Fleet News

ECO plans open to mis-selling

SOME fleets are failing to understand the concept of employee car ownership, which leaves them in danger of opting for schemes that are not right, warns tax expert Alastair Kendrick.

'There is a considerable amount of misunderstanding of employee car ownership among fleets, leaving companies open to mis-selling or accepting schemes that are not right for them.

I am not trying to say they are not a good idea for employers and their employees. It seems to me though that there is still considerable misunderstanding about them. The interest from employers at present is largely to do with cost saving rather than creating more flexibility in employee remuneration packages.

It is right that employee car ownership schemes can produce savings but it is important to ensure that this is the case for your fleet before wasting considerable sums in modelling something that does not work for you. It is important to ensure the savings identified can be achieved in practice.

Many employers when considering whether this can produce savings do not always take into account all the associated costs. It is rare to see employers take account, for instance, of the cost of early termination.

It is also the case that there are a considerable number of concerns who only have an interest in selling this product who do not seem to go out of their way to point out these costs.

There are still some people suggesting vehicles bought by an employee in an employee car ownership scheme can be sold on to a new employee if the first employee leaves. The likelihood that this would work in practice is remote. I question how such an approach can be enforced.

It is important to ensure that your figures stack up before you go too far down the road considering a employee car ownership scheme. It is also vital to set up systems going forward to ensure that these savings are being achieved.

Ensure that the saving is being generated from the introduction of the employee car ownership scheme. I have seen cases in which the saving proposed largely came from the end of providing free fuel for private mileage, or from the change of vehicle supplier and levels of discounts obtained.

In these cases, therefore, it was not necessary to introduce the employee car ownership scheme to generate the savings identified. Then there is this new era of employee car ownership scheme in which savings are achieved by the use of a tax reconciliation process on business mileage.

This maximises the use of Inland Revenue tax and NI-free payments, but will only produce the savings predicted if the data used matches the actual mileage patterns of the drivers.

Any differences on business mileage may impact on the savings. Also if there are problems over the capture of mileage data then the employer may be exposed to considerable tax/NI liabilities at the time of an Inland Revenue employer compliance review. The settlement demanded by the Inland Revenue may in fact exceed the predicted savings.

It is also essential that the paperwork is robust to show what is happening. In reality the figure side of the reconciliation is minor compared to the need to change HR policy to meet the requirements of the tax legislation.

If there are problems over the documentation then there is a real risk that the entire payment will be considered taxable and the use of tax and NI-free Inland Revenue approved mileage allowance payments (AMAP) not permitted.

This is a significant risk and employers wanting to go down this route should ensure the Inland Revenue see all the documentation and be satisfied that the scheme is robust enough to avoid tax on the payment and for them to use the AMAP relief rather than the employee. The purchasing of a software system is only the first step.

It is clearly the case that employee car ownership schemes are an attractive proposition and employers should give consideration to whether they are viable for them. However, it is important that they do this exercise with their eyes open and take proper advice in reaching that decision. Just because it worked for someone else does not mean it will for you!'

  • Alastair Kendrick is director of PAYE/NI Solutions at Ernst & Young. He is a company car tax specialist with considerable experience of employee car ownership schemes
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