A Holistic Approach to Employer Provided Vehicles
Twenty years ago, the company car market was pretty straightforward; organisations chose to either purchase their vehicles outright or lease them, mainly through contract hire with hire purchase and finance lease thrown in when the circumstances demanded.
In the intervening years the market has diversified, with new (or repackaged) offerings being launched with the promise to take advantage of the accounting regime and tax legislation of the moment. At a headline level these offerings have included employee car ownership (ECO), salary sacrifice and employee personal contract hire schemes, but behind the scenes there are numerous variants of each available.
As their popularity has waxed and waned with successive regulatory turns, it has left a landscape that’s littered with options and that can be extremely confusing, even to seasoned fleet professionals.
While the routes to a company provided vehicle have evolved, what has remained is their popularity as a benefit. In research earlier this year1, CLM discovered that more than three-quarters of individuals see a car as a valuable benefit and only 12% of respondents were unlikely to take a company car in the future.
The future – blended schemes
What the most progressive fleet management providers are now developing, with the help of advanced systems, are ‘blended’ fleet solutions, that provide clients with the advantage of multiple financing methodologies, all delivered seamlessly to meet their fleet objectives.
In practice, this means that you may find traditional company car leasing sitting alongside elements of an ECO scheme, with personal leasing or salary sacrifice available for employees that fall outside of eligibility for a company funded vehicle.
The selection of the type of scheme (or combination of schemes) that will be most appropriate will vary from business to business, depending on a wide range of factors. Below we take a look at the range of ‘building blocks’ that can be used to create the ideal blended scheme, based on the organisation’s business context.
Company Car Leasing
Usually referring to contract hire arrangements; business car leasing is perhaps the most broadly applicable form of vehicle finance. For a fixed monthly cost, and for a set period of time, the employee gets the use of a car, usually determined by monthly rental value in the employer’s fleet policy. Business contract hire is by far the most common form of finance used for business need cars and is also very popular for traditional ‘perk’ cars.
Maintenance is often included and there’s no financial risk to the business of what the car will be worth at the end of the contract; the vehicle is simply handed back and a new one selected. It’s the stalwart of company car provision because of its simplicity, lack of risk and ease of budgeting.
Alternative Forms of Finance (Hire Purchase / Finance Lease / Contract Purchase)
While contract hire remains the most common type of company vehicle finance there are situations where alternatives can provide specific advantages to an organisation. These mainly occur due to differences in their treatment for corporation tax, VAT and financial reporting. Organisations can use different types of financial agreement to determine:
- Whether vehicles have to be reported as assets on their balance sheet and how the vehicles’ expenses are treated in the P&L
- How much VAT is recoverable and when payments and recovery can take place
- Whether capital allowances are available and how much of the rentals are treated as deductible business expenses
If you’d like to know more about different types of vehicle finance, download our free PDF Vehicle Funding Guide.
Employee Car Ownership (ECO)
ECO schemes differ from traditional company car schemes in that the title of the vehicle usually passes to the individual employee at the beginning of the agreement. This means that benefit-in-kind tax is not payable. The employee pays a monthly fee to use the car for a specified period and the employer reimburses them, usually through a combination of payments for their business mileage, plus a top-up to the value of the rental.
ECO schemes need to be carefully constructed to conform with HMRC rules but can be advantageous, particularly for organisations with a large number of high-business-mileage drivers.
Salary sacrifice became very widespread as organisations sought to offer vehicles as part of their flexible benefit packages. This often meant the inclusion of employees who may not have been eligible for a company funded vehicle. Originally, these schemes also had attractive tax and National Insurance benefits, as payments for vehicles were deducted from employees’ gross salaries.
Changes to tax law in 2017 removed many of these benefits for traditional vehicles but retained them for Ultra Low Emission Vehicles (ULEVs – producing 75g/km CO2 or less). With the ever-increasing range of Battery Electric Vehicles (BEVs) and Plug-in Hybrid Electric Vehicles (PHEVs) on the market, salary sacrifice is seeing a resurgence as a valuable employee benefit and as a way of improving an organisation’s environmental performance. Read more about ULEV benefit-in-kind tax here.
Personal Contract Hire & Personal Contract Purchase
These ‘personal leasing’ options have become extremely popular with consumers in recent years, as they allow individuals to choose a higher specification car than they would be able to afford as an outright purchase. Employers too have been keen to utilise these highly flexible options to open up car benefits to the widest possible audience within their businesses.
Businesses also have the option of providing a completely open choice of manufacturers and vehicle types or, restricting this range in order to deliver additional volume discounts and to exert a degree of control over the type of vehicle driven – just as in a regular company car policy.
These schemes are seen as a practical way of encouraging cash allowance takers to drive an efficient and well-maintained vehicle and some are even open to the friends and family of eligible employees.
Flexible, Short-Term Leasing
Consider the contractor that needs to make business journeys during their six-month placement, the perk driver with an extended delivery time for their new car, or the new recruit working through their probationary period. There are situations when mobility and employee benefit requirements dictate the need for additional vehicles, but the long-term commitment of the funding methods outlined above simply isn’t appropriate.
Short-term leasing provides the ideal way to plug these gaps, providing a vehicle for between three and twelve months at rates that significantly undercut those available through regular daily-rental channels. Products, such as CLM’s own Mini-lease, also mean that organisations can select the exact vehicle (rather than just a vehicle class) to fit in with their existing fleet policy and that the driver gets to keep the same vehicle for the entire lease period, avoiding the down-time of changes between short-term rental cars.
The solution to a wide range of business issues
Organisations are often pulled in opposing directions by the demands that the market places upon them and even by their own business objectives. The need to control expenditure never relents, but this needs to be balanced against mobility requirements, the provision of attractive benefit packages, improving environmental performance and mitigating risk.
From the employees’ perspective, they too want the most cost and tax efficient route to a new vehicle, as well as a degree of choice that will meet their personal and business mobility needs and deliver to their increasingly rigorous environmental demands.
Delivering to all of these demands is not straightforward and this means that selecting a single type of car benefit is far from optimal for many organisations. By working with a provider that can deliver a blended approach, incorporating several different methodologies, a broader range of organisational objectives and employee demands can be reconciled.
CLM has been providing flexible fleet management solutions since the early 1980s and, with the additional capabilities of our sister company Maxxia, are able to deliver the widest range of car benefit schemes and funding options. If you’d like to know more about our holistic approach to employer provided cars call on 01908 210100 or contact us.
1 Online research conducted with 301 company car eligible drivers between January and March 2019