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Key Factors In Funding Choices

Jim Salkeld, managing director of Toomey Opticar discusses the factors affecting companies' choice of funding option for company car fleets.

There’s something special about the first quarter of the year that makes it an ideal time to plan financial and personnel strategy, with the budget and a new tax year just around the corner. Most businesses have just completed their financial year-end and the results are available for management to examine and compare against budget.  Even if the performance has met all expectations, there is always room for improvement, and the old Chinese proverb sums it up beautifully: “Success is a journey, not a destination”.

Although funding and managing core business activities will naturally be uppermost in the minds of the finance director, ancillary costs will also play a major part in the business plan. We all know that people are essential for a business, and that the right people cost more to recruit and retain, so it follows that the best benefits packages will meet employee expectations at the least cost to the business. As this will inevitably include a car benefit, the methods used to acquire and fund the fleet will need careful thought. So what are the key factors?

Competition

The first step is to look at what others are doing in your industry, remembering that the car benefit will play a major role in your recruitment and retention goals. If growth is one of your objectives, or you want to maintain market share in your sector, the car benefit should be at least as good as that offered by your competitors in terms of perceived value to employees. This doesn’t mean it has to cost any more, just that it is fully optimised in cost and tax terms for both employer and employee.

Fuel policy

Before looking at actual funding methods, it’s a good idea to make sure that your fuel policy is as tax-efficient as it can be. If you currently provide all fuel, check to see if employees are actually getting the benefit or if it is mostly going to the Chancellor.  Unless your employees drive very few business miles, it is almost certainly worth paying for business fuel only and “buying out” any employees who will be worse off via a salary adjustment. A painful process at first, but this is one that will ultimately produce bigger savings for both employer and employee than any other measure.

Funding

There’s an art to this. Leasing companies will prove to you with all sorts of numbers that it is better to contract hire than anything else, and others will reveal massive savings if you put an employee car ownership (ECO) scheme in place instead.  Somewhere in the middle are the outright purchase, hire purchase, lease purchase, finance lease, operating lease and other asset funding options. If you have the luxury of flexibility, and are able to manage the fleet as a whole, then the ideal will be a mixture of company-funded and employee-funded, making the most of available tax and national insurance contribution-free mileage payments where possible.

However you actually pay for the car, you will have to fund depreciation, maintenance and money costs. Even if you buy the car outright, you should consider your internal rate of interest and be sure you can afford to tie up capital over several years. Leasing companies have become expert at acquiring and maintaining cars at least cost, and manage the end of contract disposals well. Unless you have the services of an expert fleet manager (in-house or outsourced), this may well be the best option for the company car, but watch out for hidden charges. 

If you can, work some flexibility into the arrangement to allow for redeployment, excess mileage pooling and end-of-contract refurbishments. Leasing can also become expensive when applied to big executive cars, so it could pay to fund these on a purchase arrangement and take title to the asset. The important thing to consider though is the tax position, as this will affect value to the employee as well as net cost to you.  The company-funded option is best for low business mileage drivers under the current tax regime.

Employee-funded arrangements can provide the flexibility that you want, while still allowing you to take advantage of manufacturer support where available. These fall generally into two categories, the traditional cash allowance and the more structured ECO schemes. The former has the advantage of very little administration, although there is a danger of paying either too little or too much (because driver mileage profiles vary considerably), which can either cost more than the company car equivalent, or can leave employees disaffected.

The latter has attracted a lot of attention recently, especially from HM Revenue & Customs (HMRC). A good ECO scheme can provide the tax efficiencies and savings that you’re looking for where the business mileages are high, but will produce huge costs where the business mileage is low. They are better than straight cash allowance schemes in delivering value to employees, but will not suit every situation and carry some risks where HMRC compliance is not absolutely transparent.

The ideal then? A combination of company-funded and employee-funded car benefit, with the whole being effectively managed as a single policy. Some of the larger fleets have been doing this for years quite successfully, and there is absolutely no reason why smaller fleets cannot benefit from similar arrangements.

For more information contact Opticar on 01582 518181.