Fleet News

Insight: Blended funding

When it comes to vehicle funding, the experts are in agreement: mixing methods for different vehicles can save fleets money.

Historically, many companies have adopted a simple approach to funding for their vehicles – contract hire for cars, outright purchase for vans – believing that using more than those results in an increased  administrative burden, not least the additional accounting treatment needed to cater for vehicles both on and off the balance sheet.

In contrast, using just one method requires just one management system while also generating minimal back office work.

However, most experts assert that the potential savings gained by introducing different types of funding to cater for a fleet’s individual needs – often called blended funding – can bring considerable benefits that make any increased admin burden worthwhile.

Gary Killeen, managing director of GE Capital Fleet Services, feels many organisations have still to realise that blended funding could be right for them.

“I think the perception remains that blended funding can be very complicated in terms of managing a fleet,” he says.

“This alone can lead to companies allowing simplistic  solutions to be left in place which aren’t necessarily the best for them.

“With any fleet, there’s likely to be considerable variety in terms of what’s required from the vehicles it uses – and that’s where blended funding comes into its own, by  matching what’s required with the best funding method.”

Andrew Hogsden, senior manager in Lex Autolease’s fleet consultancy team, adds: “When it comes to blended funding, there’s rarely just one way of doing things.

“It is ultimately about tailoring the solution to ensure that an organisation has the right vehicles in place to meet its needs in the most cost-effective way.

“This can be achieved in different ways. Decisions taken by a fleet surrounding blended funding should be driven by cost considerations, and taxation implications are a part of this.”

Any organisation considering blended funding should first think through the precise purposes for which it is needed. This is usually done on a department-by-department basis, but it can be dictated by individual employee’s requirements.

Some of the questions that are worth posing to help  determine the best funding solution include:

¦ Are vehicles essential for the job?

¦ Are they driven only on business trips?

¦ Are they deemed to be more of a job perk?

¦ Can they be classed as specialist in terms of the use to which they are put?

Companies should also think through their vehicle operating cycles, whether they can afford to buy them outright and the likely level of CO2 emissions.

Killeen says: “There are frequently several viable blended funding solutions available to large corporate clients.

“In many instances, these vary according to tax  situations as well as the length of time that the vehicles will be used for.”

Ian Hughes, commercial director of Zenith, says the most effective blended funding arrangement boils down to working out what’s best on a driver-by-driver basis.

He explains: “Changes – including to capital allowances, Approved Mileage Advance Payment (AMAP) rates and benefit-in-kind tax – and the increased availability of lower emission cars suitable for company car drivers, mean that the cost effectiveness of different funding methods has altered over time.

“This has led to an increase in the need for, and adoption of, blended funding solutions, which involves finding the best funding option on a driver-by-driver basis.”

Zenith has developed an online solution for its customers whereby funding methods are assessed in real-time, on a wholelife cost basis, at the point of order.

Hughes adds: “This means that each and every vehicle across a fleet is then funded using the most cost-effective method.”

Funding methods that can be used for  vehicles include contract hire, finance lease, outright purchase, employee car ownership (ECO), salary sacrifice and cash allowances (see panel for advantages and disadvantages of each funding method).

The extent to which these different funding methods work best as part of a blend will change from time to time depending on a range of factors. 

These can include tax changes, funding terms, car choices and mileage profiles.

Killeen says: “When it comes to blended funding, the best options rarely remain the same for long and the schemes should be reassessed regularly.

“Wholelife asset costs and tax provisions are changing constantly and these need to be evaluated in order to ensure that the final decision can be made following the best possible advice.”

Hogsden adds: “Organisations considering blended funding need to work with their advisors to examine their requirements holistically.

“There undoubtedly can be savings to be made with blended solutions and, ultimately, it’ll be the magnitude  of these that determines whether they’re right for an  organisation or not.”

Case study: Computacenter

IT service provider Computacenter slashed its fleet costs by £500,000 after adopting a blended funding scheme.

The Hatfield-based business, which features in the Fleet200, operates a fleet of 1,000 company cars which had traditionally been financed through a mix of contract hire and outright purchase.

The company, which specialises in looking after the hardware and software of large corporations, uses the cars to ensure that its employees are able to respond to callouts in the quickest time and also to reward key staff.

Computacenter’s management realised that it might be possible to improve tax and operating efficiencies after working with Lex Autolease’s consultancy team.

Lex Autolease’s team identified that using a blended scheme of contract hire and an employee car ownership (ECO) scheme, would reduce costs while ensuring  financial neutrality to employees.

The choice of funding within the hybrid scheme depends on the circumstances of each employee in terms of their marginal rate of tax, benefit-in-kind  tax for the vehicle and business miles. This funding recommendation is managed by Lex Autolease after having each Computacenter employee’s data down-loaded to them. All employees are given a tax neutrality  statement and an explanation of how the ECO scheme works. The hybrid scheme has delivered annual savings of £500,000 – or around 7% of its previous spend.

Computacenter is now investigating further innovations in areas such as length of contract and structure of maintenance agreements.

Keith Cook, Computacenter’s deputy UK financial controller, says: “ECO schemes have an unfounded  reputation for being complicated, but they aren’t if they are properly managed.

“The only area of complexity is in the back-office systems, managed by Lex Autolease, and once these are set up they run automatically. The employee response was initially cautious, but once it was up and running, and was shown to have no effect on them, all concern soon dissipated.

“I am surprised more organisations don’t run such a blended scheme; people shouldn’t be daunted by it.

“With future changes to company car taxation, it is certain to be more popular in the future.”

Case study: Environment Agency

Environment Agency uses blended funding to provide the best vehicles for its varied requirements while simultaneously ensuring best value.

The agency runs a large operational fleet, which features in the Fleet200, and has responsibilities including regulating major industry and waste, flood and coastal risk management, water quality and resources and fisheries management.

It operates a fleet of 5,200 vehicles, consisting of 3,700 cars and 1,500 vans, off-road vehicles and HGVs.

Vehicles are purchased through the Crown Commercial Service by taking part in regular e-auctions – an online auction which sees manufacturers bidding against each other in real-time to offer the best price on a range of vehicle requirements across central government and the wider public sector.

Environment Agency leases all its cars from  Hitachi Capital Vehicle Solutions on a contract hire with full maintenance basis.

In addition, the agency also has around 100 vehicles on flexi-rent funding as these short-term contracts are ideal for ensuring cover during times of peak demand and providing personnel employed on short-term contracts with a vehicle. Its 1,500 commercial vehicles are purchased outright.

This method suits the agency best as it allows it to ensure that appropriate vehicles are consistently in place when they are needed.

Dale Eynon, the Environment Agency’s head of fleet services, also believes that this ensures “best value”.

He says: “We used to do contract hire on some of the commercial fleet but decided to purchase them ourselves and outsource the service and maintenance  to a third party.

“We know that our commercial vehicles come back to us in reasonably good condition and, consequently, we know that there’s a good aftermarket for them.

“We use a government framework for their disposal which sees them all being sold by a single specialist auctioneer. By contrast, the aftermarket for cars is much more volatile and, for this reason, we believe that it makes much more financial sense to let Hitatchi take  this risk.

“The flexi-rent vehicles mean that we can hand them back early without financial penalty if we need to. We’ve found that this blended funding approach works best for us – and fully meets our needs.”

Contract hire

Pros: As part of a blended solution, contract hire provides low initial financial outlay, fixed costs, protection from depreciation risk and there is also the ability to reclaim some of the VAT.

Cons: “Companies have to estimate the contract term and mileage and there is no option to purchase the car at the end of the term,” says Ian Hughes of Zenith.

Leasing companies are unable to claim 100% first-year writing down allowance on cars with emissions of 95g/km and below.

Employee Car Ownership (ECO)

Pros: The company does not pay NIC (compared to a company car) and employees do not pay tax on the car. Employers can control the level of benefit and how much the employee pays. The car is off balance sheet and the employee allowances incurred by the company are tax deductible.

Cons: ECO schemes’ cost efficiencies can be impacted if AMAP rates fall – they are most effective for high business mileage drivers.

They can also be perceived as being more difficult for drivers to understand than contract hire.

In addition, HMRC has to approve each scheme; monitoring business mileage is critical; administration can be complex; vehicles cannot be reallocated; and ancillary costs are a taxable benefit.

Contract purchase

Pros: Companies avoid VAT on the funding costs and depreciation.

Hughes says: “As part of a blended solution, it can be particularly attractive for companies who cannot reclaim VAT, or who are restricted in the amount of VAT they can reclaim.”

Cons: Hughes believes that this way of funding cars can be less VAT efficient than contract hire and it is also on the balance sheet.

Salary sacrifice

Pros: There is potential for the salary sacrifice schemes to be used to replace, or run alongside, company car schemes cost-neutrally.

Hughes says: “Benefits include income tax and National Insurance savings for employees and it can be provided at no cost to the business.”

Cons: When being considered as part of a blended solution, thought needs to be given to financial risks arising from early termination of contracts.

Hire purchase

Pros: Benefits include the ability to own the vehicle at the end of the term. 

Cons: Interest rates can be high and the residual value of the vehicle is not taken into account in the monthly payments.

Finance leases

Pros: Finance leases can provide flexibility as they are not based on a fixed mileage.

Cons: The fleet takes the residual value and depreciation risk and there is no option to purchase the vehicle.  It also appears on their balance sheet.

Outright purchase

Pros: Outright purchase can deliver flexibility with no mileage restrictions. Since April 2013, the 100% writing down allowance threshold for company cars has been set at 95g/km of CO2 and below – although this is evolving. Some fleets have moved to outright purchase for cars that fall into the 95g/km-and-below sector to enable them to benefit from these tax advantages. It can work well as part of a blended solution for those companies wishing to maximise the tax benefits.

Cons: Zenith’s Hughes says: “The company takes the full risk of depreciation.

“There is also the need to be able to fund the vehicles upfront and the company cannot reclaim VAT on the purchase if there is any private use.”

Depreciation and other fleet running costs for vehicles purchased outright are shown on a company’s balance sheet – which has the potential to increase the admin burden.

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