Fleet News

Fleet funding: Cash or car – the choice for fleets

THE fleet industry can’t make up its mind on cash for car schemes.

Many companies offer them in their varying forms, but relatively few are seeing significant take-up, particularly for the more complex schemes.

The reasons behind offering this alternative are just as complex. Some are a simple attempt to buy a company out of the weight of administration and staff time that goes with running a company car fleet.

At other companies, offering a cash scheme is a genuine attempt to provide employees with free choice, giving them the chance to buy their own cars free from the restrictions of carbon dioxide based benefit-in-kind (BIK) tax, a system that ensures drivers pay for their pollution.

Others are focusing on tax efficiency, both for the employer and employee, removing not only the BIK tax burden, but also a significant Class 1A National Insurance Contribution the company has to pay, based on the benefit the driver receives.

One company claims that using its relatively aggressive tax- efficient scheme can save anything between £500 and £1,000 per car for each company per year.

The wide variety of reasons behind opting for cash for car is reflected in the level of choice facing any company wanting to move into the market. One of the fundamental guiding principles behind all schemes is that the driver no longer pays BIK tax, predominantly because he or she officially owns the vehicle.

Firstly, there is the basic option of giving staff cash, either a lump sum, or extra monthly payments in their pay packets.

Secondly, a company can organise a scheme with preferential rates, for example a personal contract purchase scheme (PCP), where the employee purchases the car, then pays a monthly loan, directly from their salary or through their bank account.

Suppliers tend to prefer the security of salary-based schemes. Finally, there is the ‘daddy’ of the range, the Employee Car Ownership Scheme (ECOS). This takes all the hassle-free benefits of a company car for the driver and combines them with the financial advantages of the vehicle not being a company car.

The company is more involved through the scheme, so it can be more prescriptive in terms of the vehicles drivers use to help meet health and safety or fleet policy requirements, but the majority of the driver contact moves to an outside supplier, often a leasing company. Here we look at the areas fleets need to consider when considering alternatives to the company car.

RESEARCH: Employee survey essential to scheme success

IF fleets are thinking of changing from a traditional company car scheme to offering any form of cash allowance, thorough research must be undertaken before deciding to switch.

Full co-operation from drivers is vital and keeping them informed at all times must be a top priority. Often employees view any moves with distrust, as they fear the company is trying to save money at the expense of an important benefit.

Roddy Graham, commercial director of the Leasedrive Group, a major leasing firm which offers a range of cash schemes, said: ‘Without doubt, there will be more employee buy-in when they have had a part in formulating the final offer.

‘They need to feel they have had a voice and been heard. So, only when a proper employee survey has been undertaken can you begin to structure a successful scheme.’

One important issue fleets need to understand is debt.

Under any cash for car scheme, if employees use their allowance to acquire a car, they then have extra debt they didn’t have with the company car. This can be an issue if they are considered a credit risk, or if they already have a lot of large loans.

In addition, while some companies may opt for unlimited vehicle choice, any attempt to insist on drivers using certain types of vehicles should be handled with care. Graham said: ‘No scheme is going to work if a high percentage of potential members have a negative opinion on a specific manufacturer or are more interested in different cars to the ones you are offering.’

Three factors which will make any cash for car scheme a success, according to Graham, are choice of vehicles, choice of contract terms and price.

He said: ‘Once you know exactly what employees want, as opposed to what you think they want, the next step is to approach manufacturers to come up with an exciting and price competitive offer.

‘These negotiations take time, but the more time invested in ensuring you offer an appealing range of attractive products, the more successful your scheme is likely to be.’

EVALUATING POLICIES: Make payments realistic

AFTER the decision has been made to take the cash for car route, the actual allocation awarded to individual employees needs to be set at a realistic level.

This is more complicated than it sounds. The lump sum handed to an employee is immediately reduced by tax and National Insurance payments. Then the company needs to take account of savings available to the driver from not paying BIK tax.

Finally, unless the driver receives free fuel, he or she will expect to claim business mileage expenses and these will need to be factored into any equation. This holds true for basic cash, PCP and ECOS.

Andrew Cope, chief executive of leasing firm Zenith, another employee car ownership provider, believes that companies could be losing millions of pounds by offering overly generous cash allowances as a substitute for a company car.

Cope believes that allowances could be as much as 10% too high. He said: ‘Company cars cost virtually the same to run today as they did four years ago. New car prices have fallen in real terms, servicing costs are lower, internet systems are creating additional savings and interest rates remain low.

‘Cash allowances, on the other hand, tend to be reviewed only once a year and the trend is very rarely downwards.’

One of the questions most often asked by companies is how much cash should we pay? Unfortunately, ‘how long is a piece of string’ would be just as pertinent. However, when talking of a simple lump sum spread over the year, many companies benchmark at about £4,000.

Graham explained: ‘Once the scheme is launched, it should be re-evaluated after a suitable timeframe in case any fine-tuning is required.

‘Employee car ownership schemes are definitely here to stay but they need to be well thought through, they need to satisfy demand and add real value. Once launched, they should be closely managed with regular user surveys.’

DUTY OF CARE: Monitoring needed from within

FOR some companies, the main attraction of cash for car schemes is the opportunity to wash their hands of the onerous responsibility of company cars.

How wrong they are. It is now a common view throughout the industry that an employer is equally responsible for drivers in business cars and private cars, if they are covering business mileage.

This means the company needs someone in-house to take responsibility for any contracts, to ensure the company is meeting its duty of care responsibilities. In addition, because employees are committing their own money to these vehicles, they often demand more support from the employer than if they were running a company car.

This is especially true in the more basic cash schemes, where a very large bill towards the end of the vehicle’s life might have the driver clamouring for help from the company.

This has led to claims of a move back into company cars, but recent large signings to the more complex ECOS scheme, which offer an experience more like a company car, suggest otherwise. Major ECOS contracts announced in recent years by leasing firms, who dominate this sector, include the BBC scheme which enables employees to purchase cut-price cars, bikes and scooters, launched in conjunction with leasing company Alphabet.

The BBC’s ‘myDrive’ scheme is described as a structured employee car ownership plan which offers access to a car scheme without drivers having to pay benefit-in-kind tax.

Pharmaceutical giant GlaxoSmithKline announced late last year that it would be renewing the massive 5,000-employee programme it embarked on two years ago for a further five years.

GlaxoSmithKline originally launched the programme with Whitechapel, but has now appointed Interleasing to provide and administer cars through its Alto scheme, as well as providing a full risk management package, insurance administration and driving licence validation, as part of an agreement that Interleasing claims will save the company time and effort in paperwork.

However, for any employer, all drivers must be must be stringently managed with a full audit procedure in place to cover in the event of an incident.

Andrew Cope, chief executive at Zenith, said: ‘I expect to see companies looking more holistically at their fleet, managing total costs – whatever the combination of cars and cash – in tandem with a robust health and safety policy, especially when it comes to private cars being used for business purposes.’

Some industry groups argue that offering a cash for car scheme takes some of the control away from the fleet decision-maker and could even lead to a prosecution case.

Greg Taylor, commercial director at ING Car Lease, said: ‘With more and more emphasis on duty of care issues, it has become vital that employers can guarantee that when travelling on company business, its drivers comply with all the requirements of the Road Traffic Act and of the Health and Safety Executive (HSE).

‘Offering anything other than a vehicle funded through traditional ‘fully managed’ schemes, such as contract hire, potentially means that the employer gives away a huge amount of control over the type and quality of vehicle driven, and can possibly increase its exposure to prosecution in the event of an at-work accident.’

ENVIRONMENT: Thirstier vehicle choice is a myth

WHEN drivers cover business mileage in private cars, they need to claim back the cost of their travel.

In most cases, this is through a pence per mile payment designed to cover the cost of fuel and the cost of running the vehicle for that distance. Officially, companies can pay 40p for the first 10,000 miles and 25p for further mileage on a tax and National Insurance free basis under the Inland Revenue-approved mileage rates.

Most companies prefer their own, less generous rates.

Even so, when a pence per mile incentive is offered to drivers for covering business miles, the temptation is to book as many meetings that require long journeys as possible.

In addition, when you remove the pollution limits of benefit-in-kind (BIK) tax, do drivers switch to cars that pollute more?

Certainly Roads Minister David Jamieson thinks so. He told last year’s Fleet News Industry conference: ‘We want to avoid opt-outs. If people do opt out then cars chosen tend not to be as clean.’

But car ownership scheme specialist Provecta Car Plan defends the opt-out market, insisting its own figures prove otherwise.

It conducted research into business miles travelled under company car schemes and under employee car ownership (ECO), and found that ECO cars travelled up to 20% fewer miles.

Nick Sutton, Provecta’s chairman, said: ‘It is a myth that drivers will immediately go for bigger, thirstier vehicles when given the choice. Cars with higher CO2 emissions tend to be less fuel-efficient and more expensive to insure. Drivers know this and take all these factors into account when selecting their ECO car.

‘Ex-company car drivers are clearly opting for environmentally friendly vehicles when they are given the choice. Drivers are taking responsibility for their own vehicles, knowing the impact their choice will have not only on their pocket but also on the environment.’

Adam Trevaskus, head of one of the country’s biggest car ownership scheme providers, Whitechapel, part of Lloyds TSB autolease, believes that the lower mileage of cash for car drivers has more to do with the driver profile than the scheme itself.

When company car tax was based on mileage, drivers in low mileage cars paid the highest tax. Those in high mileage cars paid the least, as these were considered business cars, rather than a perk.

He said: ‘Traditionally, it was this category of low mileage perk driver who, if given the choice, opted for cash in lieu of a car to avoid this heavy tax burden. In our view this could explain why the mileage profile of these drivers differs to those in company cars.’

WHAT IS CASH FOR CAR?

CASH LUMP SUM

This is the basic option of giving staff cash to purchase a vehicle. It can either be a lump sum, or extra monthly payments in their pay packet. The amount of allowance given will depend on the employee’s position within the company.

PCP SCHEME

The employee purchases the car, then pays a monthly loan, which can be taken directly from their salary package, or through their private bank account. The driver contracts the car for a certain term, which can be anywhere between 12 and 48 months, at a specified annual mileage. Service and maintenance, including tyre replacement, can also be included for an additional fee.

EMPLOYEE CAR OWNERSHIP SCHEME

Drivers officially take ownership of the vehicle, but the whole process from then on is managed just as though the employee was in a company car. The driver shouldn’t see any change in service levels, only in their tax bill. Because they own the car, they don’t pay benefit in kind tax.

Leave a comment for your chance to win £20 of John Lewis vouchers.

Every issue of Fleet News the editor picks his favourite comment from the past two weeks – get involved for your chance to appear in print and win!

Login to comment

Comments

No comments have been made yet.

Compare costs of your company cars

Looking to acquire new vehicles? Check how much they'll cost to run with our Car Running Cost calculator.

What is your BIK car tax liability?

The Fleet News car tax calculator lets you work out tax costs for both employer and employee