Government figures suggest that 250,000 company car drivers have “disappeared” according to Inland Revenue estimates of the total number of tax-paying business car users. This news has prompted a policy review at the Inland Revenue into why the number is falling.
Estimates released by civil servants reveal that the total number of tax-paying company car drivers plummeted from 1.6 million to 1.35 million in the two years to November 2003. These findings are supported by the latest Financial Director fleet management research, carried out in association with Hitachi Capital.
The research reveals that 53% of companies offer a cash alternative, while 35% have reduced the total number of cars. In addition, 11% already have, or will be introducing, employee car ownership schemes that offer the equivalent of a company car, with a driver getting a hassle-free vehicle that is fully maintained and handed back at the end of a set term. However, because ownership of the vehicle has been transferred to the driver, it is technically a private car, so there is no benefit-in-kind tax liability.
There has been growing interest in cash-for-car schemes and employee car ownership schemes since the government introduced the new carbon dioxide-based company car tax system. While it is working on encouraging drivers into greener company-owned vehicles, it means any driver choosing a more powerful car with high emissions is heavily penalised. The most obvious impact has been in the growth in diesel sales.
The Financial Director survey revealed that 50% of the 474 companies interviewed have switched to low CO2 diesel vehicles, with a further 6% planning to do the same in the next two years. A further 14% have moved to smaller vehicles, while 6% are promoting car sharing schemes, and 3% introduced LPG vehicles.
The report, compiled by VNU Research, concludes: “Over half of organisations are already restructuring their company car schemes – most are offering cash alternatives in an effort to reduce the size of their car fleet.”
When the new tax system was launched, experts at the Inland Revenue expected the number of company car drivers to increase by hundreds of thousands because the new tax system was fairer and cheaper, if you chose the right car. So when the estimates of company car numbers landed on the desk of government ministers, they proved expensive reading.
As a result of the drop, revenues from company car tax have taken a nose dive. Tax of £2.66bn in 2000/2001 fell by £120m in 2003/2004. It will fall by a further £140m in 2004/2005. That is enough to keep a large local authority or a hospital going for a year.
Experts are now examining what has caused the change in company car levels at a time when the economy is relatively healthy. Certainly, there has been growth in opting out, particularly in employee car ownership schemes.
Looking at car fleets in the Financial Director survey, 67% contract hire, with 56% using outright purchase, while 19% use finance lease and 10% contract purchase. But a sizeable 8% use employee car ownership schemes, while 18% are planning to – by far the greatest percentage planning to use any form of new funding. Only 3% are offering PCP and a further 10% planning to introduce such a scheme.
Employee car ownership schemes can be extremely complicated, but the report suggests that the financial expertise of modern day fleet managers may be helping.
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Only 41% of firms have a specific fleet manager role. Of those that didn’t, 53% had handed responsibility to the financial director, just the person to handle a complex employee car ownership scheme, with the financial controller taking the helm in 19% of cases, followed by HR (8%), managing director/chair (6%) and facilities or office manager (5%).
It has been suggested that one key benefit of opting for a private car scheme is access to generous tax and National Insurance-free authorised mileage allowance payments, which employers use to reimburse staff for the cost of running a vehicle. Currently, these are 40p per mile for the first 10,000 business miles covered in private cars and 25p per mile for further mileage. If employers don’t pay the full sum, drivers can reclaim a tax break for the shortfall.
The mileage payment rates play a key role in many opt-out schemes and the Inland Revenue will spend the next year collecting evidence about the causes of the mass opt-out. It is likely to advise the government by April 2005.
Strangely, the drop in the number of company car drivers is not reflected in falling company car sales. In fact, company car sales have remained at more than one million for more than seven years, although this does include indirect sales; for example, rental fleets.
Furthermore, the highest estimates suggest that only as many as 100,000 drivers are taking a structured cash option. Indeed, research by LeasePlan showed that 60% of HR executives didn’t even know what an employee car ownership scheme was, while it claimed that 97% of drivers were staying with their company cars. What has happened to the rest isn’t clear. Some may have simply dropped out of any sort of scheme altogether, preferring to take the cash instead. But in all circumstances where a private car is being used on business, there is an element of risk.
It is now a firm belief among industry experts that an employer has a duty of care to an employee driving on business, whether the car is company or privately owned. This duty stretches to ensuring the driver is trained to carry out the task in hand; for example, having driver training to cope with covering long distances and ensuring the vehicle is fit for purpose. This could include being certain it is insured for business use and properly maintained. While this is accepted with a company car, it may not be the case with an employee’s private car.
Employers seem to understand the risks, however, with 96% in the Financial Director survey believing they are responsible for an employee driving a company car, while 81% say they have a duty of care to a driver in a privately owned car on business paid for using a car allowance. And 82% say they would be responsible for someone driving on business in a wholly private vehicle.
“There is certainly a place for employee car ownership schemes, but the tax structure for cleaner vehicles and duty of care issues are still encouraging businesses to use contract hire,” says Philippe Bismut, chief executive officer of Arval PHH.
Some experts have even gone as far as saying that instead of letting drivers use private cars, it is safer from a legal point of view to put them in rental vehicles – something your fleet supplier will be more than happy to help with.
The Royal National Institute for the Blind (RNIB) has switched its fleet from outright purchase to outsourced contract hire under a new four-year deal. The contract encompasses 170 vehicles, including 100 on a sale and leaseback basis. “The certainty of fixed costs through contract hire was an attractive option for us, and enabled us to include sale and leaseback for about 100 vehicles from our previous outright purchase arrangement,” says Alan Miles, RNIB’s administration and data protection manager responsible for the fleet.
RNIB’s contract includes maintenance, direct driver contact, accident management and the ServiceTrak maintenance and repair facility. Rod Allen, regional business development manager for Lloyds TSB Autolease, the company that won the deal, says: “We’ve worked closely with the RNIB over a number of years to create the right solution to meet its needs. Its fleet deal provides more certainty by eliminating fluctuating costs and reduces the administration burdens, which is helpful when running a charitable organisation.”
Electronic security company Secom aimed to save thousands of pounds when it switched its fleet from contract hire to outright purchase. The move was the first time the company had used outright purchase to fund its 400-vehicle fleet and the company estimated the move would save £1,000 per vehicle over a three-year period.
Before the outright purchase move in 2001, fleet had been run on a contract hire agreement for 10 years. Finance director Paul Simpson said at the time of the deal: “Moving to outright purchase gives us a greater degree of flexibility on the fleet, and allows us to change vehicles as and when we need to.”
EMPLOYEE CAR OWNERSHIP SCHEME
Construction company Bluestone opted for an employee car ownership scheme in a bid to reduce its fleet costs and administration this year. Under the new three-year contract, the first 450 vehicles were provided through car ownership, increasing up to 600 as the remaining company cars are phased out.
Pauline Speight, director of human resources at Bluestone, says: “The ability to implement the scheme alongside our existing company cars ensures a smooth changeover and minimum disruption to our employees. Our drivers can now benefit from a fully funded scheme, which means they don’t have to make any financial contribution to their vehicle. This, complemented by the benefit-in-kind tax savings made possible through car ownership, means that vehicle provision has no impact on their net pay.”
The car ownership scheme also presents employees with an increased choice of vehicle to suit individual driver requirements, ranging from a smart coupe to a family saloon or people carrier.
Increasing numbers of companies are looking at flexible rental as an alternative to buying cars or leasing them for several years. Rather than being tied into a long-term commitment, companies can have vehicles on short-term leases. They can then either extend the contract or hand the vehicles back, without penalty.
It makes sense if your fleet and staff levels are constantly changing, but it is more expensive than contract hire or outright purchase if your short-term vehicle ends up on the fleet for three years. For example, if you have an employee carrying out work for two months, ordering a rental car might cost £170 a week for a Renault Megane-sized vehicle. Good for a week, but lousy for a month as it would cost £732. Contract hire for a Renault Megane for three years/60,000 miles would cost £227 a month, but if you handed the vehicle back before the contract finished, early termination fees could cost you hundreds of pounds. In between these two options lies flexible rental. For example, specialist Apex Easy Fleet will give you a Vauxhall Astra 1.6 for £378 for one month, or £290 a month if you commit to a three-month period. After that, you just hand the vehicle back, or sign up for another rental.