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What’s the real impact of VED changes for fleets switching to electric?

To support them in their journey to greater sustainability, the UK government has implemented financial incentives to help promote electric vehicle (EV) adoption, including tax exemptions and grants. These include support with EV chargepoint installation, Clean Air Zone (CAZ) and Ultra Low Emission Zone (ULEZ) exemption, and a host of tax benefits.
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20 November 2023

By Neill Emmett, Head of Marketing at ALD Automotive/Leaseplan (soon to be Ayvens)

DESPITE the deadline for the sale of petrol and diesel vehicles being pushed to 2035, many fleet-operating businesses are already looking ahead and making the switch to electric.

To support them in their journey to greater sustainability, the UK government has implemented financial incentives to help promote electric vehicle (EV) adoption, including tax exemptions and grants. These include support with EV chargepoint installation, Clean Air Zone (CAZ) and Ultra Low Emission Zone (ULEZ) exemption, and a host of tax benefits.

However, at last year’s Autumn Budget, the Chancellor announced that one of these tax benefits – an exemption from paying Vehicle Excise Duty (also known as car tax) – will end in April 2025, leading some businesses to question the impact this will have on their fleet savings.

In this article, I’ll examine the true impact this will have on businesses and explore the different ways we, as part of the wider mobility industry, can continue to support the roll-out of EVs across the country.

An overview of the current landscape 

As previously mentioned, driving an EV in the UK means enjoying certain incentives like tax advantages. This includes lower Benefit-in-Kind (BiK) and company car tax (CCT) rates, as well as an exemption from VED. These incentives make EVs even more financially viable to businesses, making them more likely to prioritise EV adoption at an earlier date. It’s an important pull for businesses where budgets may be tight, particularly within the context of rising interest rates.

But, with over 810,000 EVs on UK roads as of June 2023 (source: SMMT), the EV market is growing rapidly and electric driving now entering the mainstream. As such, the government is reviewing its current policies as it strives for fiscal sustainability.

Naturally, the removal of any financial incentives has the potential to impact public perception and may lead to a slowing down of the current rate of uptake we’ve been seeing these past few years. However, a recent study from LeasePlan and Deloitte has found that businesses can still make considerable savings for both job-need and perk vehicles when they calculate the Whole Life Costs (WLC) of an EV compared to a petrol model.

Case study:

 

Our 2023/24 Fleet Funding and Taxation Guide provides an example case study which illustrates the financial implications of introducing VED to battery electric vehicles (BEVs).

A key finding from the case study is that the additional rate VED supplement for cars with a list price over £40,000 will have a material impact on the costs involved. At the time of writing (March 2023), the additional VED supplement adds £355 per annum to the cost of VED starting after the first year. Over a 48-month replacement cycle, this would add at least £1,065 to the overall cost of VED (although this number is likely to be higher after accounting for inflation).

The results for the job-need cars show that the introduction of VED for BEVs will increase the Whole Life Costs (WLCs) of funding these cars, and this will reduce the potential saving these vehicles offer when compared to petrol or diesel alternatives. However, the cost increase is relatively low meaning the saving offered by the BEV modelled would fall from 11% to 10%, which is unlikely to have a material impact on decision making.

The results for the perk cars follow a similar pattern, where the introduction of VED for BEVs will increase the WLC of funding these cars and reduce the potential savings compared to petrol or diesel alternatives. However, the additional rate VED supplement will increase the financial impact of VED being introduced, with the savings offered by the BEV modelled falling from 15% to 10%.

Keeping EVs attractive to businesses

It’s worth noting that despite the more material increase in Whole Life Costs for a BEV, it still offers a significant saving compared to the diesel engine alternative modelled. The removal of the VED exemption for BEVs in April 2025 will see costs increase, with a more noticeable impact for any cars attracting the additional rate VED supplement. However, at the same time, the Autumn Statement confirmed that arguably the biggest EV incentive in the form of low company car tax rates will remain in place until at April 2028, meaning these cars can still offer a cost-effective option.

Data from our 2022 Car Cost Index shows that EVs are now more cost competitive than ever before – with EVs in nearly every European country the same or cheaper on a total cost of operating basis than petrol or diesel cars. This means that regardless of changes in incentives, it is still financially beneficial for businesses to make the switch to electric driving.

It’s also important to consider the bigger picture. The journey to electric driving isn’t just about saving money, it’s about protecting the planet. Zero emission vehicles represent a key step in reducing our global carbon emissions – and that’s something you can’t put a pound sign on.

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