Fleet News

Guest opinion: opt-out schemes: a win-win situation

Roger Glenwright, head of transport at John Lewis, claims alternatives to the company car are a winning formula for all.

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'I HAVE implemented an alternative strategy to the company car twice – once for Siemens in the UK and now one for the John Lewis Partnership.

And why? Company car tax scale charges have trebled in the past decade and there is a 2% escalator for the next two years, without taking into account the Treasury's expected tax shortfall this year.

So let's think about what benefit-in-kind tax is meant to be all about. It is meant to be about reflecting the cash value of a benefit an individual receives from a non-cash part of his or her reward package.

Remember, the value is often accounted for by what it costs to provide that benefit. If your company buys private health insurance it will no doubt negotiate the premium price. Let's just say it pays £300 per annum per person, a price it had negotiated down from a list price of £400.

No-one complains about negotiation or even attempts to base the tax on the retail price – the employee gets taxed on the basis of what the insurance cost – £300 in this case. No-one is dreaming up a spurious notional list price for this.

But that is not how it works for company cars though, is it? There is no basis in money's worth here – nobody refers to what the benefit was bought for in cash terms. For example, company A provides employee X with a car worth £20,000 and gets a 20% discount worth £4,000, giving the car a gross capital cost of £16,000.

The car has a residual value of 30%, or £6,000, so the net capital cost to the company is £10,000. If you add the value of maintenance provided by the employer, that comes to £2,000 over four years, while insurance and road fund licence is £1,800.

The total cost to the company of providing the car to the employee is £13,800. Remember, that is not the list price of £20,000, but £13,800.

This is a car provided for four years, with an average CO2 figure, equating to 25% tax, but this is a tax on the £20,000 list price, not the £13,800 cost to the company. In real terms, the employee would be paying tax on £6,200 of benefit that he or she didn't get and that is assuming there is no business useage.

If the employee is a 40% taxpayer, then he should pay £1,320 every year, but in fact is charged £2,000 in tax. Charging an employee £51 a month for a benefit he or she is not receiving is not fair. An unfair tax is usually inefficient. There is usually a more efficient way of doing it.

In this case, replace the 'benefit in kind' with money. Money is, after all, taxed at a 'straight rate'. The trick is to let the driver buy the car for £13,800. As a result, there is a saving of £51 a month, which is more than £600 per year.

This is called a car ownership scheme and is sometimes referred to as PCP. I am particularly referring to a structured PCP. In practice all of the schemes are designed to achieve savings of about £1,000 per annum per car. That is at least 20% of the car budget that can be put to other uses.

Savings can be made by making use of existing tax legislation.

First of all any employer is entitled to lend any employee up to but not exceeding £5,000 free of interest – this is usually repaid by returning the car at the end of the contract term.

If the driver opts to keep the car he or she will need to repay this. This £5,000 acts as a deposit and reduces the funding requirement. There is not a tax implication to this loan.

Secondly, you can also make use of the Inland Revenue Authorised Mileage Rates to pay as much of the car allowance as possible free of tax.

Generally for the first 10,000 miles per year of business mileage, a company may reimburse drivers by 40 pence per mile. Fuel only costs about 12ppm, so the remaining 28p may be used towards paying the original capital costs less the £5,000 interest free loan.

Generally companies don't want to give the £13,800 in one lump sum – it is phased over the period of car ownership, so interest applies. For this to be tax-efficient, the interest rate must be equal to or greater than the Treasury official rates. Car ownership is not VAT efficient but this is a minor cost in these schemes.

Early termination is an expensive process so high staff turnover among drivers is a real inefficiency to these schemes. As a rule of thumb, if you have 20% driver turnover per annum all benefits are lost. Car ownership is administratively complex and detailed procedures and pre-Inland Revenue clearance are part of it.

So where else could you make savings of 20% per annum on your operations? Certainly not in maintenance, disposals, discounts or administration.

There is quite a simple route map to look at. Check what your driver turnover is like, get a feasibility study – and read it. If it passes scrutiny, get board approval for a scheme design stage. And finally, go for it if you can.'

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