Impending rises in vehicle excise duty (VED) for electric vehicles along with falling residual values are creating a ‘perfect storm’ for fleets and forcing some operators to rethink their replacement cycles.

Some operators are turning to short-term rental to plug any gaps in the fleet

Mercia Fleet Management, part of EV salary sacrifice specialist Fleet Evolution, said it’s currently witnessing businesses carrying out a strategic rethink in the light of the tax increases announced in the 2022 Autumn Statement and set to increase the tax burden for most vehicles, especially those costing over £40,000.

From 1 April 2025, first-year VED rates will rise from zero to £10 for EVs while second-year rates will rise from zero to £195.

And vehicles costing more than £40,000 will be liable for the expensive car supplement of £425 a year from the second tax payment onwards.

That’s a total of £620 per annum, which is thought likely by some experts to raise leasing costs by £50 a month for cars registered after April.

At the same time, falling residual values for EVs are causing some outright-purchase fleets to pause in their replacement cycles to avoid heavy losses on their vehicles.

Andrew Leech, head of Mercia Fleet Management and founder of Fleet Evolution, said that fleet operators were having to rethink their strategies and try to be more flexible in their approach.

“We are in a very erratic market at the moment, with many businesses having to re-assess their fleet strategies from two viewpoints. Firstly, fleet managers are looking at the timing of the replacement of their fleets, especially those on outright purchase with a high percentage of EVs.

“We are seeing such fleets deferring their replacement cycles and staying out of the used markets in the hope that residual values on EVs will improve. As a consequence, some are turning to short-term rental to plug any gaps in the fleet, which can be very expensive.

“Secondly, those that already use daily rental vehicles for short-term requirements are facing expensive rises in rental rates due to the increase in VED, which rental companies charge on top of their daily rate. Either way, fleet operating costs are on the increase,” he said.

Andrew Leech, head of Mercia Fleet Management

The company believes that one way of exerting greater control over costs could be to adopt a more flexible fleet policy, one that is not locked into a long-term leasing strategy.

“An option is to flexibly introduce EVs on subscription rather than long-term leases – especially for businesses with seasonal or contractual requirements,” said Leech.

“We are currently seeing a record increase in enquiries for EVs on subscription as a way of helping mitigate these increased costs,” he added.

Although more expensive than long-term leasing, EVs on subscription of anything from three to 12 months are significantly cheaper than resorting to daily rental, Leech pointed out.

“We have been able to reduce operating costs by up to 40% by putting in place three-month subscriptions for EVs to give clients more breathing space to assess their fleet options,” he said.

“Our most popular EV remains the MG4 at around £300 per month – far less than the same vehicle on daily rental.

“We firmly believe that ‘flexing the fleet’ should be considered as an important part of a fleet strategy, and that introducing EVs on subscription is one way of achieving that,” he said.

Mercia recently launched an EV subscription service, Subscribe Electric, to give corporate customers a taste of going electric at affordable prices while meeting short-term business needs.

Subscribe Electric is available on most makes or models on the market which are provided fully expensed, including all servicing, breakdown, tyres and insurance costs, and requiring only the addition of electricity as and when required.

Andrew Leech added: “We are seeing record-levels of enquiries for Subscribe Electric at a time of rising costs for most businesses. It should also be remembered that EVs can play a role in helping businesses meet their corporate sustainability targets and reduce their carbon footprint at the same time.”