100th issue supplement – The comeback of company cars

Eco-taxation has forced firms to shift down a gear with the company car perk and offer alternatives. But Nicola Smith says fleet cars are on the rise again

At a glance

In 1998, 65 per cent said they viewed the company car as an essential recruitment and retention tool. In 2005 this figure had dropped to 43 per cent.

In 1998, less than five per cent offered LPG fuel, compared to 17 per cent in 2005.

In 1998, 48 per cent provided a cash alternative. In 2005, 70 per cent offered this option.

17 per cent of respondents restricted the choice of company car to diesel between January 2004 and January 2005.

In 2005, 88 per cent of respondents had introduced a formal policy on the use of mobile phones.

Article in full

The year after Employee Benefits launched in 1997, a report by the magazine into fleet strategy revealed that 65 per cent of fleet managers cited company cars as an ‘essential recruitment and retention tool’. In January this year, a similar survey carried out by the magazine revealed that this confidence had slipped to just 43 per cent. It is indicative of the changes that the company car fleet has undergone over the last eight years. So what are the key factors that have shaped the fleet of today?

A factor that has had arguably the biggest impact on how fleets are managed is the change to the way that company cars are taxed. Under the previous system, drivers were incentivised to clock up as many miles as possible. "The tax system was so heavily penal towards the ‘perk’ drivers – if you did less than 2,500 business miles you paid through the nose, whereas if you did over 18,000 you paid an artificially low benefit-in-kind tax," explains Roddy Graham, commercial director of the Leasedrive Group. "The cogs started turning as people realised it was no longer a benefit to their employees. A number of industries tried to find ways to put together a better overall remuneration package."

This changed in April 2002 when the government introduced a CO2 emissions-based tax aimed at cutting pollution. This system taxes drivers a percentage of their vehicle’s list price based on the CO2 emissions the vehicle produces. High mileage drivers lost out and low mileage drivers gained – and the tax regime has started to achieve its environmental goals. "We’ve seen a reduction across our fleet in the mileage drivers do, and if you look at the average CO2 emission four or five years ago, that again has dramatically fallen," says Gary Killeen, general manager of the Structured Finance Division at GE.

But it also initiated a broader movement. "The tax change definitely prompted a review among many corporates which resulted in a lot of companies looking at a cash alternative," says Killeen. The 1998 Employee Benefits/Godfrey Davis Fleet Research showed that 48 per cent of respondents offered a cash alternative, compared to 70 per cent in the 2005 survey, with 44 per cent of companies introducing the option in 2003 alone. Giving drivers the option to take cash and fund their own car also led organisations to review how they managed their fleets and to consider less rigid ways of operating.

"HR has had to become more flexible in the way it remunerates people," says Mike Clue, managing director of IFS. "For example, employee car ownership plans (Ecop) were really driven on the basis of companies wanting to give staff the benefit of the car without the risk." While 1998 saw 44 per cent of survey respondents opting for outright purchase as their main fleet acquisition method, and 57 per cent opting for contract hire, the picture is very different today.

"Eight years ago the majority of our customers would have been on one funding product for their fleet," says Killeen. Typically, now they will have two, three or four funding products in place. There’s a greater sophistication and a greater drive to make savings from a tax and cash flow perspective."

Indeed, the Employee Benefits/Alphabet Fleet Research 2005 stated that 15 per cent of respondents had introduced personal contract purchase plans (PCPs) in the last year (where the car is owned by the individual but funded by the company). Nine per cent had introduced structured employee car ownership plan (Ecop) (where the employee receives a cash allowance and owns the car, but the employer manages purchasing responsibilities) in the same period.

While the introduction of the CO2 tax forced companies to rethink their fleet operating policy, the move towards cash and ‘unstructured’ schemes is now also being questioned.

In December 2003, a ban on the use of mobile phones while driving came into force and a number of companies have been prosecuted to date. Some 88 per cent of respondents to the 2005 Employee Benefits survey have introduced a formal mobile phone policy, and the law has sharply focused corporate minds on ‘duty of care’ responsibilities.

This focus has been given further emphasis with the proposed Corporate Manslaughter Bill, which is expected to be introduced this year. The law will mean that in the event of serious injury or death on the road, companies can be prosecuted for duty of care failings, with cripplingly large fines being enforced. Robin Mackonochie, chairman of the BVRLA (British Vehicle Rental and Leasing Association) explains there are three levels of risk: "Where a company has provided a car, the risk is relatively low because it will be insured and maintained, and the driver will have been licence checked. The next level down is a cash for car scheme, where the driver is much more responsible for the condition of the car. The risk therefore increases. Thirdly, and most dangerous of the lot, is where a private car is being used on company business. Increasingly, companies are saying that is an absolute no-no."

With the government cracking down on health and safety while driving at work, and many companies unsure of their responsibilities, another change is underway. "I’ve seen a number of fairly large organisations who are sufficiently concerned about health and safety looking at their whole HR and remuneration policies with a view to moving back to some form of company car instead of giving a cash allowance," says Leasedrive’s Graham.

Clue, from IFS, agrees. "There is a real risk management review going on. Several companies have got rid of pool vehicles in favour of rental cars due to the issue of maintenance, and we are seeing early signs of companies reviewing cash schemes."

The move back towards company cars is also appealing due to the increasing range of diesel products. Seventy six per cent of respondents to the 2005 Employee Benefits survey now offer the option of diesel cars, while 17 per cent have restricted the choice to diesel only since January 2004. "Diesel has seen a meteoric rise," says Mackonochie. "In 2000, total registrations of diesel were 313,000. In 2004 the figure was 835,000 and I think it will be over 900,000 next year." Graham adds that the performance of a diesel car is now as good as, or better than, its petrol equivalent: "There’s no longer stigma attached to it."

Since April 2002, the move to diesel has also been encouraged by a three per cent tax waiver on cars that meet the Euro IV emissions standards. However, in April the government announced that this incentive will be withdrawn for all cars registered after 1 January 2006. "A lot of companies have adopted Euro IV diesel [cars] due to the benefits to drivers, and a large part of that benefit is now being taken away," says Clue.

The impact of this withdrawal remains to be seen, but may be limited, in part because alternative fuels are still in their infancy’ but popularity is growing. The Employee Benefits survey in 1998 showed that less than five per cent of respondents offered an alternative fuel, compared to 25 per cent in its 2005 survey. There is no question that the face of the fleet is changing.