Digital Transformation » Systems & Software » FLEET MANAGEMENT – Driving the Chancellor round the bend

FLEET MANAGEMENT - Driving the Chancellor round the bend

Organisations are turning increasingly to private leasing schemes asemployees' demand greater say in their choice of company car. The onlyreal loser in this situation is the Treasury. Shame.

One near certainty with New Labour looking for new revenue streams is that company cars are not going to get any cheaper for employees. Already the tax penalties for driving “on the business” are severe enough to have imposed some significant changes on the industry.

We have not yet reached the position where accepting a company car would be tantamount to financial suicide. Yet the bite the Chancellor now takes from most employees with business cars is steep enough to make people want to have a say in the kind of car they get for their money. It is worth remembering that the Treasury’s view of just how much this benefit-in-kind is worth is not exactly generous, viewed from the employee’s perspective – 35% of the list price of a car, per annum is the figure used. This is reduced by a third if the employee does more than 2,500 miles business travel a year, and by another third if the mileage is in excess 18,000 miles.

A voice in the vehicle selection process might seem like no more than a reasonable request from employees in those circumstances. However, this additional dimension of choice can have a considerable impact on an organisation’s ability to control various aspects of what one could loosely call its “image”.

This includes, for example, the enterprise’s ability to achieve anything like a strict match between an employee’s rank within the organisation and the kind of car they drive. Enterprises now have a far more tortuous task on their hands responding to employee expectations concerning the company car. A simple way out of the whole complicated business – and certainly the option that appears to be favoured by governments both past and present – is for management to present employees with a cash alternative.

However, nothing it appears, is particularly straightforward when it comes to cars and cash.

As Anthony Mehigan, a partner in Arthur Andersen’s tax division, points out, there are better options for a company than simply paying more money to an employee as compensation for not getting a car. What the industry has been trying to do is work out alternative ways of funding employee car ownership, while still retaining a measure of corporate control and corporate input.

Arthur Andersen has created a specific product, SECOPS or structured employee car ownership plan, that offers just this. The idea is to allow the individual employee to personally lease a car through a scheme administered by their organisation. The lease contract is designed to offer the same kind of hassle-free, all-inclusive motoring the employee would have enjoyed from a company car, except that it is his or her own private possession.

The company organises group insurance policies and gets the benefits of scale that come from being able to act for large numbers of employees.

The employee gets a sufficient increase in salary to meet the leasing payments and as usual, this increase is not treated as a pensionable allowance, so the company does not have to bear additional pension costs as a result of increasing the employee’s remuneration. From the organisation’s point of view, the amount it pays to the employee to fund the purchase is 100% tax allowable, which saves the corporation corporate tax at 31%, less around 10% NI. This still works out better than a straight corporate lease, where the corporation suffers tax disallowances on a sliding formula for vehicles valued over #12,000.

Because the contract is still between the employer organisation and the contract hire company, the company is generally in a better position than a private individual would be to secure the most competitive rates. Mehigan explains: “Since the scheme is administered by the company with amounts being paid directly from the company payroll to the car lease company, they are happy to regard this as a lower credit risk. This in turn has a favourable impact on the amount of cash that needs to be paid to the individual employee to make the lease deal work.”

Another “sweetener” in the deal is that the company can then pay the individual a mileage allowance, in accordance with the pre-defined scales agreed by the Inland Revenue, for all company-related usage. The only real loser in this arrangement is the Treasury, since the employee is no longer paying tax on a benefit-in-kind and the company is making some savings on corporation tax. Mehigan admits high street vehicle dealers had some concerns about SECOPS when it was first mooted, claiming it would divert people who would otherwise be turning up in their showrooms. However, more sober reflection has enabled most dealers to see that the corporate car user was never their customer in the first place. The idea that increasingly high taxation would drive corporate users into car showrooms in their thousands was always something of a dream.

The Chancellor could choose, of course, to change the rules of the game substantially at the next election. Geoff Becque, director of corporate communications for Avis Fleet Services, believes his company still has some doubts about the way the Treasury might come to view plans such as SECOPS if they were to be widely adopted. The Chancellor, he argues, might be tempted to treat the whole arrangement as a benefit-in-kind. “If this was such a good deal, everyone would be doing it and there would be no more company contract leasing – it would all be personal leasing,” he notes.

Mehigan, not surprisingly, disagrees. “Geoff knows about cars, we know about tax and we have looked into the detail of this scheme very thoroughly,” he points out. Mehigan argues that British law has an admirable degree of precision in its terminology at times and the simple fact is that if an employee owns a car, it cannot be a benefit-in-kind. The Chancellor could change the rule book, but only by introducing new and rather difficult legislation. “We’re not telling everyone that they have to rush out and implement SECOPS right now, but what we are telling them is that if they run a 100-car fleet, then they should be giving it serious consideration,” he explains.

However, Mehigan and Becque are of much the same mind in their expectation of what the Chancellor is likely to do about company cars. They both feel the signals from the Treasury seem to suggest the 35% of list price formula is unlikely to be made yet more penal. Instead, both think the Chancellor is more likely to take a severe view of the use of the company car for private mileage.

“Companies already have to report business mileage. They know the total mileage, so working out the private mileage on each car is a simple exercise,” Becque says. This measure alone could bring in substantial revenues. The second area they both expect some action on is the realm of free fuel.

“It is crazy that right now the tax an employee pays on the private use of fuel is the same if his private use is 10 miles or 10,000 miles,” Mehigan notes. Introducing a real mile-for-mile benefit-in-kind tax on the private use of company fuel is another measure that could bring in significant revenue to the Treasury.

Mehigan argues that a third measure the Chancellor might be contemplating is the abolition of one or both of the mileage threshold rebates. “Most employees with company cars never get near the 18,000 mile threshold, so scrapping that is less attractive from the point of view of fresh income.

But abolishing the 2,500 mile threshold would claw back some serious money for the Chancellor.” None of these measures would be likely to do too much damage to the fleet hire business, other than to accelerate the employee’s desire for more say, and perhaps for something along the lines of SECOPS.

The big contract hire companies, as we have already seen, would still want the business even if it was in the form of a hundred personal leases rather than one corporate lease – particularly if the arrangement was linked directly to the corporate payroll.

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