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Companies are under increasing pressure to show their green credentials nowadays. But while putting a windmill on the factory roof is a highly visible gesture, operating an environmentally-friendly transport fleet is one of the easiest ways to go green and will also show a positive return on investment.

Cars and lorries have been identified as the biggest target by ecological lobbyists, with road transport demonised in many quarters as environmental enemy number one. One of the most significant ways in which green demands can be satisfied is by a company seeking to reduce the carbon dioxide (CO2) emissions of its fleet, either by fuel efficiency or lower use.

However, the pressure to be seen to be green does not usually come from investors, even if large companies now devote more of their annual reports to boasting about how they are socially responsible and helping the community. Nor is it usually directors who demand that their company goes green. It is certainly not the bankers or suppliers either, nor is it usually customers, even at those businesses that sell to a retail market. And while politicians are increasingly incorporating the environment into their manifestos, the pressure that they put on businesses directly is limited to tax incentives for green companies, even if that effectively means financial penalties for those firms that do not change.

So unless the board is itself committed to saving the planet, why adopt green measures on the transport fleet or any other part of the business? The answer is that the pressure comes not from boards, bankers, suppliers or customers – it comes from the staff. But as it is employees that drive company cars, keeping them happy is good business. And if making the fleet green also means improving financial returns, then there is a double incentive to join the environmental bandwagon.

Company cars remain a key tool in incentivising staff. Despite legislative changes aimed at reducing the financial benefit, such vehicles are still seen as status symbols, not only for top managers but also for employees like sales representatives who are paid by results. Company cars feature more prominently in recruitment advertisements rather than pension schemes or other perks, such as medical insurance.

There has been a succession of British budget changes aimed at encouraging companies to operate greener fleets. When the Inland Revenue’s benefit-in-kind rules for taxing the private use of company cars was revised in 2002, the tax burden was related directly to the CO2 emission of the vehicle. Since the start of 2006, the 3% surcharge applies even to users of diesel-powered cars that comply with the European emissions standards.

Chancellor of the Exchequer Gordon Brown’s 2006 Budget made a further step toward encouraging the use of green vehicles by introducing a tiered road-tax charge that – in theory – allows cars with the lowest carbon emission to pay no duty while the tax on gas-guzzling 4x4s and cars that emit more than 225g of CO2 per kilometre was raised to £210, or £215 for diesel vehicles. It happens that few, in any, of the tax-free smaller cars are likely to be used as company vehicles and that the extra duty on a 4x4 or fashionable sports car is nominal compared with the capital cost of the vehicle. However, the Chancellor’s move gave an indication of how taxation is likely to be used in future budgets to encourage environmentally-friendly vehicles. Companies should expect the differential to widen in future years.

The 2006 Budget was accompanied by a consultation document from the UK Treasury aimed at revising the now-complex regime for giving capital allowances on company cars. Legislation is expected to follow this year that will favour low-emission cars.

At present, companies can offset 25% of the value of cars costing less than £12,000 – in line with the capital allowances given on other plant and machinery – but are restricted to £3,000 a year on more valuable vehicles. That £12,000 threshold has not been changed since 1992, despite the increase in the purchase cost of vehicles over a decade and a half.

It seems likely companies will in future be able to write-off cars against profits at a flat rate, irrespective of their value: the allowance rate would be below the current levels, but could be accompanied by first-year allowances that will be higher for environmentally-friendly vehicles. Companies could be allowed to write-off their most efficient cars completely in the first year and the rules may be widened to allow higher tax relief for companies that lease vehicles, rather than purchase them.

It remains important, however, for companies to monitor the rate at which their fleet depreciates in value. Ironically, the same sports cars and 4x4s whose use the government wants to deter with higher road tax are the vehicles currently holding their value longest – a trend that is reflected in contract hire rates.

It also remains important to use vehicles efficiently. With fuel accounting for a third of the cost of running a fleet, it makes more sense to save on the cost of transport than tax. That means reducing mileage through efficient logistics and increasingly ensuring that transport fleets are subjected to the same degree of professional management that is applied to functions such as finance. Although satellite navigation systems may seem like a further perk for the salesforce, at many companies they will more than pay for themselves within weeks by reducing mileage and time wasted by drivers.

The government concedes that the existing tax regime is not only inefficient in encouraging the use of green vehicles, but imposes a heavy burden of red tape on companies. Employers inevitably need to take these varying road tax rates into account when assessing the cost of the reward being offered to staff, but for smaller companies, there is also the decision of whether to buy cars, operate a pool, rent vehicles or reimburse employees for using their own.

The cost of managing a fleet, rather than operating it, deters many companies trying to run their businesses on limited management resources – especially when legislation is changing so often. But there are ways of minimising the bureaucracy while also going green.  

Renting is increasingly being seen as an efficient alternative to operating a pool of vehicles. It not only passes the onus for maintenance to rental companies and results in a safer fleet, but also offers flexibility by allowing businesses to increase the number of vehicles available and permits them to change these to suit their needs. For smaller firms that cannot maintain large fleets to cover fluctuations in demand, renting is a real alternative to long-term leasing or direct ownership. Although using vehicles less intensively may look like a short-term green goal, idle fleets are both an environmental and financial waste; obtaining greater use from fewer vehicles, as is possible from renting, represents an better ecological solution.

Fewer cars also means less car parking provision is required – another green measure that is being forced on to companies by planning regimes. To obtain permission to build a new headquarters, one City of London property developer has promised to demolish a car park for 193 vehicles and replace it with just 33 parking spaces – and accommodation for more than 600 bicycles.

Some rental companies seek to demonstrate their green credentials by joining a carbon-neutral scheme that assesses the CO2 produced by its users and plant trees to offset the emission. Although such measures are dismissed by some as a gimmick, it is an indication of the pressure the green lobby has on transport users.  

Biography

Anne Lowe was managing director of a London business consultancy and also ran a promotional company based in the US. She now writes for financial and trade publications, including The Business, and advises small companies.