Fleet Management Supplement 2002 – Strategy : How to review a car policy

It’s amazing how two years can sneak up on you. One minute Gordon Brown is announcing tax changes which won’t happen for years, and the next minute half the company is up in arms because the CO2 tax rules have hit them hard in the wallet and they want to know what you’re going to do about it. Although 70% of fleet professionals think they’re handling the issue, according to Barry Chaplin, director of fleet at Arval PHH: “My gut feeling is that despite employers’ best efforts, anything between 20% and 50% of drivers are probably blissfully unaware of the changes. They’ll only wake up when they get their first pay cheque.” But the good news is that the uproar will be limited. For a start, not everyone is going to be worse off, so the key is to identify which drivers will suffer, and see if there’s a way to avoid them taking the brunt of the changes. If there is, communicate the solution, and if there isn’t, communicate the problem so it doesn’t come as a surprise. Nigel Underdown, director of marketing at Godfrey Davis (Contract Hire), recommends that companies first work out how serious the problem is. He says: “Look at your current choice list and do a before and after tax bill for each driver and see how the average pans out. There will always be winners and losers, but if there are a significant number of losers it may be necessary to re-evaluate the whole policy.” Even if only a few suffer, it’s important to address their needs. As a simple rule of thumb it’s the drivers in executive cars doing over 18,000 miles a year who will face a bigger tax bill. Unfortunately, as Barry Wilkinson of Wilkinson Read & Partners explains: “Directors, senior managers and the highest performing sales people are going to be very badly affected. These are often the most important people in a company.” The experts stress that there’s no simple solution for every driver in an organisation, so the advice across the board is to offer drivers flexibility. This can go as far as allowing drivers to opt out of company cars altogether. Offering a cash alternative is a growing trend. John Given, sales director Lloyds TSB autolease, claims: “Of our largest fleets there is up to a 10% reduction in fleet sizes as some people opt out.” However, allowing people to buy their own cars raises other issues. Stephen Tasker director of product marketing GE Capital Fleet Services explains: “You have to be sure drivers are properly insured, and they’re driving a car that’s fit for purpose.” A less complex solution is simply to ensure the choice list features CO2-friendly options. For a lot of people this conjures up images of squeezing drivers into smaller cars. This is an option. David Wreford, senior consultant at William M Mercer, says: “The minimum option would be to provide greater flexibility in their choice of cars and allow employees to flex down the spec of the vehicle to provide access to lower emission vehicles.” If this takes off, it could be self-perpetuating. Back at Arval PHH Chaplin claims: “Company cars still have a lot to do with status. If my neighbour has a similar job to me and has a smaller car in the driveway then I’m not so bothered. If everyone comes down people won’t mind so much.” But Godfrey Davis’ Underdown emphasises that this isn’t the only answer: “You don’t have to put everyone in Nissan Micras, you just have to think differently.” One alternative is diesel. This fuel offers lower CO2 emissions than petrol cars, and although the government has added a 3% levy for diesel cars, lower operating costs make them an attractive proposition. Chaplin explains: “Frankly the major effect of the new tax will be an encouragement to drive diesels. It’s a quick and relatively easy fix. The old stigma about the noise and spec of diesels no longer exists.” At Lloyds TSB Autolease Given notes: “We’re doing 30% diesel at the moment.” Alternative fuels such as LPG and dual fuel cars are less popular, and take up so far is minimal. Once there are CO2-friendly cars on the list, the key is communication – to let drivers know which cars are best in tax terms. And here fleet professionals seem to be making progress. Ian Tilbrook, managing director of IMG Car Lease, believes this communication is going well. “By and large fleet managers are communicating pretty well internally. Since the end of last year we’ve seen employees picking more CO2 efficient vehicles, so they are having an impact.” But this assumes that changing the list of options is simple, and for organisations with sole supplier agreements with one manufacturer things can be more complicated. If the sole supplier is a poor CO2 performer, there will be pressure to change. Underdown claims: “If drivers work out that if you’d broadened the choice they would have a significantly lower tax bill, then you get quite a bit of dissent.” But he adds: “They may have signed into a three year commitment on purchases with a single badge and got financial support in return. That could be difficult to negotiate out of, and companies could find themselves paying back some of the discount.” Drivers who are stuck with a poor CO2 performer – whether it’s through a sole supplier arrangement, or because they made a three year choice before the new tax was announced – may well demand compensation. The industry reaction to this is unequivocal. At Arval PHH, Chaplin explains: “I haven’t come across many companies looking to increase salaries, except a few small companies who have a vehicle that’s very much fit for purpose. They’ve decided to stick with it and pay the difference.” So unless companies can bring the replacement date forward, or contact the leasing company to see whether a switch of models is possible, employees may just have to bite the bullet. If organisations have a large exposure to this sort of situation, there’s good news from Tilbrook at IMG Car Lease. He claims: “There has been quite a bit of emotion from drivers who do over 18,000 miles. But cars drivers have been through plenty of tax changes and they get used to it.” The opportunities Reacting to the CO2 tax changes can be a blessing in disguise. Companies can use this as an opportunity to: Modernise the policy Barry Wilkinson, partner with Wilkinson Read & Partners, claims: “Many old-fashioned perk car schemes are past their sell-by date, but people back away from changing the policy because company cars are so sensitive. The chancellor has thrown a big rock into the pool and forced people to take action.” Provide added value John Given, sales director, Lloyds TSB Autolease, says: “We’re seeing two cars becoming an option rather than one. A few years ago it was fairly common to have a two car package, but the second car wouldn’t be doing any business miles, so it was being taxed at 35%. Now the second car will be taxed at its CO2 rating. So somebody could take on a very efficient car as a second vehicle. We’ve had one or two people saying ‘Instead of having that big expensive gas guzzler I can have two cars for the price of one and it’ll cost me no more in tax.’ Others are trading down and getting enough cash and tax back to do a PCP on a car for the weekends.” Cut costs Barry Chaplin, director of fleet, Arval PHH, claims: “It’s a God-given opportunity to cut costs. A lot of people will be opting for smaller cars, so companies save on NIC contributions.” While Ian Tilbrook managing director of IMG Car Lease says: “If you’re in a business when you’re tightening the belt a little, you can use it as a chance to downsize the fleet.” The Rules From April 2002 the C02 emissions rating of a car will determine the percentage of the list price that the company will have to pay tax on. So if the car emits 165 g/km of C02, 15% of the list price is taxable. For every extra 5g/km of C02 the car gives off you’ll pay another percentage of tax. So cars emitting 170g/km of C02 pay tax on 16% of the list price, those emitting 175g/km of C02 pay tax on 17% of the list price, and so on. In addition diesel cars will attract a 3% levy on top. Further reading * Full details of the new tax rules at www.inlandrevenue.co.uk * Related articles, news and employer case studies available at www.employeebenefits.co.uk * Information and advice at www.smmt.co.uk * Incomes Data Services Report on company car policies. Order online at www.incomesdata.co.uk. * Alan Jones & Associates Company Car Survey report 2001. Contact Evelyn Watson on 01600 716916 * Lex Vehicle Leasing 2001 Report on Company Motoring available at www.lvl.co.uk * Tax calculator at www.fleetnewsnet.co.uk