Cash allowance calculations crucial

Nick Golding sorts through the confusion surrounding cash allowance calculation

Case studies: Yorkshire Building Society, McDonald’s

Article in full

In essence, when it comes to company cars, cash allowance schemes do exactly what they say. That is, allow employees to exchange their company car for its equal value in cash. The money is divided up and paid into their salary each month to finance the purchase of a chosen vehicle.

Sounds simple enough. However, in reality, calculating the cash allowance can lead to some tricky maths. Graham Rees, managing director at the vehicle consultancy Fleetworx, believes an exact calculation is required to ensure employees are offered the exact value of the car, no more and no less.

"The focus must be to end up with a sum of money that equates to the amount it costs the company to provide the car. To do this, they must work backwards from the current cost of [providing] the company vehicle."

Employers should also deduct employees’ mileage when working out the cash allowance. HM Revenue & Customs allows employees who drive business miles in their own vehicle to claim back tax at a rate of 40p for the first 10,000 miles and 25p per mile thereafter. If a true cost of ownership is to be met, this healthy tax allowance should also be taken into account.

"Take out all the costs that are associated with the company car driver, such as tax and mileage allowances, and this figure will be the cash allowance," Rees explains.

Although this is not the only way to calculate the cash allowance, it will help a precise allowance figure to be met and will also ensure that the benefits of having a company car are equal to the benefits of a cash allowance.

However, while cash allowance schemes have been popular in the past, it has been suggested that they are now falling out of favour with employers.

In fact, Employee Benefits/Alphabet fleet research published two years ago revealed that 11% of employers expected to introduce a cash allowance scheme to their employees. The same survey repeated in 2006 found that the number of employers planning to offer a cash allowance scheme had fallen to just 4%. Fleet experts say there are some disadvantages to such schemes. Not least is the level of control lost when employees have the option of choosing their own vehicle. This shift of control from employer to employee can have implications for safety, buying power, company culture and image.

Pete Nolan, commercial manager at fleet management company Masterlease, explains: "As soon as an employer offers the employee the option of cash in lieu of a car, they lose control. The employer can face legal action from an employee if involved in a car-related injury whilst on company business."

With a company car the employer has the control over the make and model and can oversee servicing issues, which is not possible with a cash allowance scheme.

For this reason, Nigel Trotman, relationship manager at Whitbread, decided to alter the car ownership policy at the company so that only senior employees were able to take the allowance.

"Before June 2005, all employees could take the cash allowance, but since then we have changed the scheme because we were concerned [that] those employees driving long miles in company vehicles were not buying cars that were fit for the purpose."

Furthermore, Whitbread was concerned about the effect the cars would have on its company image.

"Many of the employees were not office based and used their cars to meet clients. We wanted to get the control back over which vehicles they could use to do this."

Whitbread also found that company culture could be affected by the type of cars chosen by its employees. "If an organisation supports environmentally-friendly initiatives, providing cash means that it cannot be sure to provide its employees with environmentally-friendly cars. Cash drivers may opt for used vehicles or vehicles with large CO2 emissions," Trotman explains.

Another key feature of running a company car scheme is the money that can be saved through the bulk buying of cars from one manufacturer. Moving to a cash allowance scheme means that employees have the opportunity to buy vehicles from whichever manufacturer they choose and the cost effectiveness is lost.

What’s more, employers are likely to lose touch with the pricing of company cars, making it harder for them to accurately calculate cash allowances being offered to staff.

"Bosses will soon lose touch on the reality of how much a company [car] actually costs to run, which will cause problems when it comes to calculating a cash allowance scheme in the future," explains Fleetworx’s Rees.

Yet it is not all doom and gloom for employers who have, or are in the process of offering, a cash allowance scheme to their employees. Not only does a cash allowance scheme release the burden of administration associated with company cars, it also provides an effective and flexible benefit which can help to increase a organisation’s competitiveness.

"We saw the benefits of offering cash [allowances] from a lifestyle choice perspective, which, in turn, added to the effectiveness of Whitbread as an employer compared to our competitors," explains Trotman.

In a cash allowance scheme, the main relationship exists between the leasing company and the employee. This means that the employer has no real need to become involved and can divert all the administration to the leasing company. "For the employer it is a simpler process. Once the costs and allowances have been calculated, they can play a much smaller role than they would in a company car scheme," agrees Rees

Case Study: Yorkshire Building Society

Yorkshire Building Society has had a cash allowance scheme in place since 1998.

Mary Blackwell, supplies manager at the organisation, believes the reduction in admin is the key advantage of the scheme. "It certainly is easier to administer, we obviously have more to do when we have to organise a vehicle for employees," she admits.

Blackwell expects the number of cash allowances to increase over the next few years because more employees want the flexibility and choice that such schemes offer. However, although this means less administration for the fleet department, the rising number of employees taking cash allowances will mean more of a focus on health and safety.

"We won’t lose any responsibility, it will simply mean that more attention will be given to those employees taking the cash allowance. Duty of care is important and we will be working more closely to ensure all cars purchased outside the company are fit for their purpose," she says.

The amount of cash permitted to each employee for their vehicle is calculated by the human resources department. It bands employees together and aims to keep the allocated sums in line with its competitors.

The human resources department is also keen on the cash allowance scheme, because it makes the organisation more competitive and attractive during the recruitment process. "Cash allowance makes for a more flexible and competitive benefit, which is important to human resources at the recruitment stage," Blackwell adds.

Case Study: McDonald’s

McDonald’s offers a cash allowance scheme to its 1,300 employees who are entitled to a company car.

The split between employees taking a company car and the cash option is reasonably even. The fleet department calculates the cash allowance by grading employees, with each grade being entitled to a different amount.

Simon Morrison, customer support manager at McDonald’s who deals with fleet issues, says the split between cash and car was not always as even as it is today. "Now there is a fair split of around 700 employees taking the car and 600 taking the cash. Four years ago, it would have been nearly all 1,300 [staff] taking the company car, [but] we have now seen it level off as some employees have become suited towards the cash option."

The rise of the cash allowance scheme has caused a few problems, with concerns being raised over the safety of drivers who get the opportunity to choose their own vehicle.

"We have to be careful and ensure as best we can [that] our staff are driving safe vehicles. We ask all cash allowance car drivers to sign a form stating they have a suitably safe car and it is being regularly serviced," Morrison explains.

Communication between the fleet department and car drivers is important at McDonald’s. Employees are given the option to discuss all of their options with management when deciding whether to take part in any of the car schemes on offer. "We sit them down and explain the implications. For example, an employee who drives a high number of business miles should take a company car. There is no point in putting miles on their own car as it will depreciate in value," Morrison adds.