Curtis Hutchinson explains why contract hire has become the most popular form of fleet funding, as he weighs up tax and other procurement issues
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The company car may be a bruised and battered benefit but its desirability among employees is alive and well with fleet sales this year outstripping retail demand. While its obituary was being written back in 2002 during the run up to the new C02 emissions-based benefit-in-kind tax regime, the benefit has weathered the storm and is now looking in rude health.
Ever since the late 1980s, company cars have been available through a myriad of funding packages ranging from finance and operating leases to hire purchase and sale and leaseback schemes. However, according to the British Vehicle Rental and Leasing Association (BVRLA) contract hire is now the most popular form of funding.
The appeal of contract hire lies in its off-balance sheet accounting, so there is no financial risk based on the cars’ predicted residual values. The day-to-day administration and associated hassles are also outsourced to a specialist fleet management company.
For many years, the split between outright purchased cars and those funded through some form of leasing agreement was marginal. However, the BVRLA, whose membership is drawn from UK fleet management companies which collectively supply 2,500,000 fleet cars, estimates that only 35% of company cars are now bought outright.
BVRLA’s head of external affairs, Robin Maconochie, says: "Contract hire has grown steadily year on year by around 10%. Last year, our members were managing over 1.3 million vehicles under contract hire schemes."
The emissions rules created winners and losers and tax-savvy employees are now more likely to pay attention to C02 engine ratings when it comes to sourcing their next company car rather than concentrating solely on whether it has climate control air conditioning, a CD stacker or satellite navigation.
While there was plenty of speculation about whether employees would hand in their company car keys and swap them for the growing number of cash allowances, all the evidence has pointed to staff weighing up the financial pros and cons and sticking with their motors.
Colin Tourick, an independent fleet management consultant, says: "There was a rush for drivers to take cash but there’s increasing evidence that cash for car schemes have peaked. There’s also evidence that some who did come out of their company car schemes have gone back because manufacturers have come up with some good low C02 alternatives."
He also points out that many drivers simply prefer the hassle-free nature of company car motoring and the peace of mind that comes with knowing that if anything goes wrong the car will be fixed and they will not be left without wheels.
Lease Plan, which operates a UK fleet in excess of 136,000 vehicles and is part of Europe’s biggest vehicle management group, argues that the appeal of company cars among employees is growing especially with more low emission cars now being produced by all of the mainstream manufacturers.
Kevin McNally, managing director of Lease Plan, says: "The truth is that even including benefit-in-kind tax, a modern low-emission car is much cheaper to run as a company car where drivers don’t have to worry about maintenance and depreciation costs. Employees who choose to take a cash option instead of company cars are missing out on a valuable perk."
With most company cars being run under some fleet management funding scheme, the benefits for companies are numerous. The sheer administrative burden associated with running fleets is outsourced which allows the company’s finance and human resources departments to focus on their core activities rather than being weighed down by the smallest of problems bothering their drivers.
Also, for fleet management companies to remain competitive they must offer bespoke services having long ago been forced to drop their off-the-shelf like-it-or- lump-it approach.
Bank of Scotland Vehicle Finance, which funds over 180,000 vehicles in the UK, advocates the need for tailored services to meet specific company needs. Graham Hale, head of corporate business, says: "Managers should remember that it’s not as simple as one size fits all. Each of our contracts is tailored to suit the customer’s individual needs. Any reputable provider needs to work from the ground up, starting with the basics and getting to understand a company’s dynamics, its philosophy and culture."
Most fleet management firms would also argue the case for reviews to look at mixed funding solutions to address a company’s specific needs. Rich Green, managing director of GE Commercial Finance Fleet Services, which manages 54,000 vehicles in the UK, says: "Choosing which funding route to take is arguably the most fundamental decision to be made regarding a fleet. There is a huge variance in the fleet industry between fleets that undertake regular, professional reviews at one extreme through to those whose approach is intermittent and haphazard at the other end of the spectrum. We have always found areas in which our customers can save money. The best answer for funding a fleet is often a blended solution. Increasingly, different methods of funding a fleet are being adopted in order to fit the different needs of different parts of an organisation."
The UK has the most mature company car market in Europe and organisations looking at keeping a lid on their fleet costs, while offering employees a good degree of choice and flexibility, have a wide choice of fleet management firms able to satisfy their needs.
What are fleet management companies?
Fleet management companies provide an outsourced service covering the acquisition, funding, administration and disposal of company cars.
What are the origins of fleet management companies?
Originally, these were vendors which provided an outsourced service for clients covering the buying, maintaining, admin and overall management of an organisation’s fleet. However, in recent years, many have added contract hire and other forms of leasing to their list of services. Meanwhile, some firms which came up through the leasing route have found the term contract hire too restrictive as they have widened their product portfolios to cover outright purchase, personal contract purchase and a myriad of other offerings.
Where can employers get more information and advice on fleet management companies?
The Association of Car Fleet Operators (ACFO) offers its members an advisory service on the best forms of funding and keeps them up to date with legislative news. It also provides an analysis of each Budget and how it impacts on employers and employees. Telephone 01730 260162. The British Vehicle Rental and Leasing Association (BVRLA) is a lobbying body which has drawn up industry codes of practices. Telephone 01494 545711
What are the costs involved?
Quoting an average management fee per vehicle can be tricky because the cost will depend on factors such as the vehicles used and the size of the fleet.
What are the legal implications?
The provision and supply of company cars through fleet management schemes is tightly governed by legislation. In addition, employers’ duty of care regulations extend to the provision of company cars and privately owned vehicles used by staff for work purposes.
What are the tax issues?
All company car drivers are liable to benefit-in-kind tax (BIK) which is calculated on 15% to 33% of the car’s list price according to the engine’s published C02 rating. Drivers who fund their cars through a company-provided cash allowance are exempt from the BIK charge but the allowance is subject to income tax and National Insurance.
What is the annual spend on fleet management companies?
According to the BVRLA, the total spend on company car funding in the UK is in the region of £7.5 billion.
Which fleet management companies have the biggest market share?
According to the 2004 Fleet News Top 50 survey, the biggest fleet management companies in order of fleet size were: Lloyds TSB Autolease, Lease Plan UK, Lex Vehicle Leasing, Lombard and Interleasing.
Which top fleet management companies increased their market share over the past year?
Lex Vehicle Leasing, Bank of Scotland, ALD Automotive, BT Fleet and DaimlerChrysler Services Fleet Management are reported to have seen the biggest growth.