Are company cars really dying?

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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?

Contract hire 

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.

Finance lease 

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.

About Rachael White

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27th Apr 2015 12:26

Company cars

Why are company cars in decline?

I don't suppose Tax has got anything to with it.

 

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27th Apr 2015 12:47

In the good Old Days.........

A company car, employer funded pension scheme, private health cover and etc, were simply inducements to recruit staff. Since they were a tax-efficient modality.

Once the politics of envy crept insidiously onto the equation, however, they rapidly became less attractive, as Notional Benefit Tax and the same for NICs, hit the ostensible "benefit", increasingly hard.

Let's face it, the Capital Allowance regime, which set the notional value of a car at £12K and froze, was a ready indicator of government intent.

Increasingly venal employers, who treated and treat employees as simple cyphers, compounded the issues: as the employment market underwent a paradigm shift from the old days of moral certainty to the nouveau attitude of the post 1989/90 financial collapse and the even more dramatic so-called Credit Crunch, a majority of employees are holistically marginalised, today.

Of course, the automotive lobby and the SMMT (The Society of Motor Manufacturers & Traders), were once all powerful, as motor manufacturing and house building in Britain were perceived as lynchpins of the UK economy. Now that argument has been emasculated, as simply out, there are today no UK motor manufacturers of note and size.

Add to the mix, the green lobby and a determination to cast the automobile in the role of climate change Devil! Hence a morass of utter complexity reference scale charges and CAs!

Of course, if an employee honestly drives a zillion miles per year on company business, then there exists a case for seeking an optimal-cost solution for the employer.

What a complete mess our economy and fiscal supposed strategy is in!

 

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By chatman
27th Apr 2015 14:50

"the politics of envy"

Michael C Feltham wrote:
Once the politics of envy crept insidiously onto the equation, however, they rapidly became less attractive

What are "the politics of envy" and how did they make company cars less attractive?

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27th Apr 2015 17:28

Archaic!

chatman wrote:

Michael C Feltham wrote:
Once the politics of envy crept insidiously onto the equation, however, they rapidly became less attractive

What are "the politics of envy" and how did they make company cars less attractive?

Notional Benefit Tax.

Check when the philosophy of Benefits In Kind and the form P11D were introduced...(Hint: 1965. Government Labour).

Check when the earnings limited of £8,500 was set in stone: (Hint: 1975).

 

 

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27th Apr 2015 13:08

Company car

I have never had or been offered one, I would take one at the drop of a hat.  Would i provide a company car for an employee, like most Accountants...... no chance.

 

As for their demise, is it another cost businesses can side step, on-line access etc.

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27th Apr 2015 14:19

.

Company cars eh, now that takes me back.

Back when reliable transport for the masses was not such a given.

When cars often wouldn't start in the morning, or employees simply wouldn't have access to a car during work hours. 

When innovation was such that a 4 year old car was significantly different from a new one.

When a 6 year old car would be full of rust and a 10 year old one long since scrapped.  

When you had to go out and meet people face to face, for more or less everything

When people seemed to actually care about the registration plate and a new car was "something". 

Fast forward 25 years and..........having a flashy mobile phone and laptop is the new black, and cars, well they just get you from A to B and 5 year old ones look just like new ones. You can drive a 10 year old car and no-one would even think to mention it.

Its not just the tax. 

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27th Apr 2015 15:00

What about vans?

I'm loving my double cab pickup, very tax efficient and nice to drive, and returns 35+mpg. Not a great city car, but on rural roads and motorways it's great. Will definitely get another one if the company van rules continue in future.

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By chatman
27th Apr 2015 17:46

@Michael C Feltham: I still don't understand what "the politics of envy" means.

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28th Apr 2015 13:39

Tall Poppy Syndrome:

chatman wrote:

@Michael C Feltham: I still don't understand what "the politics of envy" means.

If you wish, retreat to Herodotus..........

http://en.wikipedia.org/wiki/Tall_poppy_syndrome

 

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By chatman
28th Apr 2015 16:22

Can you just explain what you mean?

Michael C Feltham wrote:

chatman wrote:

@Michael C Feltham: I still don't understand what "the politics of envy" means.

If you wish, retreat to Herodotus..........

http://en.wikipedia.org/wiki/Tall_poppy_syndrome[/quote]

I don't understand the relevance of your reference. Can you just explain what you mean?

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27th Apr 2015 19:16

Cars and fuel

Good topic. Can I just develop the comment that "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"? In 2011-12, according to HMRC stats (see para. T4.1), there were 950,000 company car drivers. 

Some of those would no doubt be better off with a private car, but the many permutations do make it a complex decision.

More surprising to me is that fact that 240,000 company car drivers were also paying tax on the benefit of car fuel. I am yet to find an even nearly-realistic scenario where it makes good tax sense for the employee to take the fuel benefit (assuming that the employer is willing to pay standard mileage rates and is left in a neutral cost position).

@Nigel: Double cab pickups can and do qualify as vans in some cases, but readers of this page should be aware that HMRC do not always accept that treatment. See EIM 23150.

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28th Apr 2015 13:56

if thats the case why

haven't the politicians just tax anybody owning a Range Rover etc...?

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28th Apr 2015 15:13

'"This is because the area of alternative fuels is developing and there is uncertainty over where we are now is where we will be tomorrow," Kendrick added.'
Am I the only person who had to read that three times?

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28th Apr 2015 17:41

Politics of envy/Tall Poppy Syndrome

What Michael is asserting is that people in positions of wealth and power are considered easy targets. As most people are not in a position of wealth and power, they can be envious of those who are, whether they have achieved those positions by merit or not. Politicians can often gain popular support by introducing policies, such as restrictions on company cars, that appear directed at that group.

Of course, both the phrases "politics of envy" and "Tall Poppy Syndrome" come from the same assumptions. That those in a position of wealth and power have achieved that position by merit, and that exercising some limit on that wealth and power is therefore automatically wrong (essentially why should they be penalised for doing well?) . Michael is very much coming from this position I think.

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By chatman
28th Apr 2015 17:55

Thanks stepurhan

@stepurhan - Thanks

@Michael - Quite a big assumption.

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28th Apr 2015 19:39

Old Adage...........

@stepurhan:

Thank you: I am glad someone understands!

@chatman:

I am not sure if you are either being deliberately obtuse: or a Quasi-Marxist troll!

There is an old Thatcher/Reagan adage: "If it moves, then tax it!"

"If it doesn't, then privatise it!"

(Copyright: PDD (R) Ltd)

Let me provide yet a further example: businesses, incorporated or not, which purchase motor cars as a genuine business asset, e.g. self-drive hire; hire cars (weddings, funerals, executive limo hire etc), now suffer a Capital Allowance Regime, which has firstly drastically reduced the reducing balance annual depreciation charge, dissolved balancing allowance, removed first year and AIA from motor cars etc.

Now, fact of real world life: people who rent self-drive hire cars treat them rather badly: ergo, their intrinsic value depreciates much more quickly than a well cared for personal example of the same marque , and a well maintained company car.

And another: where was and is the justification for Class IV National Insurance "Contributions" on the self-employed and partnerships?

No NIC benefits accrue to the payer: simply a tax on enterprise.

Is it really any wonder increasing numbers of taxpayers seek schemes to "Avoid" full taxes: and increasing numbers of others simply evade taxes?

Dear Gordon Brown (he of the abolition of ACT), reduced CA 25% rate to 20%: and the "Party of Business and Enterprise", AKA the Tories, have reduced this still further.

Yes, AIA is generous: but not with average depreciating assets, as excessive and myopic application of AIA will simply create forward Balancing Charges. Thus AIA is a sort of "Loan".

Unless, of course, the seller, books very little, sells the asset for pound notes and trousers the cash: hence inducement to evasion!

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
― Winston S. Churchill

 

 

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