• Electrification of the fleet

    Distant future or concrete reality?

Articles:

Electrification of the fleet

01 March 2022

Taxation of car costs has been a hot topic for years, both for the user - the “benefit in kind” now depends on the emission and purchase value - and for the company that makes the passenger car available to the business manager or employees. What is the impact of electrification on the Total Cost of Ownership? We put it to the test.

In the autumn of 2021, more major changes were made to car taxation. The common thread in the amended tax legislation no longer appears to be the greening of the vehicle fleet, but suggests that companies are gradually being forced to electrify their fleet in order to keep the cost of the fleet under control.

An electric car is treated extremely economically in terms of taxation. Thus, the costs are 100% deductible, the CO2 contribution that the employer must pay is usually lower and the employee is usually taxed on a lower benefit in kind. On the other hand, the purchase price of an electric vehicle is often significantly higher than that of a combustion engine vehicle (hybrid or non-hybrid). Is there still an incentive to switch to an electric car? Or will cars with traditional combustion engines remain the most economical choice thanks to their lower purchase price?

We made the calculation and the outcome was clear. Although we must immediately say that fleet managers face a double challenge: on the one hand, the choice of the best equivalent electric alternative to combustion engines for the existing fleet and on the other hand, the choice of the most appropriate form of financing. As an independent multidisciplinary party, BDO can certainly assist your organisation in this exercise.
 

Electric alternative

A common reflex when choosing an electric alternative is to opt for a model that has to exceed the traditional car in all other areas to compensate for the limited range: faster, more luxurious, larger, more technology, etc. However, if we choose an electric vehicle in the same class with the same accessories and performance, we find that this electric alternative is between 5% and 30% more expensive.
 

Form of financing

If one chooses to purchase a passenger car (whether or not financed by a credit), then the price plays a short-term disadvantage for the electric car. After all, because of the higher average purchase price, more cash must be spent on the fleet during the useful life within the company. On the other hand, if electric vehicles are sold within the company at the end of their life cycle, their resale price is expected to be significantly higher than that of petrol or diesel cars.

In short, if a form of financing is chosen which takes account of this higher residual value (operational leasing or long-term rental), we note that despite the considerably higher purchase price of an electric car, the monthly invoice is very similar to the same form of financing for a car with an internal combustion engine.
 

Two example scenarios

In order to provide a concrete answer to the question as to whether or not it is worth systematically switching the fleet to electric cars, we calculated two alternatives. Scenario 1 assumes a gradual transition of the fleet to the electric alternative. Scenario 2 calculates the situation whereby the traditional combustion engine continues to be used.

The starting position is the same for both scenarios: on 1 January 2022, the company has a fleet of 80 cars, all equipped with a petrol engine. Sixty cars are “lower middle class”, 20 cars are “higher middle class”. All cars are financed through a 48-month long-term rental contract (including maintenance, tyres, insurance and assistance). We assume that on average 20,000 km per year are driven and that the consumption is equal to the average consumption according to the WLTP (Worldwide harmonized Light vehicles Test Procedure) standard. Finally, the company employees are taxed on the benefit in kind (no personal contribution).

The Total Cost of Ownership (TCO) for one “lower middle class petrol” car is 7,300 EUR in 2022 over 12 months, while the TCO for one “higher middle class petrol” car is 11,000 EUR in 2022 over 12 months. The TCO for the entire fleet therefore amounts to 658,000 EUR for 2022.

Calculating the Total Cost of Ownership

In calculating the TCO, we take into account the following elements:

  • Rental price
  • Maintenance/tyres/insurance/assistance
  • Fuel based on WLTP average consumption
  • price per litre of petrol is 1.636 EUR (incl. VAT)
  • price per kWh electricity is 0.4235 EUR (incl. VAT)
  • Charging station costs: 500 EUR per year per electric car
  • 65% non-deductible VAT on above elements
  • CO2 contribution
  • Settlement of the tax benefit in the corporate tax

Scenario 1: Progressive fleet replacement by electric alternative

Company A replaces 15 lower middle class cars each year with the electric alternative of the same (German) make, and does the same for five higher middle class cars.
 

Lower middle class

Although the purchase price of an electric lower middle class car is EUR 42,000 (including VAT) compared with EUR 29,500 (incl. VAT) for the petrol alternative and the need to invest in a charging station, the TCO for the electric lower middle class car will be EUR 8,000/year in 2022, or an additional cost of EUR 700 per vehicle.

The TCO of electric cars will remain the same until 2025, and from 2026 it will rise very slightly due to the increase in the minimum CO2 contribution. For electric cars purchased from 1 January 2027, the TCO will rise slightly faster because the tax deductibility of these cars will fall to 95%, 90% and 82.5% (for cars purchased in 2027, 2028 and 2029 respectively).

The TCO per remaining lower middle class petrol car will also remain unchanged until 2024. There will be a limited rise in 2025 (again due to the increase of the minimum CO2 contribution). The company will no longer have petrol vehicles from 2026.
 

Higher middle class

The electric replacement of the higher middle class on petrol is only a fraction more expensive in terms of purchase price. In view of the higher expected residual value, the monthly rental price falls from approximately 560 EUR/month to 445 EUR/month (excl. VAT).

Combined with the higher tax deductibility (from 55% to 100%) and the lower CO2 contribution, the TCO will fall from 11,000 EUR for the petrol version to 8,620 EUR/month for the electric version in 2022. Once again, the TCO for the electric version remains the same until 2024, only to rise slightly in 2025 (higher CO2 contribution) and finally ends in a TCO of 9,200 EUR per 12 months in 2029 for cars purchased in 2029.

For petrol cars, the TCO will remain at approximately 11,000 EUR until 2025. The company will no longer have petrol vehicles from 2026.
 

Combined fleet

Taking into account the changing taxation and para-taxation of the cars, the TCO of the entire fleet over the years is as follows:

2022

2023

2024

2025

2026

2027

2028

2029

658,000

657,000

655,000

655,000

655,000

660,000

669,000

679,000

The increase in TCO from 2027 is due to the reduced deductibility of electric cars purchased from 1 January 2027. Nevertheless, we note that in this scenario the rise in TCO is rather limited in an environment in which the legislator tries to discourage company cars as much as possible.
 

Scenario 2: Fleet replacement by internal combustion engine vehicles

Company B replaces its fleet with the same petrol cars at the same pace as company A (15 lower middle class cars and five higher middle class cars per year).
 

Lower middle class

For cars ordered before 01/07/2023, there are no changes regarding CO2 contribution and tax deductibility. The increase of the CO2 contribution for cars ordered after 01/07/2023 remains unaffected for this class until 2025. Subsequently, the effective CO2 contribution increases significantly, ultimately almost doubling in 2029.

Since taxation and para-taxation barely changes until 2025, the TCO per car until then is almost identical to the TCO in 2022. However, from 2026 the tax deductibility for cars with an internal combustion engine ordered after 1 July 2023 will decrease. This means that the TCO for these cars will systematically increase from 2026. In concrete terms, the TCO will increase from 7,780 EUR/year in 2026 to 8,770 EUR/year in 2029 per vehicle.
 

Higher middle class

For cars ordered before 01/07/2023, there are no changes regarding CO2 contribution and tax deductibility.

The CO2 contribution of this type of car doubles immediately for cars ordered as of 01/07/2023, and in 2029 will ultimately be almost six times more than the CO2 contribution for the same car in 2022. As with the lower middle class cars, tax deductibility for these cars decreases. The impact of the fall in tax deductibility on the TCO in this category will be less significant in 2025 and 2026 because the cars are only 55% deductible from the outset. Afterwards, the impact on the TCO is significant.

The TCO of petrol cars in the higher middle class will eventually increase from 11,000 EUR in 2022 to approximately 13,300 EUR/year in 2029 per car.
 

Combined fleet

The overview below shows the TCO of the entire fleet over the years, taking into account the changing taxation and para-taxation of the cars. The overview takes into account that all cars ordered in 2023 were actually ordered before 01/07/2023 and therefore undergo the most favourable tax arrangement.

2022

2023

2024

2025

2026

2027

2028

2029

658,000

658,000

660,000

664,000

694,000

756,000

792,000

792,000

In the first few years, the TCO of the fleet barely increased. We explain this by the fact that the cars themselves have the same financial cost and that the taxation and para-taxation changes only apply to cars ordered after 01/07/2023. In 2026 and 2027, the tax deductibility of cars equipped with an internal combustion engine will decrease. At that time, the vehicles ordered after 01/07/2023 also predominate in the fleet of vehicles, with the TCO starting to rise sharply. In 2029, the TCO of the entire fleet will be 20% higher than in 2022, and the TCO will continue to increase in subsequent years.
 

Conclusion

Although taxation does not change for cars ordered until 01/07/2023, we note that thanks to the higher tax deductibility and lower CO2 contribution, the TCO for electric cars is only slightly higher than for internal combustion vehicles and even in some cases lower (cf. the electric alternative for the higher middle class). This is of course on condition that a comparable electric car is chosen as a replacement and that the appropriate financing method is used.

For cars ordered after 01/07/2023, the electric alternative in any scenario is the better choice in terms of TCO, even though the tax impact will only really be felt from 2026. After all, it takes several years before an entire fleet has been replaced and the company is equipped with the necessary charging infrastructure.
 

Questions?

Do you have any questions about choosing the best options for your fleet? Do you need help in determining the financial, tax and social impact? We help you to map out the actual Total Cost of Ownership.