Fleet News

Fleet funding: Hidden burdens of opt-out schemes

THE concept of a company car first became popular in the 1970s. For many years, if you wanted to increase your earnings, you had to take a car.

But as the years rolled by, different options appeared. Not everyone wanted a car, and the industry introduced a choice of whether to opt in, or opt out.

When run correctly, company car schemes can provide savings to the organisation and a valuable perk to employees.

But with a variety of different options available many organisations decide to operate an alternative to the traditional company car scheme. Such schemes can be very complex and, if not carried out properly, can cost firms money.

Inefficient opt-out schemes cost companies some £360 million in excess taxes and national insurance contributions during 2004/2005, according to research by HM Revenue and Customs. Paying out a lump sum of cash means tax and National Insurance contributions, which can swallow up about a third of the payment.

HMRC says its research shows that the company car is the most tax-efficient way of reimbursing employees.

Simple calculations show why. An average fleet car costing £16,000 and taxed at 20% would cost an employee, paying 22% tax, £704 a year. The same employee receiving a £5,000 cash option would pay £1,100 in tax.

But the choice of whether to opt in or out hasn’t been helped by Government guidance. It expected the number of company car drivers to increase when it changed the tax rules in 2002 to base the amount of tax paid on the amount of CO2 produced by the vehicle in question. But at the same time it also introduced the Approved Mileage Allowance Payments scheme for business mileage in employees’ own vehicles.

The idea of offering drivers 40p per mile covered, and 25p per mile after 10,000 miles, was to cover the wear and tear incurred on the employee’s car, petrol and to fund a replacement. But in practice, drivers treat it as a supplement to their salary and it often appears to be a better deal than the company car.

Professor Peter Cooke is KPMG professor of Automotive Industries Management at Nottingham Business School and an expert on the fleet industry. He accused the Government of inconsistent policies that make the correct way ahead for company car schemes unclear.

He said: ‘I’m concerned that we’re not getting consistent, joined up thinking from Government in terms of company cars.

‘We’re getting a whole range of issues and it’s costing organisations a huge amount of below the line cost, which is almost impossible to identify.

‘I would like to see the Government saying we will take a five-year view of things. It’s important that we don’t just look at one or two year situations. The Government needs to think of a policy to fit in with fleet cycles.

‘The Government needs to stand back and talk to the industry.’

There are some signs that perhaps the powers that be are taking note of what the industry is saying. In this year’s budget, Gordon Brown announce plans to investigate the further modernisation of allowances for company cars, and wants opinions from the fleet industry on how to do that.

Cash for car

WHEN an employee decides to opt for cash instead of a company car, it is normally because the tax they would pay on the company vehicle is more than the cost of running a similar car paid for from salary.

A cash-for-car employee is normally given a gross monthly amount that is subject to tax and National Insurance. This can then be used to fund a car. Fuel is normally covered by a pence-per-mile reimbursement.

This can be up to 40p/24p per mile under the AMAP scheme.

However, most fleets pay less as they don’t realise the potential savings available by using the tax and NI-saving benefits.

Those that can benefit the most from a cash alternative are drivers of high emission vehicles that would incur a large amount of company car tax, and drivers who have high business mileages.

Those that use their cash allowance to buy a car with low whole life costs can also do well, but would still lose money in tax and NI contributions demanded by the cash allowance.

There is also an additional administrative burden with the need to cover your duty-of-care responsibilities.

As a car used for business is, in the eyes of the law, a workplace, it is the fleet manager’s responsibility to ensure the vehicle is insured, roadworthy and well maintained. These can prove harder to control if the car is not owned by the company.

Employee car ownership

A RELATIVELY recent system for providing employees with a car is the Employee Car Ownership, or ECO scheme, first seen in the mid-90s. As the tax burden increased on company cars, many firms looked for an alternative arrangement.

Under an ECO scheme, and unlike a company car arrangement, the employee enters into a contract for the vehicle over an agreed term. He or she owns the car and therefore does not need to pay company car tax.

This is a much more formal arrangement than simply giving the employee a pile of cash, and allows more controls to look after duty-of-care responsibilities.

The essence of ECOs is to make maximum use of the tax-free benefits of the AMAP scheme.

Funds to cover the vehicle’s costs are provided by the company, in the form of tax-free mileage allowances under the HMRC guidelines, tax savings by not having a company car and supplemented by additional salary where required.

In the early days of ECO schemes, organisations could use estimates, deciding how much to pay tax-free for business mileage and then reconcile differences at the end of the tax year. Everyone would be happy, including the taxman.

However, as the authorities got more clued up about the schemes, it became harder to rely on estimates. HMRC says that the books should be balanced each month. According to Intelligent Fleet, schemes now need to be water-tight as getting it wrong can prove costly.

ECO schemes are getting more popular with an estimated 100,000 drivers taking part, but it pays to investigate the details of any scheme very carefully before running with it. Some ill-prepared schemes result in no savings and suspicion from the taxman. If HMRC are not provided with the full details of the scheme, they could take issue with it.

Common mistakes include focusing too much on the technical aspects of the scheme and not enough on operation performance. The impact of potential future tax changes is often overlooked, as is the forming of an exit plan if the scheme becomes unviable.

Most people begin ECO schemes to generate costs savings, but the amount saved depends on a range of factors, including mileage, tax rates and vehicle.

Detailed analysis is needed to determine potential savings – running the numbers on a few benchmark vehicles will not be enough.

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