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Look both ways

Instead of being based on the price of your car and reduced the further you drive, from 6 April this year company car tax will be based on a car’s carbon-dioxide emissions. Vehicles with a rating of 165g/km of carbon dioxide or less will be taxed at the minimum rate of 15%. With each increase of 5g/km, the tax rises by 1%. Diesels carry a 3% levy on top of these rates. Multiply the car’s list price by the percentage tax, and multiply that figure by the employee’s income tax level (22% or 40%) and the resultant figure, capped at 35% of list price, is the tax due.

This emissions qualifying level will slowly be reduced. The driver of a car with carbon-dioxide emissions of 195g/km pays 21% tax in the tax year 2002/3, 23% in 2003/4 and 25% in 2004/5.

There are a number of factors to consider when setting company car policy, not least balancing the needs of the company (to reduce, or at least contain, its financial burden) with the aspirations of the driver. But with a fleet of 500 drivers, there could be 500 aspirations, and many may want cars that fit personal requirements better than professional ones.

In Tolley’s Tax and the Business Car, published in conjunction with Deloitte & Touche and Volkswagen, author Alison Chapman of Deloittes points out that, while employees inevitably only care about themselves, employers have increasing obligations towards their staff if they want to retain and motivate them. And the company car – or its cash equivalent – is a powerful part of any remuneration package.

One thing is for sure – a company’s fleet and driver characteristics are not so homogeneous that one solution fits all. It’s clear that all organisations need to segment their fleets by business need, evaluate the provision of free fuel, calculate the most cost-effective method of finance, look at who should be offered a cash alternative, and consider offering a wider choice of car to all their employees.

CAR PARK Big Five auditor Andersen is doing away with its fleet of between 400 and 500 Audis and Fords. Steve Roe, its head of procurement, says: “We have stopped providing company cars and offered cash instead. We looked at the types of car people wanted and one category was the status car, with a big engine, which is heavy on carbon-dioxide emissions. For them, we looked at the tax benefit of a personal contract lease (PCL), so that drivers can still have their big car.” These cars will be given to managers and above. Every driver will be given a profile of their tax in relation to their car and how that operates when they switch to a personal lease – and the move won’t benefit everyone.

“Secondly,” says Roe, “we created a new offer, Fuel and Drive, a hybrid scheme for low carbon-dioxide emission cars with a 1.4-litre engine, which will have no P11D impact and incur low tax. It will be a second car, a run-around.” Roe selected Ford for the Fuel and Drive cars as it had the best deal and lowest emissions. “The break mark for us was #200 per month and the Ford Fiesta and 5-door Ford Focus fitted that,” he says. Fuel and Drive is introduced in April 2002 and will be available to all drivers, by which time Andersen will be left with the remnants of a company car fleet.

Andersen carefully conveyed the tax implications to drivers. “The changes were announced in September 2001 and were well received once everyone understood the reasoning,” says Roe. “We communicated with people via our intranet, which had a link to the Zenith website so employees could calculate their tax.”

As a result of this careful planning, Andersen is making some savings, mainly because it has cut back on administration of the fleet and pool cars. “In addition,” says Roe, “Zenith developed an on-line system for us, where people select their cars and get a quote accordingly.”

One alternative to a leasing scheme, such as Andersen’s, is a personal contract purchase (PCP), which writes in the added advantage of providing for the driver to buy the vehicle at the end of the contract. He or she may also extend the contract, or return the car to the company managing the scheme. Spencer King, marketing coordinator of Velo, says: “PCPs are similar to having a company car. Some are underwritten by the employer, some by the car leasing company, but there is no need to credit check the individual. These schemes have the twin advantages that they allow the driver to choose their car but the employer can still keep control over what its people are driving.”

Insurance broker and consultancy Aon Group has also been reassessing its fleet – which is mainly perk cars – over the past two years. It has offered Velo Direct’s PCP scheme to drivers. Velo finances the purchase of the car, giving Aon drivers the benefit of corporate purchasing power and removing the need for them to negotiate with dealerships. In addition to the vehicle, drivers can choose servicing, maintenance, car insurance and breakdown options as part of a fixed monthly service charge. And they may also spend more or less than their company cash allowance on their preferred car. However, a number of high-mileage drivers, who cover 20,000-plus miles a year, will not benefit from this plan, and Aon is reviewing their requirements individually.

Again, communication played a vital role in the changes. Aon and Velo put together a bulletin containing an overview of what a PCP entailed, with a Q&A section that related to Aon employees. This was sent to all drivers. They were then able to contact Velo Direct for further information or help via its website, email or customer helpline. Velo also provided clinics at Aon’s offices. And, two months before each driver’s contract is due to end, he or she will receive a reminder of the PCP options.

Edward Cruttwell, executive director, finance and administration, for Aon Group, says: “Our policy is to move as many drivers as possible on to cash and we have used the Velo PCP as a benchmark to ensure the sum we offer is equitable. But drivers don’t have to take the PCP.”

Compared to the company car scheme, the PCP does bring some advantages for drivers. “Drivers originally had a limited choice of cars, but with the Velo PCP, we have given a much wider choice within each grade, to include almost every manufacturer,” he says. “Our ideal would be to get out of company cars but we recognise some people have a requirement, so employees driving more than 7,000 business miles a year can have a company car.”

Of course, some companies will have to keep a large fleet. For example, if employees are driving a white van with the company name on the side, they are not going to want to pay for it themselves. Those with a high turnover of staff – 30% upwards – such as hard-sell sales industries, will also have to supply vehicles. Yet even with a small fleet, it is worth standing back and taking a view.

SMALL TALK Market Dynamics, which specialises in market research and forecasting, has five VWs. It is offering cash for cars, with no restrictions on how the cash is spent. “We wanted to give people the freedom to choose the car they wanted but to encourage them out of company cars,” says managing director Jon Francis. “We source most of our vehicles through Lex, and we pointed drivers in the direction of Lex’s website, where they could key in their income, their current car and mileage, to see the impact on their tax.”

Francis says employees used to choose their cars within a budget and they usually opted for big engines. But, as a result of the new regulations, two of the directors are reviewing whether they want to continue with a car at all.

So flexibility is now key. If companies are to ensure that cash or car remains a meaningful part of the remuneration package, it is essential that both employer and employee benefit from the deal – and that takes careful planning.

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