The company car market has been in choppy waters of late.
Assailed on one side by confusing new rules on tax, threatened by
prosecutions for corporate manslaughter on another, tasked with
trying to minimise fuel costs, with all the normal fleet
administration tasks on top, a fleet manager’s lot is not a happy
one at present. Of course, for companies which have outsourced
their contract hire company car schemes to an external provider,
the headache of catering to all of these competing demands is
mostly someone else’s problem; all they need to do is review their
contract every so often to ensure they are still getting best value
for money.
But there are many companies wishing to provide their employees
with cars, for whom a typical three-year, 60,000-mile leasing
contract is not suitable. Luckily, fleet providers – and others –
have come up with innovative solutions that allow companies to
provide cars for their staff in a cost-effective and efficient way
that does not necessarily involve ‘bread and butter’ contract
hire.
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ECO for high mileage
Employee car ownership (ECO) schemes are a popular alternative
to traditional company car schemes. They involve benefits for both
driver and employer, says Paul Coley, associate director of Lex
Momentum – the consultancy arm of Lex, the UK’s largest lessor.
“ECOs can be tax efficient and can save employers money on tax
and National Insurance contributions, while the last Budget made no
changes to AMAP rates, which has led to some enquiries about ECO
schemes from companies who think they will be viable for the next
few years,” Coley observes. ECO schemes, he says, are good for
companies which have a “stable workforce with high average business
mileage”.
However, Coley notes, unless a company is very on-the-ball
regarding tax reconciliations, ECO schemes can be more trouble than
they are worth, thanks to the high burden of administration needed
to run them successfully. “For early terminations with an ECO, an
employer has to pay tax and National Insurance on top, which
doesn’t happen with contract hire. Excess mileage is taxable,
insurance is taxable – but employers may not realise this until the
end of the tax year. At least with contract hire, you know how much
you are paying each month, and how much you will be paying in 12
months’ time.
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By GlobalData“For Lex, contract hire is our core business; ECO is there if we
need it,” he says.
Mark Sinclair, director of fleet management and leasing
company Alphabet, says that ECO schemes play a very important part
in Alphabet’s business; the lessor has the largest ECO fleet in the
UK. It is vital, he believes, to look at each driver individually
when deciding what funding method to use. For medium to large
fleets, he comments, “one size will never fit all.” To that end,
Alphabet assesses the needs of each individual driver in a fleet,
and then uses software to calculate which option – be it standard
contract hire, ECO, or an affinity scheme – gives the best value
for money on a driver-by-driver basis.
Crucially, though, Alphabet has one system to manage all
three options, so that fleet managers are able to pull up
statistics for all drivers, rather than having them segmented by
type of finance. “This gives fleet managers an easy-to-read
‘dashboard’ showing all the information they require,” he
explains.
Alphabet has recently concluded a deal with a company
which used to have its own in-house finance company to run its ECO
scheme. The customer recently decided that the scheme’s
administration was too complicated, and approached Alphabet, which
put together a “sale-and-ECO-back” structure for 1,400 of the
company’s near-1,700 drivers. “This was the first customer we had
where we could not put all drivers into an ECO scheme because of
religious reasons,” Sinclair says. For a substantial minority of
Muslim drivers employed by the company, Alphabet put together a
contract purchase scheme.
Affinity schemes and salary sacrifice
Independent fleet provider Zenith Vehicle Contracts recently
acquired Provecta, an ECO provider (see MF May 08). Sales director
Phil Jerome says that adding Provecta’s products means more choice
for Zenith’s customers: “It’s adding strings to our bow.” Another
“string” which Zenith is developing is its salary sacrifice scheme,
which Jerome describes as “more of an alternative for people who
don’t have a company car – but want one.” He reports that such
schemes already exist – one large accounting firm runs a salary
sacrifice programme for its thousands of staff – but that the idea
is still in relatively early stages for Zenith, which is to use its
own non-company car-qualifying staff as ‘guinea pigs’ before
rolling the product out to customers.
“Salary sacrifice schemes give the employee the benefit a
company gets for funding a car, while the employer gets a reduction
in National Insurance contribution costs, as the cost of the scheme
comes out of gross salary. It shouldn’t cost the employer anything
to provide the car,” he says. Another benefit is that employers
regain a measure of control over the cars their staff choose to
drive, meaning they are “cleaner, newer and greener”, Jerome points
out. There can also be motivational and staff retention benefits.
“In a climate where companies might not be doing as well this year
as last, it can help retain key staff, and might make someone think
twice before leaving,” he opines.
Salary sacrifice schemes have to be approved by HM Revenue &
Customs, and offer the highest tax savings when staff choose
low-emissions cars; for example, if an employee chooses a sub-120g
CO2/km model, it will be taxed at a low 10 per cent/13 per cent
(for petrol/diesel engines), leading to lower benefit in kind
contributions from employees. As for the risk of early termination
leading to burdensome costs, “this can be insured against,” Jerome
says, although he concurs that salary sacrifice is best-suited to
businesses with a stable workforce, and recommends only offering it
to staff after a qualifying period of employment.
“ECO is still a very viable alternative,” he adds. “The
main difference between an ECO scheme and salary sacrifice is that
the former is paid for out of net salary, and the latter out of
gross – saving either 20 per cent or 40 per cent of the cost,
depending on an employee’s tax band.”
Alphabet, meanwhile, works with customers to put together
affinity schemes for employees which “look and feel like a company
car scheme”, but are carefully structured so that employees would
be “mad” to go elsewhere to acquire a car, says Sinclair.
Manufacturer discounts are gained on the cost of new vehicles by
Alphabet, which buys in bulk, and are then passed on to affinity
scheme members.
“Affinity schemes work for drivers with or without a cash
allowance,” Sinclair says, “who can choose models from a range
decided by the employer. If you give employees a car allowance,
they tend to grab the money and run; by making sure an affinity
scheme gives good value for money, companies can retain some
measure of control over the age and environmental profile of their
employees’ cars.”
If cars provided through a salary sacrifice, affinity or ECO
scheme are driven on business, of course, employers will still have
to keep in mind duty of care considerations, as they are just as
responsible for the safety of an employee in a car on a motorway as
they are for an employee in an office or on a building site (see
‘Inchcape Fleet Solutions launches grey fleet monitoring
system’, below).
Opportunity ahead?
“The real opportunity lies with companies currently giving cash
to employees, with no real control over their fleet policy, who are
looking to move into more of a contract hire environment in order
to rein in costs and remove risk,” Coley says. “There will always
be a need for company cars as, sadly, this country does not have
the infrastructure needed to allow everyone to go everywhere on
public transport. Teleconferencing and home-working will increase,
even more so with the increase in fuel costs, and may have a slight
impact on the demand for company cars, but in the end, there will
always be a need for business travel, and for business cars.”
Sinclair concurs: “We will see growth in contract hire at the
expense of cash-for-car schemes, as leasing is coming back into
fashion, thanks to green worries and duty of care questions.”
It is clear there are several alternatives to the traditional
contract-hired company car on the market, and fleet providers are
tailoring their product offering ever-more closely to the needs of
their customers, and of individual drivers. Off-the-peg,
one-size-fits-all is no longer good enough.
Motor Finance Issue: 44 – June 08
Published for the web: June 27 08 9:26
Last Updated: June 27 08 9:31
