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WLTP confusion disrupts vehicle finance sector

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A new vehicle emissions testing regime designed to drive air quality improvements in the European Union is creating a cloud of confusion that is hanging over the vehicle finance sector.

The Worldwide Harmonised Light Vehicle Test Procedure (WLTP) is the EU’s response to Dieselgate, when vehicle manufacturers were found to be hiding the real-world emissions of their cars when calculated during official vehicle tests.

Expert analysis in Europe, which followed an initial scandal affecting Volkswagen in the US, showed that many new cars on the road were exceeding legal limits for carbon dioxide and oxides of nitrogen, even though they performed well in test conditions under the NEDC (New European Drive Cycle).

The updated programme is designed to provide a more robust method of assessing the on-road performance of vehicles in a bid to cut pollution levels, especially in cities where thousands of premature deaths are blamed on road transport emissions.

All new cars are being transitioned to the WLTP, with newly type-approved models subject to the test since last September, while all other new cars still in production must be re-homologated by September this year.

This is expected to lead to a rise in reported emissions. An interim system that uses a calculation to convert cars from NEDC to WLTP has increase reported emissions by 10% in some cases.

Arval, one of Europe’s largest leasing companies, says customers are in a state of confusion because they don’t know how their current vehicle choices will perform under WLTP, which directly affects vehicle taxation regimes that are based on emissions.

In France, car buyers pay a ‘malus’ penalty tax, which is based on a vehicle’s official emission figures, ranging from €50 for a car which emits 120g/km of CO2 to a maximum of €10,500 for cars which emit 185g/km or more.

A small rise for a new car following the shift from NEDC to WLTP could cause a substantial increase in tax costs. For example, a CO2 rise from 120g/km to 130g/km would increase the tax penalty from €50 to €300. A rise to 140g/km would take the tax penalty to €1,050.

In the UK, benefit-in-kind tax and capital allowances for business vehicles are based on CO2 emission levels.

Arval reports that some large UK fleets are extending leasing contracts because of the uncertainty, made worse because information on company car tax rates is only available up until tax year 2020-21, which is too short for the average four-year replacement cycle of a fleet car.

Shaun Sadlier, Arval’s head of consultancy, said: “Fleets find themselves caught in limbo. The government has yet to indicate when it will decide on how WLTP is incorporated into company car taxation, and the actual figures are some way off.

“For many years, benefit-in-kind tax tables have been made available for three to four years in advance, so that businesses and their drivers have a good indication of their tax liability and can plan accordingly. But at the moment, we simply don’t know what is happening.

“Because of this, we are seeing an increasing trend on the part of fleets, especially larger corporates that are generally better informed about WLTP, to sidestep the situation by extending lease contracts on a month-by-month basis.

“This, at least, will allow them to wait until there is an announcement from the government and make an informed decision on vehicle choice at that point.

“It seems very likely that we are building up a logjam of demand and that, following a Government announcement on WLTP and taxation, we will see a peak in car sales as everyone rushes in to place orders.”

Fleet software specialist FleetCheck said fleets are affected by a “triple whammy” of changes that mean policies are in their biggest ever state of flux.

This includes anti-diesel comments by leading politicians that have only recently been clarified as relating to older cars. In the meantime, diesel registrations have plummeted by one-third.

Peter Golding, managing director at FleetCheck, said: “This makes it very difficult for fleets to know which vehicles to acquire and operate.

“Will these cars measure up in terms of fuel consumption and CO2 once the switchover to WLTP is complete? Will they be affected by the ongoing shift of sentiment and Government policy affecting diesel? Will their drivers suddenly be hit with very high tax bills?

“It is difficult to recall another time when fleet policy was in so much of a state of flux.”

Val South, GB fleet manager for Xerox, recently told industry title Fleet News: “You can’t order cars from some manufacturers, because they’ve taken them off the quoting system while they undergo the test.”

This is causing a backlog of orders and complaints from drivers, she said, adding: “We’re having to extend leases beyond their normal replacement date, which could have an on-cost if you’re running high mileage, older cars.”

Paul Tate, commodity manager at Siemens, which has a fleet of 5,000 cars and vans, told Fleet News: “It’s a nightmare. Vehicles are disappearing from our rate books and there are no replacements.”

UK leasing giant Zenith recently reported it was removing all cars that are not yet WLTP- approved from its quoting platform to avoid confusion among customers.

The confusion is set to have a long-term impact, with manufacturers pausing production while they prepare models for the new test, which in some cases is leading to vehicle shortages, longer lead-times or vehicles being unavailable to purchase.

Autovista Group predicts heightened discounting and pre-registration activity in July and August as manufacturers seek to move on stock of cars that have not been homologated under WLTP.

Fleet management specialist CLM has reported a surge in uptake for short-term leases from corporate customers, with bookings up 30%.

CLM director Chris Mitchinson said: “Mini-lease can provide an interim solution to the current issues around the WLTP emissions test, and the resulting uncertainty over the CO2 values of vehicles and availability issues.

“It may also be of great interest to those organisations operating under international accounting standards which will, under IFRS16, be required to show all liabilities for leases on their balance sheet, unless the lease term is 12 months or less. The short-term nature of mini-lease means that this does not apply.”