Fleet Management Supplement 2002 – Research: Employers embrace CO2 tax

The changes to company car taxation will be the issue with the biggest impact on benefits in 2002. The move to making employees pay tax on the basis of the CO2 emissions of the car they drive, rather than on the number of miles they cover, will do for company cars what stakeholder did for pension plans – that is, force many employers to examine their company car policies. To find out exactly how UK employers are reacting to the new legislation that will come in to force in April this year, Employee Benefits magazine and Employee Benefits Interactive conducted research among 221 UK employers in December 2001. Of course, not all employers will alter their policies, but most will. Our research shows that just 8% of employers have not thought about looking at their policies in the light of impending CO2 taxation rules. Of the remaining 92%, well over half either have made, or will make changes to their car policies. This represents 56% of our total sample. Regardless of whether employers alter their policies, the new tax will impact on all drivers – either positively or negatively. Therefore it would appear essential that all employers communicate the change to their company car drivers. Fortunately our figures show that 68% of organisations have already done so, and 25% plan to. We asked our respondents to predict what effect the CO2 emissions tax will have on company cars. Because of the significantly different effects that the tax will have on essential business drivers (who tend to have high annual business mileages) and perk or status drivers (who have a car due to seniority in the company and therefore often have lower business mileages) we split the predictions into these two groups. Overall, our results indicate that not much can dent the popularity of company cars. Although a significant 43% say the new tax will decrease the popularity of company cars among essential business drivers, just 4% say it will increase the popularity. This means that just over half do not expect it to have an impact. There is a bigger split in opinion on perk cars. This is because there are two opposing dynamics here. On the one hand, the vast majority of perk drivers tend to do very few business miles, so have never benefited from the tax advantages of doing high mileages. But on the other hand, these are the people most likely to be driving large luxury cars, so they may suffer under the new rules too. Because these larger cars tend to have higher CO2 emissions – and the emissions level is combined with the value of the car to work out the tax payable – high level employees are likely to be hit in the pocket. Those lower down in the ranks who only qualify for smaller, less expensive cars may be better off under the new tax regime. This would explain the divided opinions among our respondents – 24% say the new tax will increase the popularity of perk cars while 33% say it will decrease their popularity. Because status is so tied up with perk cars, many employees are expected to bite the bullet and pay the extra rather than move down to a lesser car. Fortunately, car manufacturers are working on reducing emissions for all sizes of car. So size and status needn’t always conflict with low emissions. One might expect the new tax to affect how employers view the company car – and in a couple of instances it has. Comparing our results this time to those from Employee Benefits research conducted a year ago when we asked a similar group of employers the same questions, we note that 33% now say that administering the car fleet is increasingly complex. A year ago, only 21% said this. No doubt, the extra work that comes along with any change in policy is taking its toll. A year ago just 12% said they used benchmarking. This has almost doubled to 23% now. The most obvious reason for this is the pressures employers are facing. One the one hand they need to keep costs low, and yet on the other they have to keep employees happy in the face of a new tax that is likely to leave many drivers worse off. Compensating drivers for higher tax bills would be an expensive business – and possibly a dangerous one if employees start to demand compensation for other tax rises; while withdrawing the company car would be emotive and unpopular (and that too can be expensive as you still have to compensate the employees affected). Keeping a close eye on your competitors in these circumstances is the only way to make sure that whatever you choose to do with your car policy does not affect recruitment and retention in the long run. We also asked employers what alterations they expect make to their car policies in the coming year. These changes did not necessarily have to be linked to the new CO2 emissions tax. However, it appears that the tax changes have had a far-reaching effect. A year ago, 24% of employers predicted that they were going to reduce their fleets – this was the most common response. Our research indicates that fleet reductions have been even more widespread. Among our current sample, a remarkable 36% said they have reduced the size of their fleet in the past year, while a further 31% are predicting reductions in the coming year. But the company car is not necessarily on its way out – 37% of fleets stayed the same size and 24% increased the size of the fleet. The rise of the cash alternative continues apace. Last year we found that 57% of respondents offered a cash alternative to some or all of their employees who were eligible for company cars. This year two thirds (66%) of the sample do. And the larger the organisation, the more likely this is – less than half of the respondents with less than 100 staff offer a cash alternative, but in corporations with more than 1,000 employees this rises to a hefty figure in excess of 80%. Many employers are concerned about offering cash allowances to essential business users – because of a fear that employees may buy inappropriate cars. However, 54% of our sample offer cash allowances to all staff and just a third (33%) restrict them to perk drivers, so this concern hasn’t influenced policy to a great extent. In most cases (87%) drivers can choose between taking the car or the cash, but in 12% of organisations, the cash allowance is compulsory. The most commonly cited reason (72%) for offering a cash allowance is to give employees more choice. But there may be harder financial reasons behind this sentiment. Half (48%) do it in order to reduce the size of the fleet and 31% do it to cut costs. A quarter (26%) say they are doing it in order to get rid of company cars altogether. This last figure is well up from our research a year ago, when only 15% of our sample said cash spelt the end of the company car. The majority of our respondents (62%) expect the proportion of employees who take a cash allowance to increase. This contradicts predictions that when the tax changes, low business mileage drivers who currently take cash allowances will come back to company cars and benefit from the more favourable tax regime. Interestingly, 60% of employers claim that the cash allowance they offer is cash neutral – so neither the employer nor employee is worse off with the cash. Perceived wisdom is that this is impossible – if an employer pays the employee the amount it would cost to provide a car the employee will be worse off. This is because the employer benefits from bulk buying, while the employee has to pay high street prices. A more reliable figure is the one that says 16% of cash allowances are favourable to the employee. One assumes the remainder are not. Luring employees out of cars by offering an increased cash alternative has lost its gloss – it was the fifth biggest predicted change last year, but is at number 11 this year. No doubt budget realities have put a stop to this. The typical cash allowance is ¬£4,000-¬£6,000 a year. It appears that 2002 will be the year to introduce personal leasing. Over a quarter (27%) say this is the way they plan to go. The advantage of these schemes is that the car is not a company car, and is therefore not taxed as one. Also, for employers, it removes the hassle of administering a fleet. By contrast, wonderful green ideas are beginning to fade. At the beginning of 2001, 12% of employers told us they planned to introduce LPG or other green fuel-powered cars. Now just 5% have such noble plans. So while we don’t expect to see a radical change in the company car landscape, the new CO2 emissions tax is beginning to have an impact. It will be interesting to see what really happens in the coming year.