UK: Still mad about the company car.

UK: Still mad about the company car. - Despite the threat of being hard hit in the next Budget, the love affair between drivers and their company car is still in full flourish.

by Mark Payton.
Last Updated: 31 Aug 2010

Despite the threat of being hard hit in the next Budget, the love affair between drivers and their company car is still in full flourish.

The worst wasn't that bad after all. The collective sigh of relief from the nation's company car drivers following Gordon Brown's first Budget was almost audible: what had promised to be a savaging transpired to be more of the same: fuel up (although it broke the giddy £3-a-gallon barrier in some regions), and a little on road tax.

But while the increases will doubtless drive private motorists into smaller, more frugal cars, company drivers remain entranced by their funded wheels: 'punitive', it seems, is in need of a drastic redefinition before it is allowed in their dictionary. Of course, we may yet still see a redefinition in the next Budget. Included may be a tiered road tax system (based on vehicle size), a hefty bill for using the firm's car park, and an end to what Labour perceives as a discount for high-mileage company drivers (who enjoy a two-third reduction in the tax bill if covering more than 18,000 business miles a year).

Until that dreaded day, Britain's fleet drivers will make hay. Analysts predict a healthy swelling of the UK fleet during this year, up by 200,000 from last year's three million. In 1996, every second new car sold was paid for with a corporate cheque.

And far from rationalising in the face of Labour's not-so-veiled threats, industry's reliance on fleet is growing: company car sales have rocketed by 13% in the past four years, compared to just 7% among private individuals.

So why, when it could so obviously end in tears, are British drivers so enamoured of the company car? Perhaps the answer lies in the latest Lex report on motoring, and its research into the take-up rate among companies offering the cash-for-car alternative. Despite being billed the 'next big thing' just a few years ago, only 5% of employees in the 6% of companies surveyed offering the alternative were happy to give up their company cars. It seems that company drivers would rather lose their teeth than their cars, a theory that cynics believe is a foundation of Brown's revenue-generating policies.

'What industry observers failed to consider before making their pronouncements is the benefit and importance of hassle-free motoring,' says the latest British Vehicle and Rental and Leasing Association (BVRLA) annual report.

'Employees place significant value on their ability to hand over their car problems to a specialist third party.'

It's a view shared by Geoff Cobley, managing director of Fleet Management Services. 'I don't see the fleet market changing dramatically in the next few years,' he says. 'The drivers may carry an extra tax burden, but they don't want the risk of owning a car.'

And when a typical company driver is covering twice the annual mileage of his or her private counterpart (18,000 miles against 9,600 during 1996), who is to say that those fears are without foundation?

John Peachy, a commercial manager for B&Q, typifies the attitude of so many company drivers. Covering 45,000 miles a year in his Peugeot 406 2.1 turbodiesel, Peachy is well aware of the value of his company car - and isn't about to surrender the privilege. 'The level of tax on the car isn't a worry - I do well over 18,000 miles, and the mortgage on the house isn't what it was. As for the future, I don't really think about the next Budget.'

It's hard to argue against Peachy's case. Even with a 40% personal tax rate, his £18,750 406 costs just £75 a month in tax (including fuel benefit, but without any mobile phone or capital contribution on his part). A private buyer would face a personal contract purchase (PCP) monthly bill of £450-£500 for the equivalent. Even with a supposedly hassle-free lease arrangement, that private buyer would then the risk of the underwritten minimum guaranteed future value of his or her chosen car not meeting the deposit needed for a new one.

Even for drivers with relatively low mileage, the emotional pull of the company car is strong. Gilbert Lemon, a 41-year-old corporate recovery manager for an accountancy firm, drives a 208bhp, sub-£20,000 Subaru Impreza Turbo. 'The company runs two policies,' he says. 'You either get to pick from the standard company car list, or else you can choose your own - with the catch that you have to take the car if you leave under your own power.' Lemon doesn't qualify for the full high-mileage discount, as he covers just 12,000 business miles a year. 'I'm waiting to be hit by the next Budget,' he says, 'and many colleagues are seriously reconsidering their company cars.'

Of course, some companies have been quick to make the cash alternative more attractive. According to the recent Companies and Cars: the Way Forward report from the environmental group The Ashden Trust, 'Schemes to support the maintenance of private cars can be a useful complement to providing cash for cars.' But it points out: 'Estimates suggest that the annual cost to the employer of providing a company car, plus fuel for 20,000 miles a year, is approximately one-third of the vehicle's capital cost.

So a decision to pay an allowance of 30%-35% of the capital cost of a car for a particular grade would be broadly cash-neutral for the employer.'

Some firms have tried to circumvent the issue by incorporating a car into a menu of benefits. Says Ron Matthews of NatWest's Group Vehicle Services: 'Select (the scheme) offers qualifying staff the choice of taking cash. The company expects at least 1,000 employees to take up the cash option over the next 12 months - some 300 staff didn't accept a status car, even when no cash alternative was available.' Matthews is clear on the overall benefits: 'Because they're using their own car for business, there is no incentive to clock up extra business miles to meet the tax breaks, which in turn reduces congestion and fuel consumption.'

Others have taken a slightly less subtle approach. Back in 1994, City bank Merrill Lynch simply removed status cars from its remuneration package.

Its fleet shrunk from 800 cars to three - a couple of pool cars and a limo.

Aside from negotiating a corporate deal with a taxi firm to help employees move from A to B, the bank also allowed staff with company cars to buy their vehicles at a quarter of capital cost.

But let's remember that these measures only see the light of day because of the company car's initial popularity. Of the 166 companies surveyed by the Monks Partnership last year, reasons for the low acceptance of cash included insufficient remuneration for the employee, financial uncertainty and plain inconvenience.

In a direct attempt to allay those fears, many fleet management companies now have personal contract leasing plans. The employee still pays for the car, but with all the convenience elements of fleet contract hire.

Says Nick Gafney of fleet management company Velo: 'Essentially the employer supplies a taxable cash allowance - effectively a pay rise, but internally earmarked as money for the car. Company cars are built into the business culture these days - employees do not want the hassle of looking after their own vehicles.'

Which is why Velo launched Velo Direct. The employee simply presents a menu (budget, length of ownership, mileage, preferred models), and Velo does the rest. He or she can then either lease the car via monthly payments, buy the car on hire purchase, or use a personal contract purchase scheme (PCP) with a guaranteed future value.

This is simply a variant on the PCP schemes offered by most franchised dealerships to private buyers. Velo Direct's spin is to scrub all of the grime from running a privately-owned car. Says Gafney: 'Aside from financing the car, we'll tax it and deliver it to the driver's door. If something goes wrong, or the car needs a service, one call to our control centre will have the vehicle collected, repaired and returned' - in other words, everything that the current company driver takes for granted.

But while some are making the cold turkey as painless as possible for employees, others are feeding the habit with schemes that make choosing a company car as flexible and painless as possible. According to the Lex report, almost half of the company drivers surveyed described their choice of car as entirely their decision.

As Steve Carmen at Lex Vehicle Leasing points out: 'The greater choice is creating markets that would have problems being sustained by the private market alone. Just look at the two big growth sectors in the past few years - 4x4s and MPVs. Both have been fuelled by the fact that company car drivers want something more distinctive than the usual repmobile.' Richard Drake is a case in point.

A growing family prompted 32-year-old Drake, who works in the customer services department at Rank Xerox, to choose a Ford Galaxy.

Even food giant J Sainsbury, winner of the 1996 Fleet Car Greenest Fleet Award, has to accept the car's influence as a status symbol. According to the company's head of facilities Nigel Rawlins, some serious 'creative thinking' was needed to balance their environmental intentions with status recognition.

'The company aims to reduce the fuel consumption of its fleet by 10% over three years,' says Rawlins. 'But while four-wheel-drives were banned from most of the allocation bands on environmental grounds, a model meeting the relevant fuel efficiency criteria was included for senior executives.'

Meanwhile, some smaller firms have realised that giving employees a freer hand can pay dividends. Take 19-year-old Paul Chill, marketing manager at publisher Nursery World Limited. Chill opted to spend his £10,000 on a classic - a 1983 Fiat Spider. 'I'd looked at a Porsche 911, but couldn't find one reliable enough within that budget,' he says. 'My car cost £10,000 - the same model is now selling for £12,000.'

Another example is Helphire in Corston, Bath, a business providing credit car hire and credit repair services to drivers involved in non-fault accidents. Twenty-seven-year-old claims manager Alli Hooton chose a BMW 318i convertible as her company car. 'A soft-top BMW was my dream car,' she says, 'I thought hard about the costs and I've already allowed for any tax increases in my budget.' Operations manager Victoria Bryant is equally enthusiastic about her MGF VVC: 'I wouldn't be able to afford the MGF if I were paying for it myself,' she admits. Group personnel manager Caroline Bailey meanwhile opted for an 'envy-inspiring' BMW 323i convertible.

The key to greater employee choice in larger or more flexible firms has been the emergence of whole-life costs, which have effectively taken the variables out of the motoring mathematics. They unite depreciation, fuel and maintenance under an easy-to-grasp cost-per-mile banner, widening choice for the driver and reducing risk for the employer.

Cowie Interleasing is just one of the big players to publish a regular menu booklet, sorting every major model into ascending cost-per-mile order. The result is real flexibility, with the company user realising that a Nissan Serena MPV, Suzuki Vitara 4x4 or Ford Escort Ghia hatchback will come in at the same price.

Not that the cost-per-mile equation banishes all witchcraft from the fleet game. Although competition is obviously a big factor, contract-hire and leasing companies also rely on the single biggest cost of ownership when setting a price - residual value. And despite the presence of two dominant trade price guides (Glass's and CAP), prices quoted for the same car can vary greatly.

Those residuals are also heavily reliant for their stability on government policy toward motoring. If next spring's Budget proves a savaging of business drivers, many of today's company fleets will suffer. Says Cobley: 'It isn't the companies that will downsize their fleet at first but the private buyers - they'll be keener than ever on small cars that are cheap to insure and cheap to fuel. That will feed demand for those types of vehicles on the used market, and therefore drive up their value. It doesnot take much effort to realise that the thirstier, cash-hungry cars will depreciate faster. And guess what many fleets are running today?'

The complexities facing the fleet manager don't end there. The table above presents most of the pros and cons of the various options, but there are still a few basic guidelines. Although buying outright is still the most popular form of fleet purchase, around 60% of companies with larger fleets (75 vehicles plus) are using contract hire, and it's easy to see why. Staff are not entwined in the hassle of disposing of cars at the end of their useful life, and you know how much your company will spend.

Contract purchase, meanwhile, favours pricier cars and smaller companies.

It has contract hire's low administration costs, but with a conditional sale agreement built in. The agreement can also include maintenance, and an option to resell back to the supplier. One warning, however - while contract hire and leasing invariably takes the hassle out of fleet management, beware of the buy-out clause, which can prove costly if you need to get rid of the car in a hurry.

Regardless of which service suits best, company car drivers continue to act as their own worst enemies. In the latest Lex survey, every prejudice against the fast-lane rep is reinforced: 78% had verbally abused another driver in the past year (compared to a survey average of 52%), one in five confessed to having read a map while driving at speed, and the same number had used a mobile phone while on the move. Almost half had driven when very tired (compared to a 31% average), while 40% had parked illegally (against a 27% average).

Some large operators have taken fairly dramatic steps to police their fleet - with mixed results. Marks & Spencer, for example, discounts the cost to the employee of a company car based on fuel efficiency. While this may not have forced many M&S staff into more frugal cars, it has made them safer. M&S environment co-ordinator Rowland Hill says that, 'Aside from aiming for environmental improvement, we also concentrated on safety, equipping cars with an airbag and anti-lock brakes where they were options.'

Rival food retailer Sainsbury's has taken a tougher stance toward economy, its aim being to slash the fuel consumption of its 1,800-strong fleet by 10% within three years. Weapons being deployed include interest-free loans for rail travel, driver training, and straight banning of thirsty vehicles from its car list.

Such manoeuvrings may yet prove the first shock waves of a seismic shift in fleet-buying policies before the next Budget: the chancellor has until then to evaluate just how much the industry and its drivers can stand.

Judging by the blind loyalty of the drivers to date, Brown may just be the first man in history to be planning a genocide that doesn't involve a single murder.

WHICH ARE THE MOST POPULAR COMPANY CARS? (JAN-JUNE 1997)**

Figures are for sales to fleets of 25 cars-plus

** Source: Top Fleet magazine

B SECTOR

1. Ford Fiesta 24,676

2. Vauxhall Corsa 17,895

3. Fiat Punto 11,499

4. Renault Clio 10,030

5. Peugeot 106 9,030

6. Nissan Micra 8,936

7. Citroen Saxo 6,918

8. Rover 100 6,549

9. VW Polo 6,535

10. Ford Ka 4,032

C SECTOR

1. Ford Escort 32,260

2. Vauxhall Astra 31,396

3. Peugeot 306 20,748

4. Renault Megane 14,927

5. VW Golf 13,184

6. Rover 200 11,528

7. Fiat Bravo/a 7,109

8. Honda Civic 4,370

9. Nissan Almera 4,099

10. Citroen ZX 3,471

D SECTOR

1. Ford Mondeo 45,272

2. Vauxhall Vectra 34,133

3. Rover 400 20,047

4. Peugeot 406 17,913

5. Renault Laguna 15,238

6. Nissan Primera 8,419

7. Rover 600 7,840

8. Toyota Carina 7,661

9. Citroen Xantia 7,044

10. Audi A4 6,206

WHICH FLEET POLICY WILL SUIT YOUR COMPANY BEST?

Outright Contract Hire

purchase hire purchase

Ultimate ownership with your

company Yes No Yes

Off balance sheet No Yes No

VAT on purchase price Yes No Yes

VAT on rentals N/A 50% reclaimable No

VAT recoverable on maintenance Yes 100% of VAT on

rental Yes

Cash-flow improvements No Yes Yes

Maintenance risk Yes No Yes

Ability to predict whole-life

cost No Yes No

Reduced administration No Yes No

Residual value risk Yes No Yes

Full corporation tax relief Yes No - £12,000+

only Yes

Company gearing reduction No Yes No

Specialist staff required Yes No Yes

Finance Contract

lease purchase

Ultimate ownership with your

company No Yes

Off balance sheet No No

VAT on purchase price No Yes

VAT on rentals 50% reclaimable No

VAT recoverable on maintenance

Yes Yes

Cash-flow improvements Yes Yes

Maintenance risk Yes Optional feature

Ability to predict whole-life

cost No Yes

Reduced administration No Yes

Residual value risk Yes Optional feature

Full corporation tax relief

No - £12,000+only No

Company gearing reduction No No

Specialist staff required Yes No

Source: Cowie Interleasing Company Car Comparisons.

Find this article useful?

Get more great articles like this in your inbox every lunchtime