Cruise control
Having given staff pretty much a free rein when it came to choosing their cars, many employers are now taking chargeagain of the company car fleet. Jeff Senior finds out why.
If you go back 20 years or so, a company car was the top business perk. But successive tax regimes squeezed out the benefits and dented the attraction. But the wheel has turned full circle, and company cars are regaining popularity.
The reasons for this renewed focus are twofold. The tax structure has changed, and new legislation puts the onus of responsibility on employers.
The tax situation regarding company cars affects employers and employees. A company car is classed as a benefit in kind, with the value offset against tax allowances and causing a tax charge through PAYE at their top rate.
The calculation of the benefit used to be straightforward, based on a car’s value and annual business mileage. From 2002 this changed, with environmental issues entering the equation. Alison Haynes of Deloitte says: “The government has two motivations. One is revenue raising but the other is trying to encourage greener behaviour.”
This encouragement means cars with higher CO2 emissions are taxed more, while the taxable benefit for low-emission cars is discounted. The bands have continue to widen, so the taxable benefit to the employee can range from £155 to £11,200 a year.
For the employer, the tax options are more complex. For outright purchases annual capital allowances depend on emissions. All maintenance and running costs can be reclaimed, as can the interest on a loan. Lease costs can be offset against tax up to a certain value while the reclaiming of VAT, as ever, is full of twists and turns. On the other side of the coin, Class 1A National Insurance contributions are payable on the calculated benefit to the employee.
If, as an employer, you provide all fuel for a vehicle, VAT can be reclaimed but a scale charge is applied for the private element. If you do this, check the figures. Paul Spenceley of Deloitte is amazed at how many companies pay for all fuel when private mileage is low, resulting in high cost and little benefit for the employer in the long run.
For those companies that don’t provide private fuel, Andrew Richie of Grant Thornton says employers need robust records to prove it. He says HMRC inspections are focusing on private fuel and, if the records aren’t right, scale charges are sometimes imposed retrospectively.
The alternative for all cars is to pay mileage expenses. The maximum rate is 40p a mile and has been for some years, although the Institute of Directors suggests a 52p rate is more appropriate.
Much of this is down to the government changing its position. In the past, as the tax burden for company cars increased, employers turned to cash payments so employees could finance their own cars, often used on company business. In effect, employers washed their hands of the responsibility.
But that meant companies lost control of the appearance, efficiency and roadworthiness of the vehicles. “This wasn’t perceived as such a problem until April this year when the Corporate Manslaughter and Corporate Homicide Act 2007 came into effect,” says Nick Davies of accountancy firm ArmstrongWatson.
The act emphasised the duty of care employers have for company vehicles, even if the company does not own the vehicles. According to Andrew Richie, this means “making sure those cars are serviced in accordance with the manufacturers’ recommendations, that the tyres are okay and the drivers have full insurance cover for business use”.
David Raistrick of Deloitte admits he would be worried if he had employees in their own cars going out on company business. “If they have an accident, the company is potentially liable,” he says.
As a result, many companies are going back to providing cars, ensuring they are modern, well maintained and properly insured. Another advantage of in-house supply is that, according to Russell McGrath of Total Vehicle Leasing: “Businesses are changing the focus as to what’s important to them in terms of the image employees portray when meeting customers.”
The move back to company cars has been helped by the fact that they are generally now more efficient. This extends to emissions, and also fuel efficiency and running costs. Spenceley says attitudes have changed. “The industry is starting to look at the whole life cost, not just how much they’re paying out for the car,” he says.
This means including running costs, residual values, NI costs and capital allowances. It also raises the question of how cars are acquired, whether it is outright purchase, leasing or contract hire. Andrew Cope, chief executive of Zenith Vehicle Contracts, says there’s no single solution. “It often involves a multi-layered service proposition,” he says. “It might be part contract hire, part employer ownership, or part cash allowance within one structure.”
But what about companies that have yet to set up any company car system? Moving into car ownership for the first time is a big decision, requiring administration time and cost. It may also mean appointing a fleet manager, although Cope says fewer than 50 vehicles will not require a full-time manager.
He also believes fleet managers are involved with policy and less with the day-to-day administration. This is often helped by the fleet provider making computer software available that controls every vehicle, prompting when services are due, when road tax expires or cars need replacing. Some of this can be handled through the contract with the fleet provider.
Andy Ibberson of the Conservatory Outlet runs a fleet of nine vehicles, which he is gradually switching to leasing. This is mainly for financial reasons, with fixed monthly payments rather than a large outlay. The ability to replace vehicles frequently also helps with the image of the business.
The main aim is to keep running costs down. “The greenest mile is the one not travelled,” says David Watts, fleet consultant at the Energy Savings Trust. Matthew Penn, logistics manager at Frontline Bathrooms, has tried to achieve cost savings by putting his drivers through a government SAFED course, which teaches fuel-efficient driving techniques. He says: “It’s hard to snap them out of how they’ve been driving but they realised they were doings things wrong.”
If companies don’t provide cars for employees that do business driving, there are alternatives. Companies based in city centres can use a ‘pay as you go’ car hire service. Cash payments and mileage rates are, of course, still available but companies must cover themselves by ensuring the vehicles are properly maintained and insured.
A compromise is the Employee Car Ownership Scheme, which Davies says “is a hybrid between the company car scheme and giving someone cash”. The employee gets an allowance and obtains a car from a prescribed company that sells or leases cars with a maintenance contract, so employers can ensure standards are maintained.
Company car ownership is complex with many factors to take into account; there are no hard and fast rules. The best action is to seek advice.
Raistrick, of Deloitte, is in no doubt the age of the company car has come again. “At limited or no cost to the employer, you’re giving employees a real benefit,” he says. More tax-efficient cars are available now, so there are options to trade down to lower CO2 cars with a compensating payment or even a second family car to make up the difference. So it is worth a look.
