Fleet News

Fleet funding: Hassle-free motoring and cash savings too

WHEN structured employee car ownership plans (ECOP) first appeared they were shrouded in mystery, with critics arguing that the schemes relied on smoke, mirrors and fat consultancy fees.

Now, however, the smoke has lifted, and the notion that such schemes are 'too good to be true' is widely dismissed.

From the employee's perspective, bar a few contractual changes, the car looks and feels to all intents and purposes like a company car. A guaranteed buy-back provides a residual value guarantee, while the majority of ECOP plans include a comprehensive service and maintenance package to mirror the hassle-free motoring associated with a traditional company car.

The majority of schemes tend to keep drivers in a tax neutral situation, while delivering promised savings of £700 to £1,000 per year to employers.

The original ECOP schemes ate into these corporate savings because of their reliance on extensive and expensive tax planning, including the creation of in-house leasing companies, but newer schemes provide a completely outsourced service, and mainstream leasing and fleet management firms now promote ECOPs as core products.

Indeed, this year's Fleet News FN50 analysis of the top 50 leasing and fleet management companies featured a company whose entire fleet is arranged on an ECOP basis.

Provecta was established in 1995, and originally supplied the intellectual property behind its ECOP product, while farming out the residual value and service and maintenance risk to third party suppliers. In 1999, however, the company decided to take on this risk itself.

'The third parties we sub-contracted the work to were effectively controlling our business in a way that did not suit us,' said Nick Sutton, managing director of Provecta.

'Controlling the quality of service delivered to the end customer, our customer, is always more difficult through a third party.'

Taking control of its own destiny, Provecta has remained exclusively focused on delivering ECOP schemes, determining that it would be too difficult to differentiate itself in the UK's mature contract hire market.

It offers two levels of package, one requiring the client to create an in-house leasing operation, and the other an outsourced solution.

Sutton insists, however, that the consultancy fees involved in converting a traditional fleet to an ECOP model are done at close to cost price because the implementation is merely the entry point to longer term revenues.

'More companies are less willing to pay structured fees,' he said. 'Our revenue comes from two sectors, the funding of the operation and the detailed administrative support, such as pay roll reporting software, that allows clients to pay IRAMR to drivers.

'But we have always had the policy that we pass on any discount or bonus we achieve on vehicles so the driver gets the full benefit.'

He concedes that in the early days manufacturers struggled to see ECOPs as anything other than retail business, but said the majority now accept that the schemes are still fleets - just with the cars owned by individual employees.

Indeed, some manufacturers are prepared to negotiate over limited badge and even solus supply arrangements to fleets structured on an ECOP basis.

Today, the challenge facing ECOP suppliers is not manufacturer hostility, but the prospect of the new company car tax system.

The vast majority of ECOPs were developed to deal with the current benefit-in-kind tax system based around business mileage discounts. This system created winners and losers - the winners being high business mileage drivers and the losers being employees who failed to breach the 2,500 annual business mileage threshold.

The new environmentally-driven system, based on a company car's carbon dioxide emissions, will create an entirely different set of winners and losers. Furthermore, one of the essential ingredients of ECOPs, the mileage reimbursement rates, fall to 40 pence per mile for the first 10,000 business miles from next April.

Sutton concedes that these changes alter the landscape, but says Provecta's calculations indicate that its scheme could actually prove more cost effective after April 6, 2002.

'From a driver perspective it depends on the CO2 emissions of their car - for high emission cars the savings could be considerable, but less so for more efficient vehicles,' he said.

'If the fleet is predominantly 2.0-litre plus, moving to the new IRAMR rates will be tax disadvantageous. But 80% of our customers have cars with engines smaller than 2.0-litres, and so long as they are doing more than 5,600 business miles a year the new rates will be beneficial.

'In addition, if fuel prices continue to come down, the IRAMR rates get more attractive,' he said.

With so much resting on the mileage reimbursement rates, most employers will protect staff against changes in their jobs and work patterns that could see their business miles decline. The simplest solution is to increase the cash allowance. Likewise, most schemes involve early termination insurance to protect employees who leave the business or who are made redundant, delivering valuable peace of mind to staff who may be nervous at signing on the dotted line to take ownership of their company vehicle.

It is also increasingly apparent that many employers are seeking to take responsibility for insuring ECOP cars on behalf of their employees, even if the employees technically own the cars, as health and safety duties towards at-work drivers increase. This can be done either through a corporate self-insurance scheme or through a third party insurer, with the premiums recharged at cost to drivers to avoid any benefit in kind implications.

Such detail highlights the importance of taking expert advice when implementing an ECOP scheme, and Sutton can only see the popularity of such programmes increasing.

'They can save £700 to £1,000 per year per car, although it does depend on the fleet. We are aiming to reach 10,000 to 12,000 vehicles in the next three years. He said: 'But we have to maintain our levels of service. The issue of providing structured schemes is their detail and the attention you have to give to individual drivers.'

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