Potholes to avoid with company cars
Reports of the demise of the company car have been exaggerated. Some companies that had pushed employees to opt for cash instead are now peddling motors again
1 The conventional wisdom.
One of the enduring images of the eighties was the advertising executive stepping out of his flash company car and braying into a mobile phone the size of a brick. Now both yuppie accessories are gone. The mobile phone is a barely noticeable Bluetooth headset, and the company motor is privately owned, bought with a cash allowance from his employer.
Proximity London is one of many advertising agencies to have gone this way. In 1999 it had a fleet of 90 cars. Now it has only five and FD Damien O’Donohue plans to phase even those out within the next 12 months. “We needed a full-time administrator for the fleet and our staff were always complaining that they didn’t have the car they wanted,” he says. “So we got rid of the fleet and increased their salaries. Being based in central London, we don’t really need cars for business and getting rid of the perk has done a great deal to save us money and cut down on administrative hassle.”
2 But... the car’s still here.
When even the ad men are getting rid of them, you can understand why people are keen to write the epitaph for company cars. Yet there have been signs recently that assumptions of the company car’s demise will turn out to have been premature.
According to the latest Monks Report, an annual snapshot of the company car market, in 1999 60 per cent of companies offered a cash alternative to the car. By 2004 this had soared to 89 per cent. But in 2005 it fell marginally, to 88 per cent.
In November, Barclays announced that it was re-launching its fleet programme for high business-mileage drivers and would even encourage its “perk car” employees to take company motors rather than (the still available) cash alternatives. Why? Two main reasons: health and safety, and environmental concerns (both of which we cover below). Interestingly, the bank is also returning to a more traditional fleet management arrangement and ditching its employee car ownership (ECO) scheme because it was too complex and didn’t generate any financial advantages.
Other FDs are finding that cash has become less attractive. “Financially it works out the same for our employees, but company cars have a kudos attached, and are also a hassle-free way of motoring,” says Paul Edwards, FD of National Computing Centre in Manchester. “If anything goes wrong, we sort it out for them. In any case, because we have a duty of care for staff even if they’re in their own cars, we’ve to get a copy of their licences and MOT certificates, as well as satisfying ourselves that they are insured for business use. It’s a much greater administrative burden for us.”
When Damian Hosty became FD at business transfer agent SBS Commercial two years ago, he was shocked to see how much the company was spending on reimbursing its staff for business travel in their own vehicles. “We were paying our consultants a 20 pence a mile premium, and some of them were making a good profit on this by running old bangers,” he says. “This was not only expensive; it was also bad for our image. So we bought a fleet of Jaguar X-Types, and even though maintenance costs are higher than we expected, we’re saving around £16,000 a year.”
So after a decade in which the prevailing wisdom was that it makes financial sense to offer cash instead of cars, and to offload the risk to employees, we may be witnessing the return of the company fleet.
3 You still have to watch road costs.
According to a recent survey conducted by fleet management company Leaseplan, 24 per cent of FDs think that road charging will have a serious impact on their business – only 14 per cent were concerned about it a year ago. And 20 per cent of you are now concerned about the loss of business hours from traffic congestion. The announcement in March of the UK’s first “car-share only” lane, on the M62, shows the government is taking road use seriously, but it’s unlikely to solve your reps’ lost time if they’re the ones using the car on their own.
More companies are now dealing with fines, too. The introduction of gantry-mounted speed cameras on sections of the M25 (around the Heathrow junctions, in particular, where variable speed limits often apply); the creeping use of “average speed” cameras on longer stretches, which can’t be defeated by slowing down momentarily; and increased use of mobile camera units are all conspiring to catch company car drivers in a hurry.
(There’s no shortage of anti-camera resources of the web, mind you, from the idiotic to the thoughtful. It’s now easy to get a road map showing existing camera sites and up-to-date info on new developments – try www.ukspeedcameras.co.uk or www.safespeed.org.uk.)
4 VAT and other tax rules.
On January 1, new rules on how companies recover VAT on mileage claims came into force following a ruling in the European Court of Justice. Under the new legislation, you’re only able to claim back VAT from business mileage if each claim is supported with a valid VAT receipt for the fuel purchased. This changed the existing practice which allows you to recover it without any supporting VAT documentation.
Software provider GlobalExpense estimates that UK employees make more than 20m claims for business mileage per year – so, for a business with an average of 150 employees claiming mileage expenses each month, the VAT at risk from these changes is as much as £45,000 per annum.
“Businesses need to allocate additional resources to check all mileage claims
are supported with the necessary fuel receipts,” says Peter Bradshaw, compliance manager at GlobalExpense. “They need to take a view on the cost of administration against the benefit of VAT recovery. But in most cases the extra scrutiny will be worth it as companies with employees claiming mileage will end up paying extra VAT if the receipts aren’t present.”
The Chancellor also announced a review of the taxation around employee car ownership (ECO) schemes in last month’s Budget. “The focus of the review is likely to be the aggressive schemes that incorporate employer-guaranteed funding or some form of guarantee or surety of payment from employers; salary sacrifice systems to pay for the car; employers guaranteeing early settlements resulting from leavers; and mandating a lease supplier,” says Nick Sutton, chairman of ECO supplier Provecta. He recommends “arms’ length” ECO schemes that are less likely to attract HMRC attention. But if any review does target “employer-controlled” schemes for tax, you might reasonably conclude that bringing the drivers back in-house or into a company-leased fleet is a reasonable option.
5 Duty of care legislation.
The quarterly Company Car Trends survey from GE Commercial Finance revealed that 95 per cent of FDs see duty of care as the most crucial aspect of fleet management. Company car drivers are around 50 per cent more likely to be involved in road accidents, and they cause over 20 fatalities and 250 serious injuries every week. Yet research by the Federation of Small Businesses found that one in ten SME employees is driving a private car that has not even been insured for business use. “Employers are walking a legal tightrope by not keeping a tighter reign over their employees and enforcing transport policies,” says Stephen Alambritis, head of parliamentary affairs at the FSB.
The corporate manslaughter legislation currently under consideration by the Commons will sharpen your thinking on this subject. “The draft bill sets out the government’s proposals for reforming the current law,” Home Office minister Fiona Mactaggart told the House last month when she submitted the government’s responses to the Commons’ committee review of the draft. “[It] would overcome the main obstacle to convictions under the current law, by removing the need to attach corporate guilt to the criminal negligence of a single very senior individual within the company. This would allow for companies to be found guilty of manslaughter if grossly negligent management failures led to a death.” Good news for individual directors; bad news for businesses.
And according to the Institute of the Motor Industry, “Employers who fail to provide a written road safety policy, to implement safety procedures including risk assessment, or to arrange for their employees to receive appropriate driver training and supervision will lay themselves open to fines and even imprisonment in the event of an employee being involved in a serious accident while on company business.”
The implications are significant, particularly for those of you who have “pool cars” for employees, or who provide cash allowances in lieu of company cars. “If staff are using their own vehicles on company business, the employer must undertake checks and implement procedures to ensure that their employees possess valid driving licences and insurance and that their vehicles are fit for such purpose,” says Bank of Scotland Vehicle Finance’s Sean Bingham.
Currently very few firms do this. A survey conducted by Provecta showed that 27 per cent of companies failed to check if drivers had the correct insurance and 40 per cent had no idea whether employees’ cars being used for business had a valid MOT. More than half failed to check whether privately owned vehicles being used at work were suitable for the job.
In short, you need to conduct regular audits on the roadworthiness of the vehicles used by your staff for business, regardless of who owns those vehicles. You also need to ensure those staff are properly licensed, insured and trained. Finally, you need to develop and communicate clear policies on the use of mobile phones while driving and the need to take breaks every two hours. Next to think about? Smoking.
6 Environmental impact.
“The business case for greening your fleet is pretty clear-cut,” say David Barnes, product development manager at LeasePlan. “Drivers in lower-emission cars pay less tax, while fleets that reduce fuel consumption and plan journeys more efficiently could cut thousands off their running costs.” There are also reputational issues. “Running a fleet of greener company cars can make your company much more attractive from a corporate responsibility perspective. In addition, a lot of public sector tenders require companies to demonstrate good environmental practice.”
Ian Peden is a financial director at Chloride, provider of power supplies to organisations such London Underground and Wembley Stadium. Its fleet of 70 vehicles, including 30 company cars, is largely employee-owned under an ECO scheme. “We’ve been doing what we can to reduce our travel time, and therefore emissions, as part of our drive towards ISO14001 accreditation, and to reduce our expenditure on fuel,” he says. “The problem is that, as a growing business, our aggregate travel time is increasing. However, this area is important to us and we will continue to work hard on it.”
According to Andrew Cope, chief executive of Zenith Vehicle Contracts, this is another reason why companies are considering company cars once again. “Cash allowance takers either have older vehicles, which are often significantly less environmentally friendly and, in some cases, hugely so; or they go for more lifestyle choices, such as large SUVs or sports cars, which have higher CO2 profiles,” he says. “If you provide a fleet of vehicles yourself, you can decide how much CO2 they will emit.”
7 Balancing price and appeal.
Some employees need company cars – but for many it remains a perk, given to attract, motivate and retain them. How does that square with a need to keep your people moving at the lowest cost? “It can be the source of much tension between human resources and finance departments,” says Phil Peace, head of sales and marketing at fleet management firm Velo.
But GE’s Company Car Trends survey indicates that a move back to perk cars is gathering pace. Around 61 per cent of fleet decision-makers said they offer senior staff a company car even if it’s not pivotal to their job. Over 60 per cent of them expected to continue offering these non-essential drivers a perk car in the next 12 months, an increase of almost 20 per cent compared to this time last year.
The watchword in employee benefits is flexibility, and this applies to company cars as much as it does to childcare, pensions, holidays and other benefits. “Businesses are becoming increasingly sophisticated in their approach, recognising that ‘one size fits all’ is no longer appropriate for managing fleets efficiently,” says Rich Green, managing director at GE Fleet Services.
NCC FD Edwards believes that offering choice is the most important aspect of his company car policy. “Our staff are all different and so all want different cars,” he says. “We have a fleet of 20 Mini Coopers for our telesales agents. They can customise their cars, adding alloy wheels, top notch speakers or even a Union Jack on the roof. The only stipulation is that they can only spend up to ten per cent of the purchase price. Any more than that and you are really destroying residual value.”
But they’re not to everyone’s tastes. “Our consultants tend to be more mature so they prefer saloons,” he goes on. “The only rule is that they can’t have soft tops as they tend to get broken into. Then there is a third group who would rather have a cash equivalent. They get between £300 and £600, depending on how senior they are. It’s easy to work out the cash equivalent by going to websites like www.cashorcar.co.uk.
In today’s competitive labour market, we have to do everything we can to attract the best staff, and offering a good, flexible company car scheme is certainly important.”
Flexibility has practical advantages, too. “We use Renault Kangoo vans for our home delivery business,” one Real Finance reader tells us. “When we started the business, all that was available was contract hire vehicles with limited mileage. This was restrictive and expensive, particularly when I didn’t have enough drivers for the vans. I now use a weekly hire arrangement with unlimited mileage. If I’m down a driver, I simply off-hire the van and remove my overhead.” Clever.
“You can’t always force employees in one direction,” says Alison Chapman, head of automotive tax at Deloitte. “Some want cars, others want cash. If you want to motivate your staff, you need to offer them a choice. That’s why the company car is certainly making a comeback.”
The FD's view: a growing fleet
Golley Slater is a communications company that provides advertising, marketing and public relations services to clients including Jaguar, Lloyds TSB and HMV. Based in Cardiff and London, it has 260 staff and a fleet of 60 vehicles. The company is committed to retaining and perhaps even growing its fleet. Some employees take a cash alternative, but FD Alan Jones, left, is keen to end the practice.
“Duty of care legislation means that there is very little benefit to us in giving someone an allowance,” he says. “We’re still responsible for them, so we have to do all the things like get monthly reports on the cars’ roadworthiness and get copies of all their licences. At least if we give them a company car we can be confident they are driving a car that is fit for purpose and looks impressive. We really don’t want staff turning up to meet clients in beat-up old bangers.”
With that need for good controls around your staff’s vehicles, perhaps it’s a good job that so many of you in the finance function are in charge of your companies’ fleets. “Nowadays we tend to deal with a finance director or an HR manager, rather than with someone who goes around kicking the tyres,” says Dean Woodward, consulting and risk manager at Daimler Chrysler Fleet Management reports. Anecdotally, at least, the specialist fleet manager is a dying breed. So if the company fleet is thriving, it’s on the FD’s terms.
Golley Slater is charting a middle course. Its fleet manager retired recently and that has prompted the company to review its options. Like many of you (judging from the feedback we get) Jones believes that his time is better spent elsewhere, so he has no intention of running the fleet himself. He might hire a part-time fleet manager, or he might engage a leasing firm to run it all.
As he weighs up the possibilities, the FD is concerned to strike the right balance. “We want to offer our employees choice,” he says. “But we also have to keep control of the costs. This is not just the initial cost of the vehicles, but also the maintenance and depreciation costs. Then there are there tax considerations around environmental impact.We will give each employee a budget so that they can go to a web site and select the options they want. If they choose a car that is expensive to maintain and has a low resale value, they will get less car for their money.”
Top fleet tips for 2006
Buy in bulk. “Look at the corporate discounts available from a single vehicle manufacturer,” says Gary Killenn of GE Commercial Finance. “£20,000 spent in one of those deals will almost certainly buy more car than £20,000 spent by your employee as an individual on the showroom floor.”
Manage fuel costs. “Over the past year oil prices have risen by 30 per cent and petrol prices have shot up as well,” says Kevin McNally, of LeasePlan. “A company running 100 Audi A4 1.9 litre TDi diesels, each doing 15,000 business miles a year, is now paying over £10,000 a year more for fuel than it did 12 months ago.” But while many firms provide fuel cards to track expenditure and ensure paperwork costs are held down (and VAT properly tracked), they don’t actually help you buy cheaper petrol...
So source cheaper petrol. Recommend that your drivers fill their tanks away from motorways (where prices tend to be higher) and, if they can, use the cheaper supermarket pumps. And keep your eye on www.findcheappetrol.com – a web site that will tell you the lowest prices in your area for different fuel types. So you could find the cheapest service station in your town, for example, and email the name of the garage to company drivers on a Monday morning.
Be more fuel-efficient. “Fleet operators shouldn’t underestimate the impact of encouraging fuel efficiency,” says Sean Bingham, new business director at Bank of Scotland Vehicle Finance. “We recently provided consultancy for a 200-car fleet and found that an improvement in fuel consumption of just one mile per gallon would reduce overall fuel costs by £10,000 per year.” An optimum driving style can improve fuel efficiency by ten per cent – well over 1mpg on almost all cars (and off-setting driver training costs). Bump that up to 40 per cent by ensuring correct tyre pressures, limited use of air-con, removing unnecessary weight and sticking to speed limits.
Encourage alternative modes of transport. “In the past rail services might not have been frequent enough for company travellers,” says Arthur Leathley, communications director at Virgin Trains (admittedly not the most impartial commentator). “Now we run a service every 30 minutes between London and Manchester. There are power points by the seats and within the next year there will be wireless internet access, so executives can work rather than drive.”
The FD's view: a shrinking fleet
Henkel is a German manufacturing company which produces chemicals, cosmetics and adhesives, most notably Schwarzkopf haircare, Sellotape and PrittStick. In the UK and Ireland it has over 1,300 employees and is headquartered in Hatfield.
Three years ago it had a fleet of 600 cars, but it has since reduced this to 300. Now staff have a choice of a company car; an ECO scheme in which they are given an allowance to lease a car from a third party; or a cash alternative.“We want to offer our staff more choice,” says head of finance Peter Budden. “Cars are essential for our staff to get around and visit customers, but they are also an important retention tool – making sure people are happy with the cars they drive helps us to keep them on board.”
Many staff have opted for the employee car ownership (ECO) scheme, because it offers them the flexibility to downgrade (and get cash back) or upgrade their vehicle. It has also produced several benefits for the company. “Employees have the option to purchase the vehicle at the end of the contract, so we’re finding that many of the cars are much better looked after than they were in the past,” says Budden. That’s good news on both maintenance costs and fuel consumption – a better cared-for car is more efficient.
Since 1996, Henkel has taken the line that it has a duty of care for staff driving company cars on business. It operates a training scheme, under which anyone taking any of the vehicle options has to be trained every three years. Budden says that this responsible approach saves the company £96,000 a year in reduced accident claims and lower insurance premiums.
The company also takes a firm line on its environmental responsibility. It does not allow the handful of employees who take a cash option to buy a 4x4 or a soft top. “The range of company cars we offer are all environmentally friendly, but we do find that many employees look for those with the lowest CO2 emissions,” says Budden. “We think that’s partly because they are aware of the tax implications, but also many of them want to minimise their harmful environmental impact.”
Where next...
www.direct.gov.uk/Motoring Useful government site
www.hmrc.gov.uk/cars HMRC’s rules
www.findcheappetrol.com Cheap petrol in your area
www.comcar.co.uk Useful car chooser site
www.cartax.co.uk Deloitte’s company car site
www.alphabet.com, www.zenith.co.uk, www.velo.co.uk, http://snipurl.com/BOS_VF, www.gefleetservices.co.uk,
www.daimlerchryslerfleetmanagement.co.uk,
www.leaseplan.co.uk, www.provecta-carplan.co.uk
The fleet solutions providers we spoke to
Picture source
