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Fleet car options for small businesses

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3rd Mar 2014
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The job title of fleet manager is becoming increasingly rare in business, but finance directors, HR managers and even chief executives are often stepping in to fill the role.

A fleet is any collection of cars, at least more than one, being used and operated within a single business, and the truth is anyone in a business can take on the responsibility of running a company fleet.

Depending on the number of vehicles involved, the difference between an effectively managed fleet and a poorly-run equivalent can significantly affect your business finances.

AccountingWEB has drawn on advice from Burton Sweet partner Nigel Harris, AccountingWEB’s company cars group, and Budget notes from Rebecca Benneyworth to help guide members through vehicle selection, company car tax and finance arrangements.

What sort of vehicle?

The fleet market can be confusing to navigate, but perhaps the most important hurdle is getting the right make and model of vehicle for your business.

From a buyers point of view it’s a question of coming up with a balance between the tax advantages of a low emissions car and the disproportionate expense of eco-friendly hybrids.

Like-for-like you will be paying a lot of extra money for something which isn’t so good performance-wise. For example hybrids are less suited for urban-based drivers who don't do a lot of long journeys, but in the long term you’ll benefit from lower fuel consumption and CO2 emissions.

In addition to hybrids there are an increasing number of standard petrol and diesel cars with ultra low emissions. However performance and acceleration are likely to be lower with vehicles that have been tweaked to achieve maximum fuel efficiency and lower CO2.

According to Harris, the double cab pick-up is a very interesting option, as long as you’re happy to drive one. 

These pick-up vehicles come with an extended cab, so you’ve got seats behind the drivers, but are still taxed as commercial vehicles. This gives them a number of tax advantages, including 100% allowances on the purchase and the ability to claim back VAT, which you can’t do with a car.

They also have a very low BIK figure for the driver.

Back-opening models from manufacturers such as Mitsubishi, Toyota and Nissan are big enough to carry a tonne, and therefore big enough to be taxed as a commercial vehicle.

“If you’re driving around the country, and particularly during the floods, it could be quite useful to have such a big vehicle, not to mention going to the tip at the weekend,” Harris advised.

Company car tax treatment

When it comes to car selection, there are two key areas to consider in terms of tax issues: low-emission vehicles and low benefit in kind (BIK) vehicles.

If you’re a company car driver the BIK is linked to the CO2 emission of the car, so a low CO2 emission vehicle will result in a low BIK.

Very low emission cars also qualify for 100% capital allowances for tax purposes, which is attractive from the company point of view.

However Nigel Harris said there are a “couple of little issues” to watch: “What the government defines as low emissions changes every year. This is not a problem for capital allowances purposes, because you get the 100% allowance at the rate when you buy it, but it’s a bit mean for company cars because once you’ve bought a company car on a three-year lease, what started out as a low emissions car isn’t low emission a couple of years later.”

The government does publish BIK figures several years in advance, but the rates are kept low to encourage car manufacturers to bring emissions figures into line with the government's aspirations.

“I don’t see them struggling to reach the threshold so it does seem a bit daft that they can’t bring those cars out now,” Harris added.

The 100% first year allowance on a car is currently up to 95g per km CO2, which the the lowest rate of BIK is available on vehicles under 120g.

The other big issue with company cars is the fuel.

There are two BIKs the company driver gets – the BIK of having a company car and a supplementary BIK if the company provides all the fuel. With fuel being disproportionately expensive, this is based on the same scale using a standard figure.

Harris explained that the CO2 rating for a car will be matched by a percentage and that is applied to a scale to work out the fuel benefit, adding that fewer and fewer companies are providing fuel for private mileage because the BIK is disproportionate.

“So it’s not based on the fuel you buy, it’s on a notional figure. And that figure is being ramped up every year in the budget,” he said. “The tax on a fuel benefit can easily exceed the amount of fuel that you’re buying, so it’s really a disincentive to have that.”

Leasing and financing arrangements

Historically, leasing and hire purchase (HP) options have been very similar in terms of monthly cost.

HP is regulated so you have to put down a minimum deposit, but you do get to own the vehicle at the end of the contract period. With leasing you don’t actually ever own it. You’re effectively renting it, but it’s not subject to the same regulations. This makes it attractive if you don’t have a deposit or part-exchange to offer.

You can also have higher monthly payments or a lump sum at the end of the lease which is covered by you selling or handing back the vehicle.

Leasing can be a bit more flexible in terms of cash flow, but you do have to pay VAT on the lease rental, so leasing is less attractive if you’re not VAT registered.

If you are VAT registered it’s pretty neutral between the two unless you’re desperate to own the vehicle.

Contract hire is an alternative to leasing, based on a pure rental arrangement where you also pay an amount towards the maintenance cost of the vehicle, or with servicing is built in.

If you can guarantee what your mileage will be it’s a good way of owning and running the vehicle because everything is wrapped up into a monthly figure including tax disc and repairs.

This is particularly good for budgeting but is geared to predicted mileage, with a hefty penalty if you overrun.

“It’s perhaps not ideal if it’s your first vehicle, but if you’ve got a track record and you know what’s going on. In particular, large organisations take advantage of being able to swap vehicles around to keep the mileage down,” Harris advised.

There is an alternative to the financing route, he added. With interest rates still low a lot of small businesses are buying vehicles outright.

“Because of the availability of leasing and HP finance, at a time when overdrafts and loans are not so easy to get, I would always encourage clients to look at leasing to help preserve the capital they’ve got. But if they’ve got funds in the bank which are earning no interest at all, they might as well buy a vehicle out of that rather than pay finance charges. It’s pointless having money in the bank doing nothing,” Harris said.

Are you considering a fleet contract for your business? If you’ve already gone down the fleet route, what was your experience, and what advice would you pass on to other AccountingWEB members?

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