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The Importance Of Fleet Planning And Finance

Jim Salkeld, CEO of Toomey Opticar discusses the in and outs of fleet planning and finance and why a "one size fits all" policy doesn’t work

Fleet planning is an area that demands a lot of attention if unnecessary costs are to be avoided, but seldom gets it. For the small business with maybe a handful of car-enabled employees, it will probably come last in the list of “things to be done urgently” from the accountant, and may never get to the top of the pile.

Even larger organisations, with fleets in excess of 100 cars, can be guilty of dragging their proverbial feet simply because it can be so complex. Such inertia can present the fleet funder with some real opportunities beyond the usual rate competition arena, and can win accounts that survive past the next rate review. Needless to say, if it was easy, everyone would be doing it.

The most obvious place to start is the funding mechanism for the company cars, and for many finance advisors this is where it would end. On or off balance sheet, lease, HP, lease purchase and variations of these would feature highly, and any one of them could be the right solution for any particular situation.

Many companies adopt a single funding solution and stick with it for years, even if they change funder. For the small business, this is probably not a bad position to take, and with just a handful of cars it would be difficult to make a catastrophic error. 

For the larger business however, the effects of scale could be significant and although there are a few general rules of thumb to assist with the decision-making, the only way to ensure that you can give effective advice is to analyse both the fleet and the tax position of the employees.

This latter may seem a strange area to examine, but the company car is a fundamental part of the compensation package and the associated taxation will have a large part to play in the advice you deliver. You may well find that the best advice is for some form of mixed fleet funding that combines company-owned and employee owned options, in which case you may have the additional opportunity to fund a properly structured Employee Car Ownership (ECO) scheme.

Before investigating the funding, it’s worth looking at the actual car policy. Private fuel should not be paid for any employee, even those of high rank driving very few business miles. It just doesn’t make sense to allow so much wastage through taxation, and particularly with increasing fuel costs and fuel scale charges. The best advice you can give (and demonstrate) is for the business to pay for business fuel using the HMRC Advisory Fuel Rates against properly recorded business mileage.

This helps “green” the fleet, as employees naturally seek to reduce their private fuel costs by choosing the cars with the best fuel economy, and also saves a small fortune with just this measure. Any employee worse off as a result can be compensated via salary. Most employees will be much better off, although the communication needs to be robust if the fleet is to sell it to them.

Another good tip is to recommend that the business reduce the actual car list to one or two badges, depending on fleet size. This will not only enable the business to obtain better terms, it will also make reallocation of cars much easier. With emissions playing such a big part in individual taxation now, it can be difficult to get employees to take cars that could potentially reduce their net income.

If you have never analysed fleet costs it may surprise you that in many cases there is little difference in overall cost terms between all the funding methods, even outright purchase. Savings are most likely to spring from the way that the car benefit is delivered to employees rather than the way the car is financed, especially so for the mainstream cars.

Again, this will be more pertinent to the larger fleet and you will probably not want to undertake this form of exercise for fewer than 100 vehicles. I would also recommend that you find yourself a fleet supply partner who can actually deliver on your recommendations and manage the cars and employees thereafter. I can’t speak for other fleet management organisations, but my organisation would be happy to assist.  In the meantime, let’s look at some scenarios covering two different cars:

Example 1 is a 2.0L diesel car with a list price of c. £16,000 and a CO2 rating of 146.  It is a fairly standard fleet car for an essential user and I’m making an assumption here that the fleet is able to obtain 20% discount off the list price by virtue of a limited badge agreement with the manufacturer. The driver is a 22% taxpayer driving 30,000 miles per year.  The following scenarios show the relative whole life (annualised) costs to the business at 21,000 business miles and 5,000 respectively over three years:

  • Leased car – 21,000 business miles: Apart from the finance charges, maintenance provision and the Class 1A NIC on the CCT charge to the employee (the old BIK tax), there are other costs to be taken into account including business mileage payments, corporation tax disallowance, VAT disallowance, motor insurance, excesses (15% claims), administration etc. If we assume that the car fetches trade price at the point of disposal, the overall costs to the business amount to £7,600 per year.

  • Leased car – 5,000 business miles: Not quite as much, due to the reduced business mileage payments and amounting to £5,800 per year. As the total annual mileage remains the same, all other costs are unaffected.

  • Outright purchase – 21,000 business miles: I’ve assumed here an internal rate of interest of 7% on the basis that this would represent minimum overdraft rates currently, and if the business were “cash rich” it should expect to secure this rate of return from its own business activities. Accordingly, despite a 20% discount giving a cost of £12,900, the annualised depreciation and funding costs (including the balancing allowance) produce a net annual cost of £8,400. 

  • Outright purchase – 5,000 business miles: Just as with the leased car, the costs reduce to £6,650 per year.

Could there be a better method of funding that could mitigate some of the CCT and consequent Class 1A NICs? Running exactly the same model but this time looking at keeping the employee “salary neutral”, with a net cash allowance based on paying tax and NI-free AMAPs (approved mileage allowance payments) and salary adjustment, the cost to the company for the mileage profiles would be £6,900 and £6,800 respectively.

The difference is slight only because the “gross up” costs for the lower business miles, (because the employee still has to receive the same net cash budget), is mitigated against the additional fuel payments and subsequently reduced AMAPs.

What about a traditional cash allowance? Now becoming increasingly more popular, as businesses give up attempting to manage a complex fleet mix, these are not as cheap as they might seem at first. In the above examples, a typical cash allowance for this grade of employee would be around £4,500 per year. 

The employee has to pay tax and NI on this so the net cash value is therefore reduced to around £250 per month, and not nearly enough to fund and run the same car over 30,000 miles per year, even though tax relief is available producing an additional £976.80 per year for 21,000 and £319 for the 5,000 profile. The cost to the business with employer’s NIC and business mileage payments amounts to £7,386 and £5,626 respectively, and apart from the likely HR challenges with the allowance being insufficient in this case, there are occupational road risk management issues to consider as well.

In the second example, we have a 2.0L petrol executive car with a list price of £32,500 and emissions of 212. The driver is a 40% taxpayer and the mileage profile is the same as before:

  • Leased car: Annualised cost of £14,400 at 21,000 and £12,300 at 5,000 business miles.

  • Outright purchase: £14,900 at 21,000 and £12,800 at 5,000.

  • ECO: Annual net costs of c. £12,400 at both 21,000 and 5,000 business miles.

Not a big surprise when comparing outright purchase with leasing, but note the ECO comparison. As with the earlier example, it really shows that the AMAP rates are eroded by the business mileage payments needed to cover fuel costs. There is a strong argument therefore that AMAP rates should either be increased, or should be disconnected from business fuel payments, but that’s for another day.

The best advice you can give in both these circumstances then, and bearing in mind the profiles will vary for each individual in the fleet, is to lease the lower business mileage cars and run ECO alternatives for the higher business mileages. As a rule of thumb, the crossover point on this type of car would be about 35% business mileage.  Buying really doesn’t appear to be a viable alternative until car costs approach £40,000, and even then the ECO option could be best with higher business mileage profiles.

Opticar provides a unique mixed fleet solution for a range of corporate clients. Toomey Opticar Limited is a wholly owned subsidiary of Laindon Holdings Limited, and a member of the Toomey Group. 

For more information contact Opticar on 01582 518181.