One solution does not fit all when considering ways to finance fleets
Different tax treatments, usage and types of vehicle are just some of the factors to ponder
By Claire Evans, head of fleet consultancy, Zenith
How viable is it for companies to use different finance products to fund different vehicles on their fleets?
One funding solution isn’t always the most cost-efficient option for all vehicles on a fleet. Car funding may be done differently compared to vans where there is a different tax treatment and requirement to retain the vehicle for a different length of time and use the vehicle in different ways. Also, business needs and perk fleets may result in optimum solutions being different funding types to ensure the requirements of employees and cost-efficiencies are maximised.
Running a blended mix of funding has become more prominent, and this can be tied to the ability to manage it efficiently, primarily using sophisticated leasing company software that makes the decision on the best funding option for different areas of fleet.
Fleet managers and employees do not want to add layers of complexity and therefore rely on leasing providers to build efficient management solutions.
What rules of thumb apply when identifying the most appropriate funding arrangements for different types of company and vehicle?
The consideration of funding options has traditionally centred on the company’s position on factors such as the VAT recovery available, weighted average cost of capital, vehicle business requirement such as car vs. van or perk vs. essential user. However, with government policy looking to consider a clean air agenda, external impacts such as changes to taxation and legislation, and the possible introduction of ultra-low emission zones (ULEZ) in cities, alongside incentives for ultra-low emission vehicles through grants and possible scrappage schemes will all play a bigger role outside of pure funding costs.
Having a clear strategy in place for fully analysing the cars’ or vans’ usage will help fleet operators identify the total cost of funding various fuel types.
With not just wholelife cost but also travel expenses such as ULEZ charging playing a greater role outside the more traditional funding factors as we approach the next decade.
With interest rates so low, should cash-rich companies return to buying vehicles outright?
Companies need to consider a range of factors when comparing outright purchase to leasing over and above their ability to fund the cars themselves. Zenith is increasingly seeing companies with a growth agenda looking to utilise the cash in investment projects rather than tie it up in fleet vehicles, often on a four-year term.
In such a dynamic environment outsourcing the risk to a leasing company has been an important factor for fleets when looking at their funding, with a requirement to de-risk on the sale of the asset.
Finally, the ability of a leasing company to utilise economies of scale and expertise to provide a fully outsourced in-life service, including a competitive maintenance package has seen fleet operators move away from funding their fleets.
Why is leasing winning a greater market share?
The environment is changing and leasing rather than owning is now an established principle, particularly among Generation Y who are used to streaming music and renting a mobile phone then trading it in for a newer model.
This trend has driven demand for car leasing, particularly in the salary sacrifice area. People lead busy lives, and for want an all-inclusive, hassle-free package all types of company cars, employees they can budget a monthly amount for, be it through a salary deduction or benefit-inbind (BIK) tax. For fleet operators having a leasing provider to help manage policy, create operational efficiencies and control costs is pivotal. Real value can be added as we move into the era of big data.
How should businesses prepare for the new accounting rules that will see leased vehicles appear on corporate balance sheets?
It is important to recognise that the new leasing rules that bring contract hire vehicles onto the balance sheet will also impact other types of assets often of greater value than cars. Indeed, most companies will already be reporting many other assets on balance sheet today and therefore most finance departments will already be geared up to report under the new rules.
It is key for fleet managers, in the buildup to this change from January 2019, to work with their leasing providers to understand how they plan to report the information required and ensure this fits their needs from an accounting perspective. Also, it may be prudent to comprehend any impacts on financial ratios such as gearing or banking covenants, but modelling suggests these will be minimal and it is merely a case of updating the relevant interested parties to the accounting change.
How will the new BIK tax rules for salary sacrifice cars affect the attractiveness of these schemes?
The tax advantage of the salary reduction played a decreasing factor in the popularity and cost-competitiveness of these schemes against retail.
Under the new rules the other cost benefits remain, such as the company’s VAT position, employee NI savings, corporate discounts and competitive interest rates.
Modelling completed on the types of cars drivers pick on salary sacrifice schemes show that only one in three are typically impacted by the changing OpRA rules (where BIK is paid on the greater of the salary sacrifice value or the car benefit charge).
We have seen new schemes launch successfully and drivers continue to order cars in salary sacrifice post the rule changes, which show the benefit is still recognised. Also, we have been working with drivers to advise them of cars impacted and other cost-effective alternatives. Employees entering these types of scheme traditionally have a figure in mind they want to spend on a car, and there is still a large volume of cars available in popular price ranges.
How will the lease rates of diesel cars change in the next three years?
The clean air agenda from government and a requirement to reduce NOx emissions has seen a range of initiatives suggested, most recently in the draft release of the clean air plan.
The spring Budget announced a review of taxation on diesel vehicles that will be announced in the next Budget and some other initiatives are in the mix with possible plans for the further introduction of ultra-low emission zones primarily targeting older diesels that are not Euro 6 compliant, starting at the earliest in 2019 (for five specified cities) and 2020 for additional cities at the earliest.
Zenith continues to work with industry bodies to influence the government and highlight that diesels play a significant role on fleets, currently making up around 80% of fleet vehicles with almost all van production being diesel-centric, and will continue to do so until there are viable cost-effective alternatives.
Any policy introduced encouraging a move away from diesel will need to be considered and rolled out over a longer term period. And, as such diesels will continue to play a role in fleet policies with current cleaner diesels available today impacted less, if at all, by government initiatives. This, therefore, ensures a continued demand in the secondhand market and a stable lease rate in the immediate future.