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November 2009
Going the Extra Mile - Company Car Schemes

The company car policy is not always given the depth of consideration that it deserves but mixed funding can add value to the benefit and reduce costs, says Peter Eldon.

The traditional role of fleet managers has suffered a slow demise across the UK, prompting company bosses to look for someone else to take on the responsibility of running one of the most sensitive and at times complex business tasks -- the company car scheme.

As fleet managers have been involved in managing company cars for decades, all their accumulated knowledge is now being lost to UK businesses as the position falls victim to job rationalisation. This in turn means that some poor soul, probably in payroll or HR, is being given a large number of files, complete with 20 years of records and a list of suppliers, while being told to get on with the job of managing the fleet.

This is an exaggeration of course, but the person now responsible will have a raft of other responsibilities of which fleet is just one. And it is difficult to absorb the nuances and technicalities of company cars, cash allowances, corporation tax disallowance, etc without really devoting a significant amount of time to it.
This is unfortunate, because fleet -- or to give it a more accurate title, the car benefit scheme -- is not only one of the most valuable parts of any employee benefits package, but can also be one of the most expensive.

Not being fully on top of it can have a damaging effect on the business from both a cost and benefit perspective. Particularly in times such as these, when companies look to shave costs from around the business but don't want to unsettle their most valuable assets -- people.

Strategy versus tactics
There are two approaches that businesses can take. The first is tactical; the easiest, but the least effective. Gathering fleet suppliers around the table for a round of negotiations aimed at reducing monthly vehicle rates is never going to be more than a short-term fix.

The thing about a recession is that it doesn't pick and choose whom it affects, and the car industry is most definitely being kept busy. So to expect your vehicle suppliers to reduce rates to meet your targeted cost is perhaps a bit unrealistic. You can go to tender, maybe even change your supplier base, but the net effect will be the same -- there will be no real long-term gain.

Sure, a supplier will give you something to make you feel good about yourself -- £10 per month off the cost of your fleet of Mondeos perhaps -- but leasing companies aren't stupid and somewhere along the line anything given away upfront will be clawed back from within the leasing cycle and any expected cost savings will disappear into the ether.
The most productive way to approach the issue of fleet is to take a strategic look at how the fleet policy is structured. Businesses are sometimes reluctant to do this -- perhaps because the specialist fleet manager is no longer there to conduct a thorough review. But for long-term and sustainable savings, strategy beats tactics every time.

Understanding the real costs
Only by exploring all the options will a business be able to implement a fleet strategy that optimises costs without devaluing the benefit to its drivers. To do this, a business must start with a comprehensive understanding of what net costs actually are to put a driver on the road.

Let's examine a typical fleet vehicle -- a Ford Mondeo 2.0 Zetec, driven by a driver who records 20,000 miles per annum, 17,500 of which are business miles. Let's assume also that the driver is a 40 per cent marginal rate taxpayer, that the vehicle is a "company car" supplied on a contract hire basis, and that the company fuel policy is "all fuel paid". The net cost to the company is a staggering £10,700 per year.

But what if that same driver was funded differently? If you utilise the tax and National Insurance-free approved mileage allowance payments (AMAPs) available for people who use their own vehicle on company business, i.e. via a structured cash allowance such as a Personal Contract Purchase offering exactly the same level of support to drivers, the cost to the company is likely to be as low as £4,300 per year. A fleet of 500 of those at a saving of £6,400 per year represents a potential real net saving of £3.2 million. I suspect that the company bosses might be interested in that.

Balancing cost and benefit
Of course, a balance is needed between cost and benefit. For many businesses the car benefit is an integral part of the flexible benefits package. "What car do I get?" is a question not far from the lips of any potential new recruit, while existing employees will always judge their worth by the type of car benefit they are being offered.

And in the current climate where pay freezes are more common than pay increases, you really need all elements of the benefits package to be working flat out to keep everyone happy. So the car benefit has to pull its weight and a "leave it be" approach just won't do. There is little point in spending a lot of company money on providing a car benefit if it's not fully appreciated by the drivers it's meant to please.

Many companies offer a choice of company car or cash, but what support is available from the company to enable drivers to the make of an informed choice? Already some benefit is eroded and the driver spends the next three or four years wondering if he has made the right financial decision. How much better would it be if drivers could see exactly what each choice means to them in terms of their own tax position?

Single funded schemes -- all company car or all cash for example -- provide another example of how a company can spend huge sums of money providing a benefit that drivers just don't get. The illustration given earlier shows how our high-mileage driver in a contract hired vehicle costs much more than if he was in a cash-funded alternative. The way the sums work means that if it benefits the company, then it will also benefit the driver in terms of the most tax-efficient way to engage with the company scheme. So again, it's a case of a supposed benefit seriously under performing, and at considerable cost to the company.

While on the subject of schemes with a single funding option, those that only offer cash schemes -- maybe an Employee Car Ownership Scheme set up a few years back -- will know the pain of the year end mileage reconciliation. Estimating annual business mileage and AMAPs are not something that HM Revenue & Customs (HMRC) is very keen on, and invariably there is only one winner when all the numbers have been crunched. Asking drivers to provide a year's worth of mileage records doesn't go down well either.

Company car or cash
It's pretty clear that the most financially efficient way to structure the car benefit is through the introduction of an integrated "mixed funding" strategy.

The key to providing a workable mixed funding approach is to understand what type of funding best suits each individual driver, so that an informed choice can be made at the point of entering the scheme.

But identifying the best funding option is only the start. To really nail sustainable long-term savings, and to avoid incurring penalties from HMRC, a robust mileage recording tool with a payroll reporting facility is an integral requirement. This way, driver costs are optimised through the length of the funding contract chosen, adding sustainability to the equation -- and no horrendous year end mileage reconciliation exercises either.

Mixed funding works on several levels as it gives drivers the opportunity to engage with the scheme in the most cost-effective manner available but also gives businesses the chance to offer restricted badge company car schemes where selected vehicle brands are available in various model formats across all grades. The addition of a structured cash alternative means additional vehicle choice. The company is saying "you can choose from a company car list, or pick your own vehicle, at no additional cost to us, to meet your own needs," which is quite a powerful message.

There's also the administrative side of things. Mixed funding solutions specialists are able to provide an online management solution to cover every aspect of fleet management from car selection through to mileage recording and payroll reporting. This means that fleet administration can be restricted to the bare minimum with no moaning drivers to deal with, no year end tax reconciliation, and time to focus on other job responsibilities.

Change can be good
What sometimes stops a business from taking the step from tactical tweak to strategic review is the prospect of change. Any change to the fleet policy is often met with driver cynicism and the expectation that the scheme is being downgraded. The temptation can be to preserve the status quo, resorting instead to the tactical short-term activity discussed earlier.

But the beauty of mixed funding is that the benefits are so clearly visible, and even ardent cynic will see the advantages pretty quickly. The other big plus-point is that existing fleet supplier relationships needn't be affected. If your contract hire supplier has been with you for years and offers a great service, then they still can -- as the contract hire supplier in a mixed funded fleet scheme. All you need do is overlay existing relationships with the online management tool from the mixed funding solutions provider that enables the schemeto be implemented across the business.

The uptake of mixed funding schemes is growing as understanding develops and the business need for efficiency and value grows. The bigger the driver population, the more beneficial it becomes. Mixed funding is also great for acquisitive businesses allowing newly acquired drivers to benefit from a better scheme than the one they left behind.

There is no trick behind the figures that support mixed funding. Understanding fleet costs is essential and a specialist solutions provider will provide a full fleet net cost analysis to quantify the realities of the funding options under consideration. The HR benefits are clear too, so it really is worth a look.

October 2009
Playtime is over: time to get serious on cutting fleet costs
Peter Eldon, managing director of car fleet solutions specialist Toomey Opticar, says that the pain of a strategic review of business costs now is a small price to pay for survival into the future.

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