If you read nothing else, read this…
- There are six types of funding options available to employers to fund company cars.
- Contract hire is the most popular of these and is often used for salary sacrifice arrangements.
- Employers are opting for a combination of funding methods to offer more choice to employees.
- Organisations are also removing cash allowances to get employees to take up a company car scheme.
A company car can be a cost-effective way to add a useful benefit to help attract and retain employees.
There are six main types of fleet funding available: contract hire , contract purchase, employee car ownership (Eco), finance lease, hire or lease purchase and outright purchase.
Historically, outright purchase was the most popular fleet funding method, but over the past 20 years this has been overtaken by contract hire.
Each funding option has a number of advantages and disadvantages, depending on the nature and needs of an organisation.
Jane White, head of fleet operations at Optimum Fleet Management, says: “Choosing the right leasing options is clearly the essential foundation of effective cost control when it comes to fleet management. Employers should choose the method that best suits their current and future requirements.”
Salary sacrifice car schemes have attracted a great deal of interest from employers and employees . These are almost always underpinned by a funding arrangement, with contract hire being the most common of these.
Contract hire is an operating lease where the employer leases the car for a set contract term and mileage in exchange for fixed rental payments, usually on a monthly basis.
Maintenance contracts make budgeting easier
For an additional fee, contract hire schemes can also include a maintenance contract.
John Given, sales and marketing director at Pendragon Contracts, says: “Contract hire with maintenance included remains the most popular way of funding a fleet. The benefits include easy budgeting through fixed monthly rentals, [while] maintenance and fleet management support services can be outsourced and included within the contract.”
White adds: “It can come with or without a maintenance package but, more often than not, employers are choosing to give their employees a fully maintained [car]. Costs for the lease and the maintenance are fixed, making it easier to budget for costs, while the leasing companies carry risks.”
But contract hire may be more suitable for some models of car than others. Andrew Hogsden, senior manager, strategic fleet leasing at Lex Autolease, says: “Contract purchase, for example, allows organisations to take advantage of tax benefits for cars which have low carbon dioxide emissions, sub-95g/km, but we see few examples of these types of deals.”
Combining funding methods makes sense
One of the latest trends among employers is to use a combination of funding methods for their fleet, which may enable them to offer a greater choice to employees.
John Pryor, chairman of the Association of Car Fleet Operators (ACFO), says: “One-size-fits-all does not apply and a combination of funding options may be best.”
Insurer Axa, for example, structures its car scheme for all employees around three funding methods: employee car ownership, contract hire and a salary sacrifice scheme.
The best way to achieve blended funding is through online real-time quoting platforms, which can help employers to identify the most cost-effective option at the point of order. These platforms will take into account the cost of ownership of a car, using a whole-life cost methodology.
Ian Hughes, commercial director at Zenith, says: “Due to the evolving tax landscape, we are seeing blended funding methods become more popular, for example across a fleet some drivers’ cars may be funded by contract hire and some by Eco.”
While Eco arrangements still make up only a small share of the market, they saw rekindled interest among employers due to the increase of the authorised mileage allowance payment rate to 45p/mile in 2011 and a rise in the threshold for interest-free employer-to-employee loans from April 2014.
Withdrawing cash allowances
Some employers are also withdrawing cash allowances at certain levels within their organisation because of concerns over road risk management. This can also help to save organisations money, as well as boost take-up of company car schemes .
Retailer Asda, for example, has encouraged employees to take up its company car scheme instead of taking a cash allowance. As a result, it has saved about £6,000 per company car, compared to the cost of providing a cash allowance.
Helen Fisk, autosolutions manager at ALD Automotive, says: ”Many employers are recognising that getting cash allowance drivers back into a managed car scheme [has its advantages]. This solves much of their concern over road risk management, which has resulted in a boost in salary sacrifice schemes.”
Finding the right funding arrangement for an organisation is a task best undertaken using a lease-or-buy analysis, with employers seeking to strike the best deal possible for funding a car scheme.
When picking a funding option, organisations should also consider residual value risk and the way they want to manage this in their fleet, says Hogsden.
“Does the organisation have the capacity and expertise to manage this internally, or should a leasing company be used to outsource elements of the fleet management?” he says. “Contract hire companies will frequently offer an all-inclusive service, requiring little management from the employer which may not have the level of industry knowledge. Crucially, outsourcing to a third party also frees up time for an organisation to concentrate on core revenue generation.”
Keep an eye on changes in accounting standards
Of all the available funding methods, contract hire is likely to remain the most popular among organisations. But there could be some changes if, or when, new international accounting standards are introduced.
These standards mean employers will have to split their lease costs into the finance elements, which will be entered on to the organisation’s balance sheet, and the maintenance and management fees, which will go on the profit and loss account.
Alastair Kendrick, tax director at accountancy firm MHA MacIntyre Hudson says: “The debt will then need to be shown on the balance sheets, which at the moment it does not. This may lead some to move to alternative funding methods.”
CASE STUDY: UNIVERSITY OF READING
The University of Reading launched a salary sacrifice car leasing scheme in June to help improve its employee benefits package.
The university decided on a leasing arrangement, underpinned by contract hire, because of its low cost and the ability to offer employees a fully maintained car.
Claire Eckett, HR manager, rewards and benefits, at the University of Reading, says: “We are always looking to do more with less and because this type of arrangement has minimal cost implications, we will be looking to save money. It was something that was attractive to us and employees.”
The car leasing scheme, Mycar, provided by Leasedrive, is aligned with the university’s sustainable travel plan and carbon reduction targets. It has implemented a 130g/km CO2 emissions cap on the cars available through the scheme.
Eckett acknowledges that it may take time for take-up to rise, with just four orders received since the launch.
“I think it is going to take a while to embed,” she says. “Company cars are not something that has traditionally been offered as a benefit and it is unusual in the university sector.
“It is something new and a bit innovative for us. It makes the university look an attractive place to work and supports our sustainable travel plan and carbon reduction targets.”
The new schemes were communicated to staff through the university’s online portal, via email and at a benefits roadshow on-site.
The organisation hopes that more than 5% of its employee population will take up the scheme over time.
WHAT ARE THE FUNDING OPTIONS?
Contract hire: A car will be leased to an organisation for a fixed term and mileage is written into the agreement on a car-by-car basis. This is the funding method most used for salary sacrifice arrangements and can provide a low-risk method of car ownership because it protects the employer against risks of costs such as depreciation, servicing and maintenance, and lower residual values.
Contract purchase: A form of conditional sale, in which the end user acquires ownership of the car in return for a series of repayments, including one final payment.
Finance lease: This method gives an organisation the choice to pay the entire cost of the car, including interest charges, over an agreed lease period, or opt to pay lower monthly rentals. It allows use of the car but does not involve ownership. Finance lease is a similar arrangement to contract hire, however, the car’s outstanding value is not guaranteed under a finance lease arrangement, and is valued on the anticipated resale value of the car.
Employee Car Ownership: A structured cash-for-car scheme. The title to the car passes to the driver at the outset of the agreement, in return for which he or she must make repayments covering finance and maintenance. These are often underwritten by a corporate guarantee. The employer makes monthly cash payments to the driver, which are used to fund the finance and maintenance repayments.
Hire purchase: This is a financing product which allows organisations to buy a car through the payment of instalment credit. The lender uses the car as security for the outstanding payments, and when the final payment is made, the car title and ownership then transfer to the employer. The amount borrowed is usually paid off in full, which means the purchaser will have equity in the car when ownership transfers.
Outright purchase: The car is the property of the organisation from the outset and has complete control of its use. The employer must take responsibility for the service and maintenance of the car, presenting a regular draw on finances.
VIEWPOINT - John Pryor: Employers must select funding models that best suit their needs
Funding is bespoke to individual organisations and while tax changes can trigger a switch in funding routes so can alterations in an organisation’s status and attitude.
These include, for example, its ability to borrow money and its own cash situation, its attitude to financial risk and its level of internal fleet expertise, as well as changes in its VAT or corporation tax position.
For many years, the marketplace split between organisations choosing to lease or purchase their fleet cars outright has been approximately 65% to 35%, but within that split there is flexibility for change.
Since 1 April 2013, the 100% writing down allowance threshold for company cars has been set at 95g/km and below.
We are aware of a number of fleets that historically opted for contract hire company cars but have moved to outright purchase or contract purchase for cars that fall into the 95g/km-and-below sector. This allows them to benefit from the advantageous tax position, because leasing companies are unable to claim 100% first-year writing down allowance on cars with emissions of 95g/km and below.
We are also waiting to see the outcome of the long-running debate on the International Accounting Standards Board’s proposals to bring all leased assets onto a company’s balance sheet.
The idea was originally to force organisations to include big-ticket items, such as buildings and oil tankers, on their balance sheets, and although it remains a nonsense that small-ticket items such as cars and vans are caught up in the proposals, organisations must be mindful of the potential for change.
Although no date for any accounting changes has been announced, some businesses will be concerned that including contract hire cars on their balance sheets will impact on their gearing and ability to borrow money.
John Pryor is chairman of the Association of Car Fleet Operators
