Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Employee Car Ownership: The best option?

by
20th May 2005
Save content
Have you found this content useful? Use the button above to save it to your profile.

Nick Phillips, sales director at Provecta Car Plan Limited, considers alternatives to the "traditional" company car.

You would think that swapping a company Mondeo for cash, to spend as you wish, would be a pretty good deal for most company car drivers. Sadly, real life is never quite that simple, as many employees have found to their cost.

First, you have to do the shopping around yourself - which is where the first problem comes in. When the car was chosen for you, it was easy.

Now you need to be sure you are getting the best deal, because you are parting with your own cash.

Then you have to find a deposit, which often runs to several thousand pounds, and that is not covered in your monthly budget. Then you have to insure it, yet another additional cost.

Add in the ongoing expenses of running a car and the total monthly costs soon mount up. Include the cost of servicing, maintenance and repair and uncertain used car values, and suddenly you find yourself missing the convenience of that company Mondeo.

Employers too have had their fingers burnt by cash-for-car schemes. On the face of it, ridding the company of the administration burden alone makes offering cash an attractive alternative.

Add in the spiralling costs and tax implications of company cars and it seems a straightforward decision to simplify the whole system with a cash allowance. However, ill-prepared policies can leave employers with unexpected problems.

VAT ruling
Tax and travel expenses in particular have proved to be a bigger expense for some companies than they had originally calculated. Up until today we have been able to claim VAT back on business mileage fuel and other business expenses.

However, the European Court of Justice recently declared the British tax rebate system on staff mileage expenses - worth an estimated £250m a year - to be illegal. It decided the VAT reclaim system of car travel allowances, where expenses are calculated on a cost-per-mile basis, did not guarantee that employees were using the fuel for work purposes.

The lack of transparency meant that EU rules could not allow firms to reclaim the VAT on fuel, currently worth about 16 pence for every litre of petrol, from the Government.

Duty of care
Given all of these problems, some employers still give a cash allowance in lieu of a company car, particularly to perk drivers.

However, a new concern has arisen for employers, in the shape of the Corporate Manslaughter Bill.

With the very real threat of company directors on trial for serious accidents involving their employees driving on company business, employers need to take a very close look at the cars their employees are using. Once 'Car Allowance' appears on an employee's payslip, liability falls on the employer.

If the cars are not found to be "fit for purpose" or poorly maintained, or the drivers have not received adequate instruction or training, then companies will be vulnerable to prosecution.

Strict guidelines already exist for drivers on company business and employers are expected at the very least to have a suitable policy to demonstrate their duty of care to employees.

Giving employees full control over how they spend their monthly car allowance is clearly leaving employers vulnerable. The cash, therefore, has to be given with certain constraints attached to it.

Employees may feel that they should spend the cash as they wish, but by demonstrating that control is needed to protect employee and company, this reluctance can easily be overcome, particularly if the control systems put in place also help employees and take the risk out of car ownership.

Choice
What is needed is a viable alternative that works like cash, but maintains the duty of care employers have to workers. There are various ways of doing this, the simplest and most effective being a system of Employee Car Ownership (ECO).

This works by giving employees their cash allowance to spend within a company-selected scheme. The choice of cars is usually much wider than that on the company car scheme, with significant discounts over high street prices.

A lump sum deposit is not needed and a fixed monthly payment covers all servicing and maintenance, including tyres and breakdown cover. The payments are protected against the driver leaving the employer, and the final value of the car is guaranteed, giving the owner various options at the end of the contract. The whole system has the feel of a company car, without the personal tax implications.

The company is protected because it knows the vehicles will be "fit for purpose" and well maintained, its costs are fixed and it no longer has the administration burden of a fleet of vehicles.

Employees are protected because they are driving their choice of vehicle and they know exactly how much the car is costing them each month.

Going green
The environment can also be more easily protected through the controls in place in an ECO scheme. Research from Provecta shows that the average CO2 emissions rating for all new ECO cars delivered in 2004 was 170.5.

This figure is lower than the average for all new cars bought in the UK last year, which according to the SMMT was 171.4.

Cars with higher CO2 emissions tend to be less fuel efficient and more expensive to insure. Drivers know this and take all these factors into account when selecting their ECO car.

Their choice therefore more closely reflects the consumer market than the company car market where employers may impose a car structure to reflect status or prestige, or promote a particular image.

As the business world changes, companies need to adapt. In order to run their businesses efficiently costs have to be kept to a minimum.

But costs are not the only factor; particularly where staff welfare is concerned. The provision of cars is perhaps the only business cost where both sides can gain if the right system is put in place.

NICK PHILLIPS

An earlier version of this article appeared in HRZone.

Related links

  • AccountingWEB's Company Car Zone
  • Tags:

    Replies (3)

    Please login or register to join the discussion.

    avatar
    By NBWNBW
    26th May 2005 12:05

    BIK?
    I would say it isn't. But even if it is a taxable benefit, the benefit is the cost to the employer...which seems to be nil.

    Thanks (0)
    avatar
    By evansjez
    25th May 2005 15:12

    Benefit in kind
    If the employer negotiates a discount for the employee is this not a taxable benefit in kind?

    Thanks (0)
    avatar
    By Bibika
    17th Dec 2012 12:57

    Administration Costs

    The ECO Scheme, does have such great number of benefits on both sides. But at the same time there are increased admin costs for the employer and that sometimes does not make the whole activity productive in a financial sense. So a save up and and increased productivity on one site and increased costs on the other for the employer. There has to be a middle ground for this, have a spot in the diagram, when these ECO Schemes are actually beneficial for the employer.

    Great post, loved it...:)

    Thanks (0)