Consulting » Cash for car – Take the money and run

Cash for car - Take the money and run

Changes in tax rules have persuaded companies to consider giving employees a cash allowance instead of a company car. But there are many good reasons - financial, legal and operational - why you can't ditch the fleet just yet.

At present, company car tax is reduced as more business miles are driven. But from April 2002, it will be based on a car’s carbon-dioxide emissions. Drivers of big cars who cover more than 18,000 business miles a year will be hardest hit – they’ll pay thousands of pounds a year extra tax (see page 16 for a guide to calculating the tax). Companies have a difficult balancing act to pull off: they have to fairly compensate drivers who need a car without incurring massive costs.

Offering cash instead of a car is one option. Cash allowances come in several forms. Given a lump sum, employees may buy their own cars, or spend the money on something else. Alternatively, with regular payments, they are more likely to enter into a personal contract purchase (PCP) or personal contract hire (PCH) agreement with a third party, or participate in an employer-sponsored PCP agreement.

However, there are complications attached to giving a cash alternative in any form. Karen Bowen, head of personal finance for Arval PHH, says: “Cash does not suit everyone. If employees have an option of PCPs or buying a car privately for business use, the current legislation dictates that companies have a duty of care to ensure the employee keeps the car in good condition, or the employer can be sued.”

For this reason, it is essential that employers think through the entire process. “They need to get buy-in from HR, finance, and the fleet manager so that all objectives are covered – looking after the employee, saving money, and getting a good alternative solution to a car,” she says.

There are several reasons for not handing out lump sums willy-nilly – not least that many drivers have been driving a company car for up to 20 years and may be confused as to what to do with the money. In addition, if an employee leaves within a year of receiving the cash allowance, he or she already has the money (and may have spent it), and although the employer can write in a caveat, it is difficult to enforce the return of the cash. If the individual is given a car, however, they can buy it or leave it behind when they go.

There is also the company image to consider. Most fleet cars are driven by sales people, service engineers and those whose jobs are client-facing.

Workhorse fleets of Ford Mondeos and Vauxhall Vectras give a good, solid image. A client-facing employee given free rein and the money to buy a car might choose to trade down to a Skoda (not the joke they were, but still not quite the image most companies are seeking), or top up their car fund and thunder about in something equally unsuitable, such as a Lotus Elise.

According to Karen Bowen, three quarters of companies with fleets are offering cash allowances, but there is a very small take-up for a number of reasons. Either the sum offered is not substantial enough, or employees are not given the tools to decide whether to stay with a company car or take the cash. There’s also the fact that a fleet car provides hassle-free motoring because the buck always stops with the company.

Bowen argues that companies need to do a lot of background work to help employees decide. “They need to look at the vehicles in the fleet, the amount of business and private mileage done by each driver, and then back up all the propositions they offer with the software to allow drivers to calculate the best route for them,” she says.

For many, the ideal is for an employer to set up, through a loan arrangement, a scheme that replicates the company car. Payments are then deducted from the salary cheque each month and the employer is the guarantor. Various types of insurance cover lifestyle changes such as redundancy, maternity, paternity and repatriation. And, because the credit line is with the employer, there are no credit checks on the employee.

David Rawlings, of the automotive sector at Deloitte & Touche, has a word of warning. “Companies have to ensure that personal contract schemes are cleared by the Inland Revenue,” he says. “There is a definition of a company car and they need to be careful not to fall foul of that. It is important to take account of every possible dynamic before making a decision.”

Consider an example. One client of KeyFleet, a division of Arval PHH that deals with small fleets, is a tool hire company with 45 vehicles, including 30 company cars. The majority are Vauxhall Vectra hatchbacks with 2.2-litre petrol engines. Drivers are in the 40% tax band and cover more than 18,000 business miles a year. They pay #890 in company car tax.

However, come April 2002, their bills will rise to #1,484 – an increase of 67%. This looks like a powerful argument for switching these drivers on to a cash allowance. However, because they are continually out on the road the vehicles reflect the corporate image and the company decided it did not want drivers to choose what they drove, regardless of the potential cash advantages.

So, to maintain the company car structure, the organisation will switch all drivers to diesel cars. The 2-litre diesel hatchback incurs a tax bill of £1,029 from 2002 and, in addition, is cheaper to run. Greater carbon-dioxide efficiency goes hand-in-hand with improved fuel economy, which saves money on business mileage for the company and on private mileage for the employee.

This policy is being fairly applied throughout the company. Even the MD’s Mercedes 3.2i V6 has not escaped tax scrutiny. Under the new rules, his tax bill leaps from £1,941 to £4,270 (a 119% increase) as the engine emits 259g/km of carbon dioxide. But if he switches to the E220 2.2-litre diesel, his tax will be £2,248.

Rawlings points out that many companies have been seduced into looking at cash alternatives for the wrong reasons. “If a company has 1,000 vehicles in its fleet, and 240 of them are perk cars, 360 are doing more than 18,000 a year, and the remainder are within the 2,500 to 18,000 bracket, it makes sense to do different things for different parts of the fleet,” he says.

He gives an example of the sort of complexities organisations are facing.

A and B are reps and do the same job in the same sort of area. Both drive a red Ford Focus. A has no social life; B is a European water skiing champion and every weekend drives to water ski events, clocking up 30,000 private miles a year.

The finance director has decided to give his employees cash, but in order to cover the depreciation that comes with B driving 90,000 miles, and to leave B in a cost-neutral position, he has to give B more money than A. To add insult to injury, A is the better salesman.

Alternatively, if a PCP is offered to those opting out of a company car, the company is at risk of being cherry picked. Under a PCP, the low mileage driver will be able to afford the same car, but his long distance driving colleague will not. As a result, those people who cost most to keep in a company car will want to keep stay in.

These are strong arguments for splitting the fleet, a device chosen by property agent and consultant CB Hillier Parker. Its fleet comprises 25 cars, the majority of which HR director Richard Walden describes as “fairly big, expensive models such as BMW, Mercedes and Volkswagen, a third of which cost £20,000 or more”.

Walden started reassessing the fleet a year ago. “Most of our senior people don’t do high business mileage, but they cover a lot of personal miles,” he says. “We decided that if we could get the cash right, the majority would be better taking a cash allowance.” The company ran a detailed model on its intranet, which was set up in conjunction with vehicle leasing company Zenith. “It modelled different levels of cash allowances to make sure 80% of drivers better off without a company car,” says Walden.

The company also provided the option of a more limited choice of company car (Ford or Volvo) or an attractive personal contract hire arrangement via Zenith through CB Hillier Parker’s intranet, which is backed by insurance at reasonable rates. “One of the big factors influencing a switch from car to cash is inertia,” says Walden. “So we tried to replicate the convenience of the company car.” The PCH is also flexible: participants can decide the period of the contract and at the end of the contract they may return the vehicle to Zenith or buy through a third party.

The more junior 20% of employees were offered a choice of staying with their company car or taking a cash option that was not sufficient to buy the same vehicle. “It made much better financial sense for those individuals to stay with a company car, which acted as an incentive to stay in the scheme,” says Walden.v Andrew Cope, managing director of Zenith, believes CB Hillier Parker is an excellent illustration of how cash for cars is not a catch-all.

“It is rare that a company would be best served by substituting a cash allowance for an entire fleet. It is not that simple,” he says. Life never is.

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