Last year, we wrote about how company cars were being "taxed out of existence". Now, we delve deeper to find out if this really is the case, and to provide an update on the finance options companies can go for if and when considering a car.
Rachael Power asked Alastair Kendrick, employment tax director at MacIntyre Hudson, for his take on this.
Essential company car users
There are two types of company car users: Essential and perk. Employers have a responsibility to certain employees under duty of care legislation.
These would be employees racking up huge mileage, for example, travelling salespeople, Kendrick said.
Employers have a duty of care to employees doing heavy mileage to look after their driving and wellbeing as essentially, the car becomes an extension of the workplace to the driver.
"It goes without saying, it would be eminently essential for such a user to have a company car.
"If for example you have an accident or if there is some issue with the vehicle - if they are in their own car, it is difficult for the employer to gain the comfort that it is fit for service," he said.
What kind of car?
When providing a company car to an essential user, it needs to be fit for purpose. Therefore as one user on UK Business Forums has suggested, it's hard to believe a classic car is the best option.
Employers need to ensure the car they provide is of a comfortable size for the type of driving employees are doing and that it's comfortable, with a sensible engine size.
How to fund the car?
Funding the car is very much dependent on some basic factors, according to Kendrick:
- Are they cash rich?
- Could they buy the vehicle or would they rather lease?
- If purchasing the car, could they bear the residual risk when the car is disposed of?
Looking at the UK, around 80% of employers who provide company cars do so under contract hire.
This method is simple, however it's not always the best, Kendrick warns, as it will be drawn over estimated mileage. If employees incur more than that, there’s a penalty on the excess. If they go under, the car has higher residual risk but employer doesn’t own the car so there is no share in the profit of that.
In some circumstances, contract hire works well if you have VAT recovery, as you will get 50% VAT relief, Kendrick advised. But if you’re in a business that doesn't get VAT relief then contract hire "isn’t really for you."
If you are considering opting for an expensive car, for example above £25,000, contract purchase is a better option.
In this case they will not get VAT recovery, but will get greater tax relief. If they outright purchase the car, it is on balance sheet and the employers bear risk when they sell the car.
With the finance lease, the employer bears the risk on balance sheet.
Be wary when talking to leasing companies, Kendrick urged, as they will sell what works for them not the customer. In addition, get proper independent advice on the funding method the company has modeled as they may not always be impartial.
He said: "Once you’re in a lease you are trapped for the duration, so once you have taken the decision how you fund you are trapped."
Perk car users
Usually, perk users are dealing with a more expensive car, upon which taxation is increasing. This coupled with employer surveys showing that these kinds of company cars may not be as appreciated by the employee as expected, are leading employers to ask whether they instead should provide a cash alternative.
Kendrick argued that this however can be costly and not just in terms of the money paid out. For example, if a company has a sizeable fleet and is potentially getting a discount from a manufacturer or vendor, then you may lose this if you cut back.
If employers do go for a cash option, employers need to ensure they get the figures right. This is because when you offer cash to employee, if the figures don’t tie later, employers can't backtrack and change it.
Hybrid/energy efficient cars
Kendrick said that hybrid/low emission cars are good for a company's green statement, but it isn't a cheap alternative.
Some leasing companies are costly when it comes to these cars, as they are nervous over what value the vehicle will have at the end of the lease period.
"This is because the area of alternative fuels is developing and there is uncertainty over whether where we are now is where we will be tomorrow," Kendrick added.
Some companies offer a low C02 diesel car as a "next best thing" alternative. However other companies that have a bit of cash to spare, with for example, a chairman who wants an electric car, tend to buy one to add to its fleet but don't make it generally available.
Why are they on the decline?
A survey carried out by the Revenue in 2004/5 showed that 1.2m company cars were on UK roads. This figure went down to 970,000 in 2009/10 but another survey hasn't been carried out since.
Factors that may have led to the decline in the number of cars on the road, he added, are advanced technology and greater connectivity meaning less salespeople, for example, have to travel. Another factor is a re-think of policy by some companies in providing a cash alternative. In addition, the tax take on company cars was 1.25bn in 2004/5, down to 1.16bn in 2009/10.
"It will be interesting to see where the next report brings it to," Kendrick said.