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Company cars: counting the cost

by Curtis Hutchinson

Sourcing and running company cars has never been straightforward. The typical fleet, finance or HR professional responsible for company cars has a lot to consider before making an informed decision. Recent duty of care legislation has clarified an employer's responsibility to staff running company cars or their own cars on business. These vehicles are now formally seen as an extension of the workplace and subject to health and safety procedures and clear audit trails which prove the cars are fit for purpose.

While the jury is out on how this will affect company car provision, many industry watchers believe the days of cash allowances to entice employees out of company cars could be numbered. Businesses with an eye on their risk management procedures realise that the best way to keep on top of the law and protect the safety of their employees is to provide company cars and make sure the process is managed either in-house or by a specialist contract hire company.

The latest new car sales figures show the fleet sector growing despite the economic downturn and this could be the first signs of a return to the traditional company car. With over 50 per cent of new vehicle sales going into the fleet sector, the company car continues to be an important tool which plays a key role in providing mobility solutions for businesses across the country.

"If you own your vehicles, you will be fully exposed to movements in the used vehicle market when you come to sell them as you take the risk on the residual values"

Fuel costs

On top of the funding and taxation issues facing businesses running cars is the spiralling cost of fuel which is now approaching £6 a gallon and shows little sign of returning to more modest levels.

Choosing company cars should no longer be about pampering to the whims of employees. The rigid choice lists of the 1990s have become increasingly fluid as employers move to provide a wide range of models in the hope of recruiting, rewarding and retaining staff in a competitive recruitment market.

Tax implications

This could all change with new tax rules due to come in at the beginning of the next financial year. Businesses can alleviate the inevitable pain which will be felt by them and their employees if they base future acquisitions on C02 levels.

CO2 emissions have played an integral part in company car benefit-in-kind taxation since the turn of the decade. By now, drivers should be aware of the true cost of their company car choice each month when they receive their payslips; canny ones will decide to reduce the C02 output of their next car by looking around at similar sized but cleaner alternatives or downsizing their engine.

The next step in this process has already been seen with Vehicle Excise Duty, or road tax, also pegged to C02 emissions. Each Budget sees the amount rise for the bigger polluters and fall for the lowest.

For this tax year, the handful of cars emitting up to 100g/km - with the specially-engineered Volkswagen Polo Bluemotion and the closely-related Seat Ibiza Ecomotive leading the market - are exempt from VED and will remain so until at least the 2010-2011 tax year.

The highest rate of VED is currently £400 for vehicles in the top band emitting over 226g/km. However, this will change next year and the implications for companies running car fleets will be dramatic.

The current seven bands will be expanded to 13 bands with the top band of over 255g/km paying £440 next year and £455 in 2010-2011. However, new cars in that band sourced next year will face a one-off charge of £950, the so-called ‘showroom tax', followed by £455 the following year.

Capital allowances

Companies acting now could make significant tax savings on many vehicles when sourcing new vehicles by drawing up choice lists which prohibit certain members of staff from choosing vehicles which emit over 160g/km. The time for toying with the idea of running a more environmental fleet is running out as many businesses will see their costs rise considerably if they do not base future sourcing on C02 emissions.

What is also likely to prompt businesses to take action is a change to the writing-down tax allowance on cars emitting over 160g/km from next April. "It is clear that the 160g/km CO2 level is set to become a watershed value," said Colin Tourick, independent fleet consultant and author of Nine Easy Steps to Managing Your Fleet (www.tourick.com).

"Lessors will be charging higher rentals for vehicles over this value because the tax changes adversely affect all car purchases above this value, including those by lessors. This is definitely the right time for fleet managers to start encouraging their drivers into sub-160g/km vehicles."

Under the new regime, cars producing more than 160g/km will be subject to a writing-down allowance of only 10 per cent, while those producing 160g/km or less will qualify for a 20 per cent allowance. Tourick is advising businesses to seriously consider cars which fall under this level, whether they are sourcing them through contract hire or outright purchase.

Canny drivers may decide to reduce the C02 output of their next car by looking around at similar sized but cleaner alternatives or downsizing their engine sizes

Contract hire companies are already beginning to factor in the changes which will be introduced at the beginning of the next financial year, according to Alison Southcombe, marketing leader, CFC Solutions, a specialist fleet software vendor.

"Contract hire fleets are already looking at the 2009 Capital Allowances changes and other moves in the Budget, and are asking us to integrate them into the fleet software they use to calculate tax, set future residuals and, ultimately, set lease rates," she said.

"Their initial findings are that cars above the 160g/km hurdle will become a lot more expensive to lease than those below. This could lead to many fleets changing the way that they structure choice lists to effectively exclude cars that exceed 160g/km.

"We expect that many employers could undertake general fleet reviews in the run-up to next April. There is a renewed focus on cost in the fleet sector and, for most job needs, cars that exceed 160g/km could be viewed as simply too expensive to consider," she said.

The message to all businesses running company cars is clear. Assess the cost implications associated with the C02 levels on all future vehicles and reconsider the amount of free choice you give employees. If you do not, you could end up paying more. The alternative will be a bigger corporate tax liability on your car fleet at a time when you are faced with rising energy costs and the need to focus on your core business.

Top-selling fleet cars

Source: Society of Motor Manufacturers and Traders www.smmt.co.uk

Financing

The basic methods of funding company cars have remained unchanged for over 10 years with the majority of businesses choosing between outright purchase and contract hire.

There are advantages and disadvantages associated with both methods and their suitability is down to how businesses want to financially account for their vehicles: outright purchased vehicles will be shown on a firm's balance sheet as an asset while contract hired vehicles are off-balance sheet as the title rests with the supplier.

Outright purchased vehicles can be managed by the company itself, ideally with a designated member of staff looking after them, or can be administered by a specialist fleet management company.

"If you like the idea of owning your vehicles, don't mind putting them on your balance sheet, like to be flexible about when you sell them and don't mind tying up working capital, outright purchase might be right for you," said Tourick. "However, you will be fully exposed to movements in the used vehicle market when you come to sell them as you take the risk on the residual values. You will also not get the same levels of dealer and manufacturer volume discounts that leasing companies can attract."

Contract hire has grown considerably and probably accounts for 60 per cent of the market

Chris Chandler, senior consultant at Lex Momentum, the consultancy arm of fleet management company Lex, said the popularity of outright purchase has declined in recent years as businesses take advantage of the lower risk alternative provided by contract hire. He said: "Outright purchase is still important, but contract hire has grown considerably and probably accounts for 60 per cent of the market, with outright purchase on 30 per cent, and other forms of funding such as contract purchase and hire purchase making up the balance."

Under a contract hire deal, agreed monthly rentals are paid and the vehicle is handed back at the end of the agreement for the vendor to dispose of. Contract hire agreements may also include maintenance costs and outsourced fleet management services.

"A lot of companies are looking for risk-free options and that is why contract hire is popular," said Chandler. "The market has moved away from supplying a finance product as customers now expect a total service which can include value-added benefits such as accident management, daily rental management and a consultancy service which can pinpoint cost savings."

Curtis Hutchinson is editor of Motor Trader

Cost comparison: contract versus outright purchase

Model: Ford Mondeo 1.8 TDCi 6sp Edge Saloon
Contract: 36 months/60,000 miles
Corporation tax rate: 28%
VAT recovery: 100%
Internal rate of return: 10%

Source: Lex www.lex.co.uk

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