Aug 18, 2010

COMPANY CARS | Employee Benefits

Few other countries in the world provide company cars to the same extent as the UK. Foreign parent companies setting up in the UK often experience difficulty in persuading head office that such generous provisions are necessary to compete in the salary market. Employees seldom move from a job where they have a car to a non-car job, even if it carries a much higher basic salary. This is because in the private sector, and now in parts of the public sector too, cars are a mark of managerial status. Company cars are normally taxed, insured and maintained at company expense. They are, therefore, a large benefit and create a major differential and, some would say, distortion at the point in a salary structure where they are given on the basis of status alone.

Add a note hereThe cash value to an employee of a company car can be as much as £5,000 to £10,000 a year (or more) depending on the model. The gap in a reward structure between the 'haves' and 'have nots' in company car terms is therefore considerable and can and does frequently cause heartache.
Add a note hereUntil the mid-1990s, company cars were a tax-efficient benefit. A series of tax increases means that this is no longer the case; successive governments have changed the taxation of company cars with the aim of reducing the number of company cars on the road. Between 1994 and 2002, cars were taxed based on the number of business miles driven each year, with tax payable reducing as mileage increased over certain thresholds. This produced driver behaviours that were exactly opposite to those aimed for, as company car drivers abandoned trains and planes in order to reach the magical 18,000-mile barrier at which tax was minimized. Taxation is now based on carbon dioxide (CO2) emissions produced by the particular vehicle, with lower levels of tax payable on more environmentally friendly cars. The government's stated intention is that the changes should be 'revenue neutral'. However, a neutral position inevitably creates winners and losers - the winners are those who have the opportunity to select a vehicle with low emissions, while the losers are those who drive over 18,000 business miles per annum.
Add a note hereCompany car policies are often a benefit 'trouble spot' and can take an inordinate amount of top executive time to get right. Car fleet management is not an area for amateurs. Most large organizations have a fleet manager in charge of the acquisition and maintenance of the company car fleet, leaving the details of allocation policy and the way in which cars fit into remuneration policy as the main problems of the compensation and benefits specialists. Here a number of problems arise. People who are not entitled to them often try to get cars on the basis of business need, or to get their jobs regraded to a level where car provision is automatic. When they eventually get cars there may still be problems about the model, the permitted extras or the replacement cycle. In devising the remuneration policy element of company car policies, the following areas have to be dealt with in relation to what the company can afford in the face of competitive practice:
1.  Add a note hereAllocation policy: this deals with who is to get cars on the basis of status, and what the annual mileage threshold is, before cars are given in response to business needs (this is typically around 10,000 miles but may vary based on the position).
2.  Add a note hereCar model entitlements: when deciding car model entitlements the choice is between setting them rigidly in relation to a small number of models at each status level or, as is now more common, in relation to a benchmark price or lease cost, allowing varying degrees of freedom of choice. Few companies allow open sports cars, while others restrict the choice to models manufactured in EC or Scandinavian countries or even to models manufactured in Britain. The market trend is to allow as wide a choice as possible within a given cost framework.
Add a note hereOrganizations may also choose to allow some flexibility either on the additional extras that may be added to the car at employees' expense or, indeed, over whether they can make a contribution out of salary to either the lease cost or the purchase price of a more expensive car if they want one. In either of these cases, strict limits must be set because there is a strong tendency to stretch allowances to their limits and indeed beyond! A typical example of the problem is the organization which leases cars and sets an absolute lease cost limit of, say, £350 a month, and finds that a remarkably high proportion of employees will passionately want metallic paint on this model, which takes the leasing cost to £375. If they are then told that the limit is £350, they may complain bitterly that the company can surely afford an extra £25 a month.
Add a note hereAn increasingly common response is to let employees pay the extra - typically with a cost ceiling that might be 20 per cent about the monthly lease cost or purchase price. Some organizations set no ceilings on additions, typically those with a high proportion of young professionals who can then at least try having a Porsche for three years before moving on to a less personally costly family Volvo. If ceilings are imposed it is critical to stick to them without exception.
Add a note hereMost car fleet managers know that if they allow themselves to be swayed by these specious arguments, the level will creep up incrementally and the allocation policy will be in tatters. It can however be very hard to hold the line in times of severe market pressure. Chief executives can, and sometimes do, intervene to ensure a favoured candidate gets the car he or she wants. As we have already said, car policy demands far more boardroom time than it should. Getting top executive commitment to the imposition of firm limits each time they are reviewed can help contain abuse of policy by directors with 'special cases'.
3.  Add a note hereReplacement cycles: cars are commonly replaced every three to four years, or 60,000 to 80,000 miles, but this varies with the use and durability of the cars involved. Three years is the the most common replacement period. Salesforce cars suffer more wear and tear and therefore tend to be replaced more frequently than top executive cars, especially where annual mileages for the latter are relatively low.
4.  Add a note hereEligibility to drive: the policy on who may drive the car, eg employees/spouse/family/named drivers, is usually determined by the provisions agreed under the insurance cover negotiated. Flexibility in this area is often appreciated - especially in dual career families where the nanny or au pair needs to be insured to drive the car to get children to school and ferry them around, or where children under 25 are drivers.
5.  Add a note herePermitted fuels: All UK employers now specify that all new company cars run on unleaded petrol - for both environmental and (as the UK government intended when it reduced the tax) cost reasons. The use of alternative fuels such as compressed natural gas (CNG) for fleets is also growing - again encouraged by the government.
6.  Add a note hereFleet management: the management of the car fleet involves not only selecting purchasing and disposal of cars, but also encouraging drivers to treat their cars properly so that their resale value holds up when they fall due for replacement. Fleet management may be done 'in house' or be outsourced.
Add a note hereCompany car policies are normally set out in a paper or intranet based manual for drivers that is regularly updated.

Add a note hereCompany Cars - the Future
Add a note hereNow that cars are no longer tax effective in general, an increasingly common solution is to offer employees a cash alternative to their car entitlement. Employees can then choose the combination of cash and car which best meets their personal and business needs and which is most sensible from a tax point of view. Cash alternatives also go some of the way to removing status differences and irregular jumps in employees' packages between the 'haves' and the 'have nots'.
Add a note hereThe 2003 Hay Group Benefits Survey shows that 72 per cent of organizations allow employees to take a cash alternative to a job-status vehicle, and 31 per cent allow cash in lieu of a job-requirement vehicle. There is also increasing flexibility around the choice of car, with 90 per cent of organizations permitting employees to take a smaller car (either for no benefit or taking the difference as cash), and 69 per cent allowing employees to take a bigger car and pay the difference.
Add a note hereSome employers are now offering 'car ownership schemes', either instead of company cars or to employees who are not eligible for a company car. Under such schemes the employer allows the employee to buy or lease his or her own car, by providing employee loans or taxable cash allowances. As it is classed as the employee's car there is no benefit-in-kind tax paid on the car. Instead, tax is paid on the loan or allowance. This may be operated as part of a larger flexible benefits scheme 

Add a note herePrivate Petrol
Add a note hereFree private fuel remains a top and senior management benefit. It is taxable, with tax again being based on the CO2 emissions of the vehicle in question. For many company car drivers, the tax charge on free private fuel may well be higher than the value of fuel provided, and this has led to many organizations reviewing their policies.

Add a note hereCar Allowances
Add a note hereWhere cars are not provided but are used regularly for business purposes, many employers pay car allowances. These should be designed to make a sensible contribution to the cost of depreciation, maintenance and other running costs. A car used on business will inevitably need replacement earlier than one used more occasionally. Organizations such as the Automobile Association provide guidelines on running costs as a basis for setting allowances.

Add a note hereMileage Allowances
Add a note hereThe cost of fuel used on business journeys is normally reimbursed. For company cars this will be on a mileage rate which reflects the actual cost of petrol or diesel. For employees' own cars, there will be an addition to compensate for wear and tear. These rates vary both in relation to the price of fuel and market practice. They may also vary in relation to total annual business mileage. The full allowance may be payable for short journeys, but a lower allowance can apply for much longer journeys. Again, the Automobile Association figures are often used in setting the level of allowances.


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