According to the recently published White Clarke Group UK Asset and Auto Finance Country Survey of the UK in the 12-month period to the end of December 2014, car finance, commercial vehicle finance and plant and machinery finance were the three dominant sectors in the UK’s finance and leasing business. As the report points out, the UK has the sixth largest economy in the world and its asset finance market is reckoned to rank higher than that, possibly the fourth largest.

Figures from Leaseurope suggest that in the first half of 2014, new business volume for equipment and vehicle finance (excluding land and buildings) reached €27.8 billion, compared with €23.5bn in Germany. Leaseurope suggests that compared with the same period in 2013, the UK market growth rate was only exceeded in Western Europe by Spain and Portugal, both of which were recovering from a steep decline.

This is in line with the growth the UK has enjoyed in the car market over the past three years. According to data published by the UK Society of Motor Manufacturers and Traders (SMMT), new car registrations reached 2,476,435 in 2014, the highest figure for a single year since 2004. This was the fourth highest number of registrations ever recorded, only exceeded in 2002, 2003 and 2004. While average growth in registrations across the European Union reached 5.7% in 2014 according to data from the European Automobile Manufacturers Association (ACEA), the market in the UK grew by 9.3% compared with 2013. In December 2014 the UK car market recorded its 34th consecutive month of growth in registrations. The UK is the second largest car market in the EU after Germany. Considering the size of the country relative to the five largest EU automotive markets, (France, Germany, Italy, Spain and the UK) and the comparative size of the country’s highway network, the figures are remarkable, not least because the UK market has been growing while most other EU countries have still seen their markets declining over this period.

Alternative Fuel Vehicle Registrations Boom

SMMT data also shows that the UK market for plug in hybrid electric vehicles (PHEVs) increased by 304% in 2014 from 3,586 in 2013 to 14,498 in 2014. SMMT data indicates that registrations of cars powered by alternative fuels (other than petrol or diesel) rose 58% from 32,731 in 2013 to 51,739 in 2014.

One of the manufacturers to benefit was Mitsubishi with sales of the Outlander PHEV. Overall the company saw registrations rise by 75% to 15,805 in the UK in 2014 and the Outlander PHEV accounted for over 50% of sales of PHEV and electric vehicles during 2014. The company saw the benefit of improved exchange rates with the Japanese Yen, enabling the company to offer more competitive prices, a factor that has similarly been beneficial to other manufacturers importing vehicles from Japan.

Mitsubishi Motors in the UK forecasts that over 10,000 Outlander PHEVs will have been registered in the UK by the end of March 2015. According to Mike Hawes, SMMT chief executive, “The year was particularly strong for alternatively-fuelled vehicles as increased choice, coupled with a growing desire for reduced costs and greater efficiency, resulted in a quadrupling of plug-in car registrations over 2013. With a variety of new plug-in models expected in 2015, this area of the market will continue to grow significantly. For the market as a whole, we expect a more stable 2015 as demand levels off.”

Like many other EU countries, the UK has a car tax regime based on carbon dioxide emissions. Similarly, Benefit-in-Kind taxation for company car drivers is based on carbon dioxide emissions and there are tax benefits for those who choose cars like the Outlander PHEV.

Under the current New European Drive Cycle (NEDC) test the Outlander PHEV returns CO2 emissions of 44g/km. In the current tax year, ending on 5 April 2015 and the 2015-16 tax year, the car will attract BiK tax at a rate of 5% compared with 23% for the diesel variant of the car, which will rise to 25% in the next tax year. Diesel cars currently carry a 3% BiK surcharge compared with petrol models in the UK. This is due to change in April 2016 though, when the 3% surcharge will be dropped and petrol and diesel powered cars will be treated equally where BiK tax is concerned.

The low BiK rate for business cars with low emissions is not scheduled to last in the UK, though. By the 2018-19 tax year, the BiK tax rate for cars with CO2 emissions between 1 and 51g/km will have risen in stages to 13%.

There are also advantages in the rates of Vehicle Excise Duty (VED). This is an annual tax payable by all car owners. Cars with low CO2 emissions attract the lowest rates. Currently cars with emissions of 100g/km or less are exempt from VED. If we take the Mitsubishi Outlander as an example again, the PHEV would be zero rated for VED, while the diesel model would be liable to pay an annual rate of £130 (€152 approx.).

Other issues relevant for tax purposes are tax relief for employers on the cost of a lease. Cars with CO2 emissions below 130g/km qualify for full tax relief and there are capital allowances for companies that choose to buy cars, with greater allowances for those with CO2 emissions below 130g/km.

Companies unsure of whether it would be more beneficial to buy or lease might find an online tool launched recently by GE Capital helpful. Using fleet information, including the kind of cars and vans operated, their normal replacement cycle, annual mileage and current age, the tool will forecast the estimated costs of each acquisition method annually and over the next three and five years.

SMMT data classifies UK car registrations in three categories, Private, Fleet and Business. Those in the Business category are those used by organisations that operate between one and 24 cars, while Fleet is defined as those organisations operating 25 or more cars. Of the 2,476,435 cars registered in 2014, 1,179,499 (47.6%) were classified as Private, 1,178,416 (47.6%) as Fleet and 118,520 (4.8%) as Business. The percentage breakdowns are more or less unchanged from 2013. The SMMT also highlights some longer-term trends, which are similar to other major European markets. Demand for smaller cars in the A and B segments has grown and accounted for just under 40% of registrations in 2014. Similarly demand for crossover and SUV models has also grown from around 5% of registrations in 1999 to just under 20% of registrations in 2014.

These trends show clearly in the best selling cars in the UK in 2014. Ford held the top two places, with the Fiesta accounting for 131,254 registrations, significantly more than the second placed Ford Focus with 85,140 registrations. The Vauxhall Corsa was the third best-selling car with 81,783 registrations, decisively ahead of the Volkswagen Golf in fourth place with 73,880 registrations.

The UK changes vehicle registration plates twice a year, with the plate indicating the year of registration for the car in the numbers shown. The changes take place in March and September, which tends to suppress demand in February and August while pushing up demand considerably in March and September, with demand tailing off notably in April and October. Currently March – August registration plates indicate the year (e.g. 13, 14, 15 etc.) and the September-February plates a prefix number followed by a number indicating the year. The prefix number is currently 6 (e.g. 63, 64, 65 etc.).

According to the White Clarke Group UK Asset and Auto Finance Country Survey of the UK in the 12-month period to the end of December 2014 the number of new cars bought by business on finance in 2014, grew by 11%, compared with 3% growth in 2013. Looking ahead, the report suggests that average growth in this area of business is expected to reach just under 5%, although some more optimistic estimates suggest it could reach 10%. The report also suggests that residual values will soften in 2015 as the number of leasing vehicle returns rises and more nearly new cars come onto the market. A recent wave of anti-diesel sentiment regarding emissions may depress diesel RVs.

CVs

Manufacturers did not expect a particularly good year in 2014, mainly because of the introduction of Euro 6 emissions regulations for all new CVs over 3,500kg GVW on 1 January 2014. Because of the way that the UK industry had chosen to use the derogation for Euro 5 compliant models, this allowed buyers to order Euro 5 models and stockpile them, introducing them as the year progressed. Given the on-cost of Euro 6 compliant models, it gave operators who had the financial resources an opportunity to contain spending on new vehicles. Light CVs are not finally affected by the legislation until 2016 and the growth in new light CV registrations offset the expected decline in heavy commercial vehicle registrations. Total CV registrations rose by 11.0% in the UK in 2014 to 363,155, with light CVs below 3,500kg gross weight rising 18.7% to 321,686. By contrast heavy truck registrations declined by -26.2% to 41,469. That said, SMMT chief executive Mike Hawes suggested that 2015 could see a return to stability. Registration data for January and February suggests he may be right. Compared with the same period in 2014, total CV registrations have increased by 21.7% while LCV registrations have risen by 20.2% and trucks by 35.3%.