Annals of nudge: British company cars

A small change in UK tax may tip large effects.

This post would be wonky if I could be bothered to do a deep dive into the rococo tax rules for company cars in the UK. Try this. But for once the tl;dr is enough.

For reasons I do not, like Cervantes (footnote), care to go into, the British tax code makes it attractive for employers to offer company cars to middle-rank employees as a perk. The company owns or leases the car and lets the employee use it for private travel and work alike. The employee pays tax (Benefit-in-Kind, or BiK) on the imputed value of the benefit for personal use, on a scale.

The typical split looks like this:

  • Company – ownership; book and residual value of the car; depreciation; insurance; breakdowns; maintenance; road tax; choice of the list of available cars, sorted by status.
  • Employee – fuel; BiK tax; choice of car from the restricted list, according to status.
  • Some employers offer fuel too, which is taxed as a separate BiK.

The result is that 35% of new cars are company ones, about 830,000 of them a year. Add to this the true fleets (rental companies, police, etc), and a remarkable 57% of new cars (pdf) are bought by companies, not individuals.

The story is that the shell-shocked British government has found the time to introduce a reform, from April 2020. This will make the BiK use tax more strongly dependent on emissions. It’s a steep progression now, from 9% to 37%. The rate will now fall to nil for BEVs.

Bank of America /Merrill Lynch have done the math and issued a shiny report with lots of pretty graphs (not public, but they sent it to CleanTechnica). The method is confusing, and the analysts do not provide a summary of costs to the company as opposed to the employee. As far as I can see, the takeaways are:

  • For employees, the BiK changes and cheap electric fuel make for very large savings in choosing a BEV or PHEV – up to 22 times less outlays for a Tesla 3 (£659) against a BMW 3 series petrol (£15,137) over three years, a common life of a company car.
  • For employers, the low maintenance costs of EVs are still outweighed by the higher purchase price, so that the total three-year cost of ownership (TCO) of the BEV or PHEV is still somewhat higher than that of a comparable ICEV for 10K miles a year. The significant savings to the employee mean that the total joint TCO is similar. The TCO becomes significantly lower (12% – 32%) for a high-mileage fleet use of 20K miles, including fuel costs.
  • The employer can now in many cases offer a higher-value package to the employee for less outlay with EVs, appropriating (unless they are dumb or unusually altruistic) a large share of the tax break. (My inference, not BoA’s.)

Here’s the cognitive beauty of this setup, which makes it a great nudge: nobody is acting under sticker price illusion. The employee doesn’t pay any part of the purchase price, and has no reason to consider it. For their employer, the analysis is done by professional HR and finance people who are automatically looking at TCO. (By this I understand purchase price plus all running costs and depreciation; Bank of America confusingly exclude the first.) Their decisions have to be justified by the data. Company secretaries and lawyers will start muttering about “fiduciary responsibility” if the Board does not pursue the cost saving. The effect is supercharged if the employer leases rather than buys the vehicles. Car TCO is just a significant side-issue for most employers. For leasing companies, TCO is the heart of the business. They will very soon be offering EV contracts cheaper.

It’s a pretty safe prediction that the company car market in the UK will shift strongly to electric vehicles from next April. That’s before taking account of competitive new models like the VW ID.3, improvements in the charging network, further moves towards ULEZ zones in city centres, and censorious pressure from teenage children inspired by Greta. The new sales will probably stimulate emulation sales to envious neighbours, some with their own Greta fans.

Does this extend to true fleets? Police have their own use requirements and are culturally conservative. Rental car companies are less so. However, they are in a rather similar position to standard company-car employers, in that it’s the renter, not the owner, who gets the benefit of the low fuel costs. The number of renters who ask for an EV is still, I would guess, quite low from lack of familiarity. But this too will change, more slowly.

The incentives here are specific to the UK and the same effect won’t be seen in the USA. But there are still many US fleet operators who are likely to be more receptive to TCO pitches than Joe Average in the dealer’s lot. That’s how electric buses are taking over, in site of the sticker premium.

Oh, yes, RANGE hiss hiss. The distance from London to Edinburgh is 402 miles: Brits see this as a major two-day expedition calling for a week’s planning with furrowed brows, as historian John Keegan puts it. A 250-mile Tesla 3 Standard meets all reasonable range needs in Britain. Distances in the US West are of course greater – but the population of Wyoming is 577,000, barely more than Sheffield (553,000). It’s absurd to let the needs of a handful of rural Real Western Men determine the framing of transport policy in a country where 80% of the population lives in cities, towns and suburbs and the average commute is 16 miles.

The EV revolution is happening, much faster than most people think. This chart leaves out e-buses, which have 90% of urban sales in China , and e-tuks, which putter below the statistical radar, but are >1.5m in India alone. For cars, the growth in sales in 2018 was a not exceptional 65%. It will be lower in 2019 because of a large hiccup in China, but the trend is unstoppable.

Footnote

The immortal opening sentence of Don Quixote:

En un lugar de La Mancha, de cuyo nombre no quiero acordarme, no ha mucho tiempo que vivía un hidalgo, de los de lanza en astillero, adarga antigua, rocín flaco y galgo corredor.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

16 thoughts on “Annals of nudge: British company cars”

  1. One need not go as far west as Wyoming to find problems with a 250-mile range. This is only to say that we’re not there yet.

    If one is in, say, Chicago, and needs to attend a seminar at the University of Illinois in Urbana-Champaign, one cannot count on a 250-mile range being sufficient… UNLESS one is guaranteed to be able to recharge during that seminar. UIUC is 134 miles from the southern city limit of Chicago.

    The key point is that until there is guaranteed infrastructure at both ends of reasonable, rational journeys, it’s radius (out and back) that’s important, not point-to-point range. That’s less of an issue in much of the UK… but not entirely negligible, as it still assumes working infrastructure in some awfully small/proudly isolated communities. And the driving to get there is no fun, either, especially on a C-or-worse road.

    “Yet” is the issue. Perhaps by 2025 things will be better, at least in the UK. I don’t see that happening in the US; even 2030 is optimistic. (It’s one thing to put in charging stations; it’s another to rely on PG&E to power them… and I’d trust PG&E before I’d trust the Chicago-area utilities!)

  2. Look at your test case. Urbana-Champaign is 136 miles from Chicago. Plugshare lists 59 public chargers in Champaign, 8 of which are Tesla superchargers (https://www.plugshare.com/directory/us/illinois/champaign-urbana). This took me about 2 minutes to find out. Stay with a friend, and run a $15 extension cable from the garage, an overnight trickle charge at the US standard 110/120V will recover a measly 30 miles; but enough to get your 250-mile Tesla home with 8 miles to spare. That’s a bit tight, so look for a friend with a $500 European-standard 240V socket, raising your margin to a safe 38 miles.

    In the 1930s, not only Okies drove long distances in cars with lower gasoline ranges than today’s EVs (Model T Ford, 10-gallon tank, about 20 mpg, so 200 miles). They did this without the benefit of today’s in-car apps that tell the EV driver the precise remaining range and supply a map of nearby chargers.

    The problem is merely that long trips in a BEV require a very little more thought than “the gas is running low, I should stop at the next clean-looking gas station”, a cognitive challenge on the level of fixing an appointment with the dentist. I am confident that most RBC readers are up to this.

  3. Perhaps things in Urbana-Champaign have changed in the last few months, but my comment was based specifically on a friend’s experience in May. Although there may appear to be sufficient recharge facilities, they tend to be quite distant from campus… and are frequently filled by people who leave their vehicles there all day while at work, or for sporting events, or for dorm move-in/out, or for other reasons that seem good to them (and may even be compelling, in the instance of a disabled driver). It’s sort of like saying “there are plenty of parking spaces at that grocery store!” without noting that the grocery store is right across the street from the L station, and its lot is usually filled up by 8am with commuter cars. (I only wish that was hypothetical, at least in the 1990s when I worked in Chicago. Thanks, Jewel-Osco!)

    I’m only suggesting caution that “return radius” is at present a better measure of reliability than is “full range,” and that will change over time. At present, “electrical vehicle support” is at about the same place as “aviation support” a little less than a century ago (when many airfields didn’t have refueling capability). It is getting, and will be getting, better.

  4. You are saying that the university doesn’t have public chargers on site? Does it have running water and toilets?

    Blocking a charger space for all-day parking is a social offence that will soon attract opprobrium and tow trucks, like an able-bodied driver hijacking a marked disabled space.
    A PS on staying with friends. The number with their own EVs is rising fast. Anybody who can afford $35,000 for a Tesla will also be buying a Level 2 DC home charger, another $500 on top of the cost of the 240V AC socket. If it’s a common 32 amps, that gives a claimed 23 miles of range per hour: a full recharge overnight. I expect that since electricity is cheap, loaning a recharge will quickly become a new form of gift-exchange neighbourliness. Tom: “Bill, I’ve got a friend visiting from Chi who needs an overnight EV charge. Can you help?” Bill: either “Sure, Tom, glad to help” or “Sorry, no can do tonight, I’ve got a long trip tomorrow myself. Try Mary. I know for a fact she’s at home tomorrow for some family thing.”

    1. I don’t for a moment question your assertion that we are moving steadily towards a probable preponderance of EVs and I agree that that is a good thing. It occurs to me that what you’re describing here, however, is a fairly significance cultural change. It would be interesting to get an anthropologist’s take on how such a thing might work. “Stay with a friend” is easier said than done. There are friends I’d certainly ask for overnight accommodations from, but they are relatively few, and they don’t always live where conferences happen or on the route to wherever I’m heading. And there really is a limit to how much of that one can do.

      Blocking a charger space for more than the 70 or so minutes required to reach full charge should perhaps attract opprobrium, but I don’t think that’s going to work on college campuses, where students are penurious (and hence unwilling to pay for the fast charge) and in my experience many of them are immune to social opprobrium of that sort. In fact, I don’t think it will work in most places–have you seen the way people park? (Yes, that’s a particularly large SUV in the “compact cars only” space.) Some kind of enforcement will be required.

      Finally, there’s another issue with recharging that hasn’t been mentioned. Waiting 70 minutes for a recharge may not always be a problem, but I suspect that most women traveling alone will not want to put themselves in a position where they are in a public area with limited ability to leave for a set and predictable period of time. The fast charger tethers one to the spot for rather a long time, relatively speaking.

    2. The University of Illinois at Urbana-Champaign is pretty much still asleep at the wheel on this. It has 8 level 1 and 6 Level 2 chargers, according to its website. I couldn’t find a total of parking spaces, but it has 47,000 students. I’d be surprised if the employees were less than 10,000. Let’s say 10,000 -20,000 parking spaces. With 10% of these equipped for Level 1 charging, it would need 1,000 – 2,000 chargers. If the university installed solar carports, it could provide the service for 5c/kwh and still make a profit. (Given the low daily value of the sold electricity, the extra cost of meters is not worth it; just add a fixed charge to the space rental, or – even simpler – spread it over all parking charges as a Pigovian subsidy/tax.) In addition, a big fleet allows the sale of V2G services to the utility or campus minigrid. So enough with the symbolic handful and start a proper rollout!

  5. I’ve taken the EV plunge. Yes it requires a bit more forethought to drive beyond its range than an ICE car, but I’ll never go back. Without a transmission, fuel system, exhaust emissions system, distributor, oil leaks, engine noises, etc, to worry about, it’s great.

    1. Your positive experience is I think typical. Here’s an example from New Zealand. I hope to follow you in 2020. All the indicators point to the balance tipping steadily more in favour of EVs everywhere, especially purchase price and charger availability. The one downside risk is I can see is that a breakthrough in battery performance will tank the second-hand value of early EVs with low ranges. But these will still be perfectly usable.

  6. Your fine analysis appears to take it as a given that electrical vehicles are environmentally superior to IC vehicles, taking account of all relevant factors, including the necessity of generating all that nice clean electricity somewhere, somehow. And so they may be; I am not arguing to the contrary. However, treatments I have stumbled across in the past tend to lean toward, “they surely will be better someday, so lets not get bogged down in the current specifics.” I would welcome a turn of your eagle eye to both parts of that question: First, are electric vehicles demonstrably cleaner overall as of now, taking account of actual current electricity generation sources? Second, what is the best well-grounded calculation of how that will change in the future?

  7. Here’s a nice chart showing how sensitive the lifecycle total is to the mix in the current electricity grid:
    https://www.euractiv.com/wp-content/uploads/sites/2/2018/03/ElectricyMixesClimateChange-1024×724.png
    Note that Messagie finds EVs are better than diesel everywhere.

    Your second question is much easier. All electric grids are going to decarbonise, so they will all look like France or Sweden eventually. The process will very probably be substantially complete by 2040, within the 20-year life of a typical car. I’m less confident about battery and powertrain production, the small bars at the top. It’s technically possible and often commercially attractive to run mines with renewable electricity (already being done in Chile and Australia), and the social pressure on Tesla, VW, LG etc, selling “green” products, to cut their carbon footprints is great. The rest of the vehicle, not a large carbon debt in total, depends on decarbonising steel and aluminium. Both are technically feasible but cost more. Once we’ve slain the fossil fuel dragon, a lot of policy changes will become politically feasible.

  8. I tend to suspect that the next few decades will differ somewhat from your vision in one of two ways. Option A is that the range and turnaround weakness of EV’s will be reduced very significantly due to technological progress not clearly in sight as of now. Failing that, Option B is that ICE’s or hybrids will retain a more notable share of the market longer than you project for some uses, and in many geographical regions where the range and turnaround issues are more challenging than in most of Western Europe.

    1. You can buy a Tesla S with an WLTP range of 375 miles with 400 coming soon; a Tesla 3 with 348 miles. Very few drivers would get any significant benefit from more. I see no reason to disagree with BNEF’s projections of continued falls in battery costs with incremental technical progress, and less dramatic increases in energy density. Meanwhile, many well-funded teams of researchers are working on new battery chemistries that would allow a step change in energy density and hence range, with electric trucks and planes as the prize as well as the now large EV car market. It strikes me as more likely than not that at least one of these paths will pay off. Hybrids are inherently more complex beasts than either ICEVs or BEVs, so they cannot match the coming cost reductions in the latter.

  9. In my neck of the woods (vermont) some businesses are already taking advantage of the market opportunity here. Install one or a few charging stations in your parking lot, and suddenly you become the place for a certain class of well-heeled, forward-thinking types to eat, caffeinate, buy trinkets or whatever (and the more browsing time, the better). Similar expenditures on other kinds of marketing would be unlikely to bring in that demographic. Eventually the first-mover advantage will dissipate, but in the meantime there’s money to be made, and it’s a little surprising (by which I mean not surprising at all) that there aren’t a bunch of intermediaries in the market as there are with residential solar.

    Meanwhile, it does say something sad about the cognitive/social resources of car buyers that an event that happens maybe a few times a year to a couple times a month is seen as an absolute showstopper. (I’m imagining the converse of someone arguing against an internal combustion vehicle on the grounds that you have to plan to get oil changes…)

  10. One of my former law partners is semi-retired. His area of concentration was condominiums, home owners’ associations, etc. I told him that, because of the rapid adoption of EVs, he would have to come out of semi-retirement. He couldn’t understand why.

    I explained that, in the very near future, one could not sell a residential condo, etc., unless it had easy access to an EV charger. Since a condo association, not the individual condo owners, controls the common areas, the condo documents in virtually every condo in the area would have to be amended.

    I wonder how many categories of commerce will undergo change due to the wide-spread adoption of EVs? Certainly, there will be far fewer jobs for auto mechanics since EVs need fewer repairs. The number of the now ubiquitous “gas & go” operations will decline. (As a practical matter, they already seem to make as much money selling coffee, etc., as they do selling gas.) And, with the disappearance of gas stations, the contamination threat gas storage tanks pose to ground water will disappear.

    Any further thoughts?

    1. The gas stations have the land, familiarity, and (up to a point) the power supply to add chargers. Total are already doing this in France for 300 stations. The difficulty may be upgrading the power supply to cope with fast (Level 3) chargers, but batteries can help.

      The demands for fast heavy truck charging are of a different order, say 1 MW (met on paper by three 350KW circuits in parallel). A truck recharging station with say 10 stalls would have to be sited near a medium-voltage grid line. Tesla, planning to launch a long-distance BEV truck, have been silent on the charger problem and its large financial demands. My guess is that they will have to retreat to an open standard to spread the financing burden.

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