- November’s pre-Budget report confirmed the last pieces of the company car taxation jigsaw to bring them in line with the government’s CO2 agenda. So now might be a good time for employers to revisit their fleet strategy.
- If employees can be switched into lower CO2-emitting cars, there is a compelling financial argument in favour of leasing. With leasing, employers don’t have to spend the cash up-front, they don’t have the cars on their balance sheet, and they are not exposed to falling residual values.
- Leasing will not be the most cost-effective method for every employer though. Employers need to ask whether there is anything unusual in the tax makeup of the organisation that may suggest another type of funding.
- Second-hand car prices have suffered in the downturn which increases costs for employers buying their own cars, and pushes up the cost of leasing. These increases in fleet costs may raise the attractions of employee car ownership plan (Ecops).
- Overall it seems that there’s no one solution that covers all drivers. Often the answer will lie in a combination of choices.
A pincer movement between being cash strapped and being overwhelmed by a rash of ever-changing tax rules has left fleet bosses in disarray. But measures announced in November’s pre-budget report will tidy up the last pieces of company car taxation to bring them in line with the CO2 agenda.
Aside from Alistair Darling tinkering with the tax treatment of cars into ever more sub-divided emissions groupings, there may be little left to alter, emphasising why now might be a great time for employers to revisit their fleet strategy.
The most recent tax to get a green makeover was a change to capital allowances, unveiled in the Chancellor’s report last autumn. Alistair Kendrick, a director with accounting firm Mazars, explains: “In the past, when an employer bought a company car, the amount they could offset against corporation tax was calculated individually. Now it is put in one of two groups. Cars over 160g/km obtain relief at 10%, and those under 160g/km at 20%.”
This change, and those that preceded it, are leading to a compelling case for offering lower CO2 emitting cars. Julie Jenner, chairman of not-for-profit representative body the Association of Car Fleet Operators (Acfo), says: “The focus for fleets should be on ensuring that all vehicles fall below the 160 g/km threshold. In simple terms, although there are variables, most company cars with CO2 emissions above that level will cost more to run after the tax change.”
Gary Hull, a director of PricewaterhouseCoopers’ Human Resource Services, agrees: “Most organisations are looking to provide vehicles under 160g/km, because generally it works out as cheaper in terms of both fuel consumption and tax.”
Therefore, the first question employers need to ask when reviewing the fleet is whether employees can be switched into lower CO2-emitting cars. If they can, there is a compelling financial argument in favour of leasing.
Much of the attraction of leasing rests on VAT recoverability. Robert Kingdom, head of marketing and business development with Masterlease, says: “If an employer were to buy cars outright then, unless they could demonstrate it would never be used for private use, the VAT cannot be recovered. But if a leasing company buys the cars, they are all for business use so the VAT can be recovered. The employer then pays VAT on the payments to the leasing company, and can reclaim 50% of that.”
In the past, this tax saving was balanced against the fact that leasing costs would have to be added back on to the write-down amounts on capital allowances, so as the cars got more expensive, the VAT saving would be wiped out. Now, however, as long as the car is below 160g/km, there will be no adding back (known as the disallowance), and even if they are over 160g/km the disallowance will only be 15%, so for expensive cars, leasing becomes more favourable. David Yates, marketing director of fleet specialist ALD Automotive, says: “The vast majority of businesses will see some potentially significant cost savings being realised – assuming car policies favour vehicles under 160g/km.”
This is in addition to the other financial advantages of leasing. Hull explains: “Employers don’t have to spend the cash up front, they don’t have the cars on their balance sheet and they are not exposed to falling residual values.” Kingdom adds: “They also don’t face funding issues, which may be a problem for employers buying company cars at the moment.”
Leasing will not be the most cost-effective method for every employer though. Kendrick says: “It depends on their VAT recoverability and what rates of corporation tax they pay.” For example, Hull says: “If you can’t recover VAT then contract purchase may be the most effective method.” So employers need to ask whether there is anything unusual in the tax make-up of the organisation that may point to another type of funding.
There are also cases when employees may not be ready to move into cars emitting 160g/km or lower, such as among drivers at the very top end, for whom this would constitute a dramatic cut in the benefit. For them, it may be more suitable to purchase the cars. Stewart Whyte, a director of ACFO, says: “The new tax rules mean that the funding arrangements for higher-emitting cars really need to be reviewed in detail. Leasing still offers many advantages, but these are by no means universal. If the company itself is profitable, and it has good credit lines then for cars over 160 g/km purchasing may be a better option.”
Whether employers lease or buy, cars are set to become more expensive. This is partly as a result of the writing-down allowances rules. Kendrick explains: “If you bought a car for £20,000, held it for three years, and then sold it for £10,000, in year one you would get relief on £3,000 (which was the maximum), then the same in year two, and in year three you would get the balance of £4,000.
“Now you no longer get the balancing allowance. Any balance of relief is done year-on-year, which means that it will take 43 years to get that relief back. This affects employers which buy their own cars. It also affects leasing companies, that will have to charge something for the delay in getting relief. So cars become a more expensive commodity.”
Putting in the miles In addition, he points out: “Second-hand car prices have suffered in the downturn.” This increases costs for employers buying their own cars, and pushes up the cost of leasing. These increases in fleet costs may raise the attractions of employee car ownership plan (Ecops). But Ecops have fallen out of favour in the last few years. Chris Bolan, head partner at Compass Reward Consulting, says: “HMRC carried out a detailed review of employee car ownership schemes (Ecos) and approved mileage allowance payments (Amaps), [which is] the tax relief available for employees driving their own cars for business. A number of organisations were holding back for this review. HMRC announced no changes, which has provided stability for planning [around Ecos].”
They will be an effective way of providing cars for some. Hull says: “The onerous requirements of HMRC in terms of administration to make it tax-compliant mean it’s quite expensive to run, so you need a high mileage to make it worthwhile, but for these drivers it can constitute a tax saving.”
The question to ask, therefore, is whether you have the high mileage drivers for this sort of scheme. Overall it seems that there’s no single solution that covers all drivers. Often the answer will lie in a blend of choices. Bolan says: “We sometimes find that a well-structured mix of company cars for some and employee ownership for others may be the best solution.”
The type of funding is an important consideration. However, it’s not the only one. If leasing is part of the mix, it’s vital to ask if there is a better deal. Employers may revisit the lease.
Kendrick says: “They can extend the lease for another 12 months to put off the pain of new leases. But this isn’t straightforward, because they may get lower manufacturer discounts which could make this less viable.”
The other major aspect of the lease to consider is the mileage. Kendrick says: “People go for leases of 36 months and 75,000 miles, but they need to look at whether drivers are actually hitting that mileage. If not, they should negotiate the contract to mirror what mileage they are doing.” Then there’s service, maintenance and repairs. Kendrick says: “They may think they are getting a good deal from the leasing company, but many have never looked at whether it would be cheaper to pay for repairs on the basis of work that is actually done rather than a fixed cost.”
Getting the right deal with the right kind of funding will maximise the cost-effectiveness of company cars. But there’s one final question that has become more palatable in the current environment. Whyte says that employers should really be asking the fundamental question: “What do we need for the ongoing business travel requirement?”
He points out that under current economic pressures, business needs have probably changed, and with a softer labour market than many industries have seen for a decade there is less risk in addressing this issue. He adds: “This is the time to right-size the fleet for your needs over the next five years. There are two aspects – the right number needed for the employees who need to be mobile, and the right size and type of car to be offered to them. This is all part of good corporate management, as well as good fleet management, and can reduce costs. Naturally it has to be done with proper regard for decent HR practices, but it has to be done.”
Kendrick agrees: “Employers may have to tell employees their benefit is being downsized. We are in difficult times, with redundancies around, so they won’t like it, but they may accept it.”