IS the perfect company car available for your organisation’s fleet? It is a question asked since the concept was ‘born’ out of the government’s 1970s wage freeze. Then, car choice was virtually this or that. Now, the UK fleet market is the world’s most mature with more model options available than ever in terms of size, style, performance and engine technology. But finance directors must address a string of issues before they get close to a company car choice list compilation.
What their business wants to achieve from operating a company car fleet and how vehicles will be funded are key considerations before the focus turns to the myriad of ingredients that go into deciding which cars to include on any choice list.
Although most of those ingredients will be financial, what over-rides everything else is business need and the requirement that vehicles on the policy are fit for purpose – supplying a small car to a salesman clocking up 30,000 miles a year is not clever, and an engineer with tools to carry will require an estate model – while image projection and brand value may also be important.
“There is a range of factors that must be considered when selecting a vehicle but the most important is that it does the job it is intended for. Irrespective of how cost-effective, environmentally friendly or desirable it is, it will never be the right choice if it can’t meet its purpose,” says Paul Marchment, fleet consultant at vehicle funding and fleet management company Arval.
BOX: Junior management
Model: Honda Civic 1.6i DTEC 5dr
P11D value: £20,865
CO2 g/km/BIK tax: 94/14%
Comb MPG: 78
Cost per month: £439.21
Experts say the perfect car for a fleet does not exist, but, according to Andrew Hogsden, senior manager in fleet consultancy at Lex Autolease, the UK’s largest contract hire company, it is possible to use a range of key metrics to compile a five- or six-strong shortlist that meets all key business and driver criteria across all company car grades.
Generally, company car allocation policies can be split into two – job-need and perk. The former is where a vehicle is essential for employees to perform their job – perhaps a salesman or an engineer – where choice is often restricted. The latter is where the car is part of an individual’s recruitment and retention package where there is typically a wide choice of vehicles to choose from, reflecting lifestyle.
The optimum fleet funding choice is also critical with contract hire and outright purchase the two most popular.
Key factors for finance directors to take into account when making fleet funding decisions include: the company’s corporation tax and VAT position, the availability of cash within the organisation, the rate of return on capital employed, corporate balance sheet implications, the level of internal fleet expertise, and the culture of the business and its attitude to financial risk and outsourcing.
“Too often,” says John Pryor, fleet and travel manager at fashion retailer Arcadia Group and chairman of ACFO, the leading UK representative body for fleet chiefs, “decision-makers don’t go back to the basics and they start compiling choice lists by talking to manufacturers”.
Crucially, finance directors must take into account both corporate and employee issues – they are different and sometimes may conflict. A further factor to consider is the intended company car replacement cycle, as operating costs vary by vehicle and usage.
Once in a position to focus on selection, it is, according to Caroline Sandall, Barclays’ fleet manager, critical to base this on vehicle whole-life costs over the chosen operating cycle. But, says Hogsden, outside of the major corporates – those operating more than 500 company cars or working in partnership with leasing companies and consultants – too few organisations used such parameters.
Instead, many organisations continue to compile choice lists from other factors: purchase price, vehicle list price, P11D value or monthly lease rate being the favourites. That could be because there is no clear definition of the metrics that should go into calculating whole-life costs or, as Hogsden explains, it was just “too difficult”.
“In many businesses, fleet costs are hidden in the profit-and-loss account. If you ask finance directors about the cost of their fleet, it will take some time to extract the figure. It is not as easy as looking up stationery costs, but businesses do not realise how big the fleet cost number is,” he said.
However, best practice would indicate whole-life costs, which reflect a car’s tax-critical carbon dioxide (CO2) emissions, should include: finance and depreciation costs, service costs, VAT (50% disallowed), fuel, employers’ Class 1A National Insurance, corporation tax and, if leasing, disallowance.
Insurance is a further cost that some experts mix into the whole-life cost calculation, identifying the average as a fixed element per car per month so it is visible with a focus on progressively reducing the charge.
David Stickland, FD at vehicle management company LeasePlan UK, acknowledges that running a vehicle fleet is one of a company’s biggest costs, adding: “While there is a lot at stake, if you accurately assess your whole-life costs, you can ensure your long-term budget and cost baseline are both predictable and as efficient as possible for your company.”
BOX: Middle management
Model: Volkswagen CC 1.4 TSI BlueMotion T 4dr
P11D value: £24,600
CO2 g/km/BIK tax: 147/22%
Comb MPG: 45
Cost per month: £650.32
What drivers want
Leasing company Ogilvie Fleet has created what it calls True Cost, which it says provides finance directors with the “total effective rental cost of any vehicle”.
“It is a more accurate representation of the costs associated with the operation of a vehicle and allows a far more precise comparison to be made between different models. Whole-life cost calculations from contract hire and leasing companies are often based on just an effective rental plus the cost of fuel. This does not provide an accurate figure in terms of the real-world cost of operating vehicles,” says sales and marketing director Nick Hardy.
“Factors such as the employer’s Class 1A National Insurance and any applicable lease rental disallowance as well as corporation tax are hugely important in calculating the real world cost of company cars. However, too few businesses take these numbers into account when compiling choice lists.”
Marchment adds: “Too many companies focus purely on the up-front lease rental or purchase price. However, this, in isolation, is not the most effective metric, as we see many examples where what looks like a cheap vehicle based on these initial costs actually isn’t when you factor in the full range of costs over the three- or four-year operating cycle.”
For company car drivers, the key metric is the CO2 rating of a vehicle as it directly influences their benefit-in-kind tax calculation and typically represents the best value for money. Drivers should also be aware of how that expenditure will rise over the life of the vehicle as emission thresholds linked to the tax charge tighten.
GE Capital Fleet Services’ latest quarterly Company Car Trends report highlighted that CO2 emissions was the number-one factor used when setting the criteria for a company car choice list with whole-life costs fourth on the list behind vehicles being fit for purpose and monthly rental cost.
Gary Killeen, fleet services commercial leader for GE Capital UK, says: “The company car choices that organisations are making remain based on providing vehicles which are tax- and fuel-efficient thanks to their low CO2 rating, are practical for fleet purposes, and can be acquired in a cost-effective manner.”
But, as brand image has risen to number five on the criteria list, he added that – post-recession – this was a signal that companies were starting to think more about staff recruitment and retention, and becoming more concerned about presenting attractive car choices as the jobs market improved.
Fuel cost is one of the few metrics – along with CO2 – that influences both employers and employees and accounts for about 25% of fleet expenditure. The majority of company car drivers will pay for fuel used privately so the better the MPG, the lower the cost.
Hardy says: “There is no perfect car for any fleet. The perfect car is more relative to drivers within whatever guidelines their employer chooses to set. Choice is important because that is what drivers want and, as an employer, you want staff to be happy because that means a productive company.”
Additionally, and particularly for perk drivers, the image the car portrays is also a key factor, with Pryor saying: “Perk drivers want as much car as they can have for the lowest cost with the best badge.”
Marchment adds: “It’s not unusual for companies to have different policies for different drivers; offering perk drivers a choice but specific vehicles for job-need drivers.”
Inevitably, when weighing up the importance of all the metrics that go into creating the environment to choose the perfect car for a fleet, it is about balance. “Every fleet is different; there is no easy answer; and one size doesn’t fit all. Having analysed the basics, the various metrics have a domino effect and, for the unwary, can result in the wrong choices,” Pryor says.
BOX: Executive management
Model: Ford S-Max Estate 2.0 Titanium X-Sport
P11D value: £30,745
CO2 g/km/BIK tax: 194/31%
Comb MPG: 34
Cost per month: £814.22
It is also important to understand fleet trends, including the introduction of new technology and how that affects the various metrics.
“Trends will impact on fleet costs so what was the right decision today may not be the correct one in one or two years. Whole-life costs change due to a variety of factors – fuel prices and tax – and that influences employees’ choice. It is up to those compiling the car policy to influence it,” says Sandall.
Mike Belcher, head of sales at Hitachi Capital, says businesses must strive to continually balance vehicle choice and desirability with cost. So, as manufacturers constantly introduce environmentally friendly, fuel-sipping vehicles featuring the very latest connectivity, it is vital to keep company car choice lists under review.
Although he recommends a policy review every one to two years and an interim external comparison review taking account of where the choice list should sit, what business competitors have done, and which new models have been introduced by manufacturers, Belcher says even then the perfect car for a fleet policy did not exist.
“New cars are being launched all the time, creating seismic changes. Manufacturers are moving so fast that the only way FDs can make sure that they don’t sleepwalk into a cost increase is to undertake regular reviews. If they look the wrong way at the wrong time, they will unwittingly generate cost increases for their business,” he says.
In the final analysis, Marchment says: “Which metrics are most important is an individual thing, dictated by business and fleet priorities. Motivations range from the need to keep costs to a minimum through to the requirement to attract high-calibre employees to the organisation; increasingly, we are seeing companies keen to introduce new technologies to meet their CO2 agendas. The key is to be clear on the requirements and select the vehicles that best reflect these corporate priorities.
“Drivers and businesses sometimes have differing priorities and this is important to manage because driver satisfaction is an important consideration. For example, while the business may be focused on cost and safety, drivers may be more interested in reducing their tax payments or the prestige of the vehicle and specification.”
Ultimately, explains Hardy, while whole-life costs “count the most”, the calculation takes account of a combination of metric. So if there is one single metric to follow, he argues, it should be CO2 in terms of the perk fleet, and fitness for purpose should be the key criteria for job-need cars.
“Whole-life costs will dictate the broad parameters of a car policy, but within different grades these may be linked to a CO2 emissions limit for perk drivers. CO2 is critical because it drives the tax-efficiency position for the company and the driver and low-emission models are among the most sensibly priced and fuel-efficient. Frequently, within different categories, the cars with the lowest whole-life costs are the ones with the lowest CO2,” he says. “For job-specific cars, it is business need that is critical within certain cost parameters and an acknowledgement to the driver’s tax bill. It is no good operating a super-cheap car with a super-low tax bill if the tools and equipment that need to be carried will not fit. There must be compromise.”
Ultimately, Tony Leigh, head of car fleet services at business advisers PwC, argues that the “message is quite straightforward”, saying: “The perfect car for a fleet will depend on the type of fleet and scheme that each company operates. Therefore, review the requirement and tailor the fleet for those needs. Whether that is one car for the many or many cars for the few, the perfect car is the one which fits the company and employee needs.” ?
BOX: True costs
Whole-life costs are “the most compelling methodology” for vehicle selection, according to Ross Jackson, chief executive of consultancy Fleet Operations.
Using Ogilvie Fleet’s True Cost data, Financial Director has looked at models across three sectors – junior management/salesman, middle management and company director. Within each grade, whole-life costs for selected models over a three-year/75,000-mile replacement cycle are almost identical.
Yet, base selection on other criteria – for example P11D value – and what appears to be a cheap car may actually prove expensive versus alternatives that potentially deliver tax, style, performance, specification and green benefits. Indeed, says Jackson: “By itself, price can be wildly misleading, without other limiting factors being linked, such as fuel economy and CO2 emissions.”
At the junior management/salesman level, the Honda Civic has the highest P11D value, but the lowest True Cost or monthly rental taking account of key factors: finance rental, service costs, VAT, leasing disallowance, Class1A National Insurance, corporation tax and fuel, while drivers will be in receipt of the lowest benefit-in-kind tax bill among the four selected models.
Move up to the next category and it is a similar picture with the ever-popular BMW 320d costing only 56p per month more, according to True Cost, when compared with the Volkswagen CC. The Volkswagen is cheaper by more than £5,000, but the BMW delivers significant benefit-in-kind tax savings due to its low emissions as well as vastly superior fuel economy.
At director level, the hybrid Lexus has marginally the highest True Cost, but returns the best combined cycle MPG of the four selected models and has easily the lowest CO2 emissions, giving company car drivers a massive tax saving.
As Jackson says: “There is no ‘best car’. The cars for each grade of employee are defined by industry sector as well as expectation. Employee expectation has certainly increased in recent years. Some of the larger companies complicate this further by having deliberate policies with regard to pay and benefits where they may want to be median-, upper- or lower-quartile in terms of their overall benefit provision.”