Inside view: Scrappage - who wins?

Consumer Editor Peter Lawton looks beyond the hype and headlines to question if the Government's scrappage scheme will benefit anyone apart from the Treasury...

Chancellor Alistair Darling heralded the Government's scrappage incentive as a shot in the arm for the car industry, but could the reality be that it's actually filling the Treasury's coffers at the expense of beleaguered manufacturers?

The majority of car makers have confirmed they will take part in the scheme, but the incentive that Alistair Darling announced is by no means the one that the industry had hoped for.

The 1000 that manufacturers are being asked to contribute to 'scrappage' purchases sets the UK's incentive apart from others in Europe where Governments are stumping up 100% of the cash.

The result is that many of the cheapest models and ranges, which have the smallest profit margin, will need to be sold for no profit, or even at a loss.

Are all cars equal?
Some manufacturers had planned to exclude the cheapest of their cars, but the Department for Business, Enterprise and Regulatory Reform (BERR) is insisting that if a manufacturer wants to take part in the scheme, it has to include its entire range - in for a penny, in for a thousand pounds.

One insider told us: 'We'll take part in the scheme we have to but we're not happy about it and have to work out what we're going to do with our more affordable ranges and models.

'There will be negotiations with BERR, and we're going to ask for the all-or-nothing clause to be dropped.'

If the industry fails to win this concession it could cost it dearly, because the majority of those scrapping a ten-year-old car are more likely to be looking at cheaper, fuel-efficient superminis. However, if manufacturers get the go-ahead to exclude cheaper models, then the whole incentive becomes less relevant to buyers.

Darling picks a winner
This catch-22 situation seemingly calls into question how well thought-out the Government scheme really is, but many manufacturers think the incentive is nothing more than a clever smokescreen that hides a cynical attempt to raise extra revenue for the Government - at the expense of the car industry.

If the incentive does stimulate demand, the Treasury will collect VAT on every sale. With VAT at 15%, a car would need to cost around 7500 before the sale becomes break-even for the Government. As cars increase in value above this figure, the Government will start to make money, and with VAT going back up to 17.5% in December, the break-even point will be even lower.

'We'd like to stick two fingers up at the Government, really', said another disgruntled industry insider that What Car? spoke to. Sadly, though, it seems the gesture may yet be the other way round.