Consulting » PERSONAL CONTRACTS – PCPs are back – and this time it’s personal.

The company car is dead. The same cry goes out with every tax hike. But most organisations can’t – or won’t – disrupt the habit of years. And their fleet providers are quick to soften each new blow with twists to existing products. So, when the next set of figures are totted up, the industry breathes a sigh of relief: “Long live the company car.” Now this happy status quo is under threat. The government is rallying to the environmental cause with all the zeal of the newly elected. If its measures to curb company car provision are as prohibitive as many expect, organisations may find recruitment and retention no longer depend on offering this popular perk, but on what they do to replace it. The fleet operators have the solution: personal contract purchase (PCP). The employer provides cash instead of a car and sets up an arrangement with a fleet operator. Employees can then take out their own contract to buy a car using the monthly allowance. If you think you’ve seen all this before, you’d be right. PCP is hardly new: it first appeared in the early 1990s. Then, the schemes were little more than hire purchase and take-up was minimal. “When PCP was in its infancy, it was fairly limited, fairly raw,” says Nick Sutton who set up Provecta Car Plan in 1995 to fill the gap in the market. “Few people offered them. The vehicles were still at retail level price. And it was based on secured funding so, from an individual point of view, there were severe penalties for breaking the contract.” Also, as is often still the case, the cash alternative was usually a direct transfer of what the company previously spent on other methods of transport provision. It was simply too little to maintain drivers, cut loose from all support, in the style to which they had become accustomed. But fleet operators now claim they can do exactly that. In fact, not only does the new package of services offer employees as cushy and hassle-free a ride as their old company car (or so they say), but clients can actually save money, largely through a more intelligent use of the tax system. The employee can choose any car within their budget and shouldn’t have to downgrade. Typically, contracts run for two, three or four years and the fleet operator forecasts the car’s residual value at the end of the period. This figure and any deposit paid are subtracted from the cost of the car new. Monthly payments cover the balance and interest on the balance, in effect funding the depreciation. At the end of the contract, the individual can either hand the car back, refinance it or keep it by paying off the agreed residual value. Typically the APR element of these schemes is pegged at the open market level, between 11.6% and 12.5% – although PHH is about to launch a product with a rate of 9.9%. “I think what people don’t understand is that you can make the APR say what you want it to say by messing around with the product,” says Roger Ashman, director of financial services at PHH. More importantly, most operators claim their total cost will beat what an individual would end up paying by shopping around for the best deal on each separate service. This starts right from the bigger discounts their buying power can extract from dealer networks. Insurance should be cheaper for the same reason. In fact, insurance may be obligatory since no provider wants to get left with only the accident-prone who can’t get cover anywhere else. The options may include pre-agreeing an annual premium for the life of the contract, thus pinning down another floating cost. PHH also offers gap insurance in case the pay-out when a car is written off doesn’t match the outstanding balance. Fleet operators also agree national labour rates and repair costs. The price of maintenance is fixed within the contract and the fleet company shoulders the risk of overspend. Since the contract is between the individual and the fleet operator, the beauty for the employer is that all the administration is done out of house. “This is completely de-risking car ownership,” says Nick Gafney, marketing manager of Velo. “We provide all the advice and administration. It’s about taking all the hassle away from employees and the employer.” With Velo, employers can take a more active role and a fully sponsored scheme can supposedly save up to 25% on current fleet running costs. That could mean companies setting up the insurance or providing credit underwriting so that employees who leave won’t have to be liable for the contract. Then there are what Gafney mysteriously calls “complicated financial mechanisms”: Velo makes potential clients sign confidentiality clauses before it will even discuss them. Some in the industry suggest these involve the £5,000 interest-free loan any company can make to an employee. But, other than that sponsorship can bring the APR down by between 1% and 1.5%, Gafney refuses to comment. Provecta’s Sutton is rather more forthcoming about the obvious tax benefits of PCPs. He hopes to save clients 5% to 10%. “The best way is to maximise the use of the tax-free mileage rate. If you need to top that up with a little bit of gross salary, fine. The employee ends up with more net cash and the employer makes a saving in the delivery of that cash.’ Under the Inland Revenue’s Fixed Profit Car Scheme, drivers of privately owned cars can put in expenses for any business miles they do. If the company does not reimburse them at the full tax-free mileage rate then they can claim back tax on the unpaid balance. What many people don’t realise is that drivers can also claim tax relief on the same proportion of the interest element of their PCP payments as business travel represents in their total mileage. PCP isn’t always suitable. Some companies do need closer control of business-need fleets. In any case, the numbers are most persuasive for senior perk drivers doing mainly private miles. A survey in April by benefits consultancy Watson Wyatt Worldwide showed the median list price entitlement for directors was £30,000. If they do under 2,500 business miles a year, the tax on the benefit in kind would be 35% of that. The median cash alternative for this price of car was £7,857 a year, on which drivers would pay 40% income tax. Of course, PCP does have its doubters. Tony Leigh, chairman of the Association of Car Fleet Operators, says: “I still believe you have to be very careful.” Employers and employees do need to be aware of a number of issues: is there a deposit to pay and can staff afford it; will any company support be taxed as a benefit in kind, a question as yet unresolved; and what happens when employees leave the company? Schemes do vary. Can staff refinance or will they have to pay off the balance? Could the company be liable for early termination? Lastly, the company must ensure all sides understand the new relationship and its responsibilities so that fleet managers don’t still get hassled. Ashman says PCP now represents 23% of the financed car market and that will rise to 29% by 2002. Interest is particularly keen in the oil industry, banking and financial services. And, if government proposals to base benefit-in-kind taxation on private instead of business mileage, the case for PCP will become even stronger. The introduction of flexible benefits packages is another factor. “You are starting to see provision trying to link in with individual lifestyles,” says Phil Hough, senior consultant at Watson Wyatt. “The car is ideal for a more flexible approach, rather than saying this is what you get whether it suits you or not.” Flexible usually means setting a minimum level of pension contributions, holiday or medical cover and letting employees switch the balance to the benefit most important to them. Providing cash and a PCP arrangement fits in well. Staff can up- or downgrade their model or spend the money on something else. Employers may also allow staff not normally eligible to buy into the car scheme. The car is a very British benefit, a status symbol. Unless that changes, companies will always need its clout on their side. Inez Andersen, employee issues tax partner at KPMG, believes this can only favour PCP: “Companies not prepared to be flexible and offer a cash alternative will be left behind.”