Cash or keys? That’s the question faced by employees eligible for a company vehicle who can elect to take an allowance rather than the car.
Given a raft of recent legislation, companies are in a quandary too. Which policy should they adopt?
Trying to strike a balance between duty-of-care responsibilities, minimising the environmental impact of company vehicles and providing employees with flexibility has forced many employers to scrutinise how car polices operate.
Offering a cash alternative to employees can be highly advantageous for businesses, according to Nick Davies, director of employee relationship management services at business strategists Armstrong Watson, but he warns that it also brings its own set of problems.
“Cash-for-car is simpler to operate administratively with associated, longer-term financial benefits for all parties,” he says.
“But for a variety of reasons we are seeing a subtle change in the way company car schemes are dealt with, particularly the cash allowance aspect.”
Jay Parmar, head of legal services for the BVRLA, takes a different view of car allowances.
He suggests that although payments under such schemes have traditionally remained static, this doesn’t mean employees undertaking business travel in their own cars are financially worse off.
“Aside from fuel prices, the real cost of motoring has fallen, making many car allowances too generous.
Therefore, as an alternative, employers should consider the financial benefits of providing a company car.”
A recent GE Capital Solutions survey showed that 72% of fleet decision-makers expect business car numbers to increase because of the rising number of companies wanting to regain more control over their fleets.
Rich Green, managing director of GE Capital Solutions, says: “In recent years, fleet operators explored options such as cash-for-car and drifted away from standard policies, but the changing economic picture suggests the trend is now reversing.”
During the 1990s, when company car tax was based on value and business mileage, many organisations systematically unwound company car schemes or outsourced the task due to the complexities involved.
Some organisations, latching on to the fact that employees wanted flexibility, decided to offer cash allowances instead, but without too many restrictions being placed on how the allowances could be used.
This, combined with the fact that 61% of the 120 million business miles undertaken each year in the UK is covered by grey fleets, is one of the principle reasons a growing number of firms are moving away from car allowances.
Roddy Graham, commercial director of Leasedrive Velo and chairman of ICFM, says: “With the Government focusing heavily on making firms responsible for employees’ actions over the past few years, the days of the car allowance being an automatic right have gone.”
Research undertaken by the BVRLA nearly five years ago showed that 9% of all businesses offered car allowances, whereas just 3% offered the option for company car drivers to participate in Employee Car Ownership (ECO) schemes.
Industry experts believe that these statistics have altered dramatically of late with a rapid increase in the number of ECO schemes being introduced.
Many employers have reported planning to offer this type of scheme.
However, while car allowances would still be offered, policies would be tightened up in respect of what vehicles would be available and the conditions under which they could be leased.
Research collated by Ford into how car policies have changed over the past year shows that, among non-essential users, company car options are 11% up with those able to take cash alternatives showing a decrease of 33%.
Climate change is having a direct impact on fleet policy, and was mentioned by 93% of survey respondents as opposed to 23% a year ago.
Employers are also moving away from allowances for cost reasons – not least because of planned tax legislation coming into effect next year.
Lower taxes for both individuals and companies are a possibility with incentives available for low-CO2 emission vehicles impacting on employees’ P11Ds and company’s NI and corporation tax liabilities.
A further reason for the move is as a result of statistics showing that those workers who opt for the cash alternative drive cars that are, on average, seven years old with higher emissions and fuel costs compared to newer company vehicles.
Nick Davies says: “Employers having to pay out large amounts in mileage claims to employees using their own vehicles for business purposes are becoming more alert to the costs involved and are therefore restricting the terms under which car allowances are paid.”
It would appear that the reasons for the cash option being in decline are part economic and part risk, bringing a pull and push factor to the whole equation.
Businesses are slowly reinventing the company car scheme of years ago in order to regain more control of this major cost base and risk factor.
Case study - Banner Holdings
Banner Holdings introduced the option of cash-for-car for its 35 eligible employees after a management buy-out five years ago.
The Sheffield-based construction management company had previously offered only company cars and the initial take-up of the cash allowance was slow, says Andrew Wilson, corporate affairs manager.
“Employees were offered the cash option on a like-for-like basis as if they had chosen a company car, but few took up the option,” he says.
Unusually, the company elected to increase the allowance on an inflationary basis each year, which it felt was important to do in order to fulfil its corporate social responsibilities.
The company’s car allowance policy has always been flexible, but as a result of wanting to retain more control over the car fleet – as well as manage costs better – it decided recently to move all employees to an ECO scheme.
“We investigated the feasibility of operating an ECO scheme and all eligible employees will be phased in over the next few months depending on when their car lease expires,” says Mr Wilson.
Employees will be able to choose cars above or below their cash allowance threshold with the difference either being paid by, or to, them. All cars must have the ability to carry four passengers but otherwise employees have a wide choice of vehicles.
Case study - Vista Retail Support
Of 111 company vehicle drivers at Vista Retail Support, just five receive cash allowances instead of a car.
This is because most eligible employees at the firm, which installs and maintains electronic point of sales systems, are engineers requiring a vehicle to carry a range of equipment in.
They don’t actually have the option of a cash allowance as it is reserved for senior management. Of those who are eligible to receive the cash allowance, 40% have elected to do so with the option to switch to a vehicle still open to them at a future date.
The company’s fleet manager, Emmanuel Lewis, says: “Before any employee signs up to the cash option, the ins and outs of the scheme are explained. But it tends to be the case that these people have already done their homework before making a decision.
This appears to be borne out by the fact that one employee who took cash has reverted to the car option.”
Those who take company vehicles can choose from a wide array of suppliers with the only stipulation being that the cars must run on diesel and have four doors.
Of the company’s current fleet of 106, just 17% of employees have chosen vans over cars.
Case study - Nationwide Building Society
Paul Bissell, head of reward at Nationwide Building Society, is currently working on major changes to the company’s car scheme.
The firm, which has approximately 19,000 employees, is moving away from a defined car ownership scheme to one that will offer company cars as well as a cash allowance option, dependent on an employee’s status and needs.
Staff deemed as essential car users – who do more than 10,000 business miles per annum, but who do not qualify for a vehicle on a perk basis – will no longer have the option of taking cash.
The decision to limit the options for essential users is designed to gain more control over the company fleet which will offer a choice of up to three badges with all benchmark cars being run on diesel.
“Duty-of-care responsibilities to our employees, ecological considerations, as well as the fact it is likely to be financially beneficial to individuals and the company, are the main reasons for the changes to the car scheme,” explains Mr Bissell.
The Swindon-based organisation has approximately 1,400 fleet vehicles with around half being essential users.
At the moment, around 20% of eligible employees elect to receive the cash allowance which can be spent on a range of options with only cars that seat fewer than four passengers being excluded. Drivers are required to produce proof that they and their vehicles are legally compliant.
Mr Bissell adds: “It was decided to make the cash allowance option as flexible as possible for employees, and it also acts as a recruitment and retention tool.”