The future of traditional company car schemes

Tax changes may have made most company cars less attractive as a perk, but corporate manslaughter legislation has left employers in a quandary over alternative arrangements, says Nicola Sullivan.

Traditionally, employers have regarded company cars as one of the most valued perks they can offer, but changes in tax rules mean that the perk is not quite as attractive as it once was for employees.

Attitudes towards the benefit began to change after emissions-based taxes were introduced in 2002. Previously, company car tax had been based on the distances employees covered each year. Chris Chandler, senior consultant at Lex Momentum, explains: “”The more business mileage you did, the less your company car tax. The logic of that was the more business mileage you do, the more the car is a necessity of the job.””

Now the tax regime penalises both employees and employers where gas-guzzlers, instead of environentally-friendly vehicles are provided to staff. The government shows no signs of deviating from this strategy having recently decided to encourage the wider take-up of green cars by reducing the lower threshold for calculating company car tax to 135g of CO2 per km for 2008/09, and again in 2010/11 to 130g per km. A new 10% tax band for company cars with CO2 emissions of 120g per km or less has already been introduced. Employers will also be affected as from 2009, the100% first-year capital allowance for the cleanest cars will be extended to 31 March 2013, and the qualifying threshold will be reduced to 110g of CO2 per km. Those that emit more than 160g/km of CO2 will attract a 10% writing-down allowance.

These measures have prompted some employers to question whether the company car is becoming too expensive for employees, especially in the current economic climate and the recent hike in fuel prices. But some employers may be hesitant to ask staff, particularly those in high-level positions, to trade down to more environmentally-friendly models. In such cases, employers may look to offer staff a cash alternative so they can choose, and buy, their own car.

Some companies may also use affinity schemes and salary sacrifice to help staff buy their own car. Affinity car schemes, entail employers using their purchasing power to negotiate a deal directly with a manufacturer or through a leasing company, so staff can buy new and used cars at a discount. Under salary sacrifice, employees can pay for a car out of their gross salary, saving on national insurance and tax.

Such measures have prompted some in the industry to question whether the use of funding methods, such as cash alternatives and employee car ownership schemes, are making the traditional company car scheme redundant. Alastair Kendrick, partner at Bourne Business Consulting, believes it is no longer a viable option. “”If you have got a guy who’s driving an E-class Mercedes, you are not going to get him into a One-series Mercedes without arguments. Those employees are going to say ‘we still want the same sort of car’ and they will expect the employer to give them cash,”” he says.

Fleet providers and leasing companies that want to build a case for the company car, meanwhile, are promoting the tax changes as an opportunity for firms and staff to make savings. New and improved vehicle technologies have resulted in some high-spec, environmentally-friendly cars joining the market, which not only attract tax breaks but also reduce fuel costs, says Chandler. Vehicles that emit 120g of CO2 or less include some Ford Focus, Volkswagen Golf, Audi A3 and BMW 1 series models.

In July, HM Revenue & Customs also increased advisory fuel rates for company cars. The rise, which doesn’t apply to drivers who use their own cars for business, allows employers to increase the amount staff can claim back on business miles.

Another factor used to strengthen the case for the company car is the Corporate Manslaughter and Corporate Homicide Act 2007, which came into effect in April and means that a company will be held liable if gross corporate failings on health and safety lead to a fatal accident involving staff who are on the road. Mark Sinclair, director of Alphabet, says this has resulted in employers wanting to take more control over what cars staff drive. “”Employers realise that by going for a cash alternative, they lose control over what employees drive. Employers have a responsibility to ensure they do so safely, so the only way they can really do that is to provide a car,”” he says

If you read nothing else, read this…

  • Changes to capital allowances and company car tax make it significantly more expensive to drive gas-guzzling cars.
  • Such changes to company cars are persuading some employers to opt for cash alternatives or employee car ownership plans, such as affinity schemes or salary-sacrifice arrangements.
  • Corporate manslaughter and duty-of-care responsibilities may encourage employers not to abandon company cars, which give them greater control over the safety of staff.
  • There are fears that going green limits an employee’s choice of vehicle and so lessens the value of the company car as a benefit.