintenance.
Whole life cost calculations take into the following related factors:
Vehicle list price (P11D)
The vehicle list price of a vehicle, called the P11D value, is the primary method for finding out how much company car tax you have to pay. P11D value comprises the list price of a vehicle + VAT, and any delivery charges. However, it does not include first registration prices or annual car tax costs. P11D value is calculated by multiplying the percentage rate of income tax, either 20% or 40%, over a leasing period and by the benefit-in-kind tax calculated by vehicle CO2 emissions.
Acquisition price (not P11D)
The acquisition price or funding cost of a vehicle is not to be confused with the vehicle list price, or P11D. Acquisition price is simply the cost that a company recognises on its books after adjusting for discounts, incentives, and other necessary expenditures. This ‘book price’ needs to be factored into your whole life cost calculation, and it will likely take up a large chunk of the final whole life cost.
Capital allowances set by CO2 value
In April 2009, the Government put in place new taxation rules for company cars and fleet vehicles with Capital Allowance. The basics of Capital Allowance are that there’s now tax incentives worth hundreds of thousands of pounds for fleets with low CO2 emissions. The rules work like this – cars and vehicles that emit less than 160 g/km of CO2 allow companies to offset a large part of a vehicle’s value against tax.
Companies that purchase vehicles with CO2 emissions can write down 10% of its value each year while for vehicles with CO2 emissions less than 160 g/km that number grows to 20%. So, it really does pay to operate a low CO2 fleet. However, you will still offset the value of the vehicle against the tax years the vehicle still has left on the fleet.
VAT – what amount can you recover?
If you are leasing vehicles in your business fleet, you are normally able to claim back 50% of the VAT you pay, and 100% of the VAT you pay for repairs and maintenance so long as these are paid for by the business with the lease and there is business use of the vehicle. You can also reclaim 100% of the VAT you pay for fleet management and off-street parking.
Corporation Tax reduced by CO2 value
Corporation tax is significantly affected by CO2 emissions, and this should always be factored into your whole life cost calculation; the lower the CO2 emissions of a vehicle, the lower the corporation tax. This makes hybrid vehicles, and alternative fuel vehicles, a healthy choice for companies.
It’s also important to consider that for some green technologies, fleet managers and companies are able to claim Enhanced Capital Allowance (ECA), which lets you set the whole cost of the asset against taxable profits in the first-year of purchase.
There is only one thing you can be sure of with a vehicle – depreciation. All fleet vehicles depreciate, but how fast your specific vehicle depreciates is dependent on a number of factors, including; real retail price, mileage, age, condition, CO2 emissions, fuel type, and fuel consumption. You can limit the level of depreciation of a vehicle by effectively buying a ‘future proof’ vehicle, which has low CO2 emissions with the potential to return good levels of real-world economy. It’s also important to maintain a vehicle effectively and to keep it in a good condition, if you plan to sell it on in the future.
The CO2 emissions of a fleet vehicle are considered to be the biggest determining factor in whole life cost. CO2 emissions are important because they largely determine employer NI contributions, and they are also used to calculate car tax, if applicable. CO2 emissions are also a good pointer toward the real-world economy, or fuel consumption, you can expect from a vehicle; the lower the CO2, the higher the miles per gallon. If the CO2 rating of a fleet vehicle is over 160 g/km, costs will be sky-high.
Fuel consumption is one of the most important factors to include in your whole life cost calculation. If you are considering a new fleet, pay close attention to fuel consumption as not only will this reduce your fuel costs, but it will also affect depreciation and final residual value.
Employers NI contribution
Employer NI contributions, or employers’ class 1A national insurance contributions, are an important part of your whole life calculation. This contribution is based on the manufacturer’s RRP of a vehicle, as well as CO2 emissions, and does not take into account savings made by going to a third-party seller.
Emission thresholds are now tighter than ever before for 2013/14, and these are set to get tighter in the future. The only way for a fleet manager to keep employers’ class 1A national insurance contributions low is to maintain a fleet of vehicles with low CO2 emissions – below 100 g/km is the gold standard, while vehicles with CO2 emissions below 110 g/km are the next best thing. To calculate your NI contributions, find out what CO2 emissions your vehicle has and then find out the current and future BIK rates. Petrol-powered vehicles have lower BIK rates than diesel-powered vehicles.
Including insurance costs in your whole life calculation is easy, because each time you renew your fleet vehicle insurance, you will have a pre-set payment arrangement. Simply factor into your whole life calculation the total cost of vehicle insurance and you’re all set.
When mapping out insurance costs for the future, look at the general insurance savings that were made on a fleet vehicle the year before. Add these savings, or a percentage of, to your whole life calculation.
Service, maintenance & repair costs
Working out the service, maintenance, and repair costs of a fleet vehicle is an essential part of working out your whole life calculation. You need to work out how much your vehicle is going to cost to run.
This can be achieved by first looking into any free work your fleet vehicle qualifies for – vehicle manufacturers generally have a 3-year warranty on new vehicles, while used vehicles usually come with a 12-month warranty, or some form of quality guarantee. Leasing companies are also known to throw in free servicing for the lifetime of a vehicle, so if you can find out what level of warranty and service pack you have this will make working out service, maintenance, and repair costs a piece of cake.
If you are running an older fleet, working out the service, maintenance, and repair costs gets a little trickier, and for a true calculation you’re going to need to do some research into the common problems your make and model of vehicle has, as well as ring garages to get a service price.
The residual value of a vehicle is the amount a fleet vehicle is worth once a leasing contract has expired.
Understanding future residual values is an essential part of fleet management, for understanding a vehicle’s residual value will enable you to plan for the future.
Residual value is not set in stone, but it can be near-accurate by taking into account information from vehicle manufacturers, auction prices, private sellers, and residual data for vehicles into your calculation. A residual value will give you a good idea of what amount of money you can get for your fleet vehicles when it comes to sell them on, but ultimately, the amount you get is going to be set by the buyer. It’s also important to consider the make, model, and year of manufacture of a vehicle, because and older-generation model will depreciate.
Where a vehicle is leased, residual value and maintenance are included in rental costs.
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