UK: THE PERK THAT DOESN'T PINK - COMPANY CARS. - Company cars - There appears to be no stopping the company fleet. As fast as successive chancellors have managed to increase taxes, so sales have risen.

by Kevin Eason.
Last Updated: 31 Aug 2010

Company cars - There appears to be no stopping the company fleet. As fast as successive chancellors have managed to increase taxes, so sales have risen.

They sit in ranks on the drives of thousands of suburban homes: shiny, new - and paid for by someone else. The company car is as British as roast beef and Manchester United, an essential part of the pay packet for millions of people. Companies spend as much on their car fleets - more than £13.5 billion - as the Government spends on law and order every year.

Fleet sales are also the driving force behind the survival of Britain's single biggest manufacturing industry, keeping car plants running during the recession when they otherwise would have been closed down if they relied on orders from customers in the high street.

But there can have been fewer more conspicuous targets for government attention over the past few years than the product which has kept thousands of sales representatives, managers and district nurses mobile. Pilloried and reviled by anyone who does not have one, the company car became the cash cow to be milked by a succession of chancellors. Tax rates on the personal benefit that accrues from company cars trebled in just eight years.

And there was more to come. The rules governing personal benefits were given their biggest shake-up from May this year, ending years of abuse of the system, getting rid of the anomalies and unfairness that had helped bring the company car into disrepute.

The changes had fleet managers reaching for their calculators and fearing the worst amid a deluge of predictions about the end of the company car, with more and more companies offering the alternative of cash to employees worried that their annual tax payment would be more than a car was worth.

They need not have worried. There seems no end to the growth of company fleets in spite of the greedy attention of the Inland Revenue. At a time when fleets were expected to dwindle, sales to companies are taking a bigger share of the market than ever. Ten years ago, fleets of 25 cars and over - the official motor-industry definition of a fleet - accounted for about 22.6% of annual sales. Last year, that share was at a record 41% and rising. In the first five months of this year, the fleet share had topped 48%. However, carmakers estimate that the true figure for company car sales is nearer to 75% when small firms, whose purchases do not show in the statistics, are taken into account. Solicitors, doctors, surveyors and the self-employed may not be buying in bulk but their cars are still very much a part of the business. That means almost 1.5 million cars this year could be paid for by a company cheque. If chancellors Lawson, Lamont and, most recently, Clarke thought Budget changes to tax legislation would put the brakes on the company car, then they have been proved hopelessly wrong. As fast as tax has risen, so have sales to company fleets.

Colin Grant-Wilson, managing director of Lease Plan UK, Europe's biggest vehicle-leasing and fleet-management company, says simply: 'The company car remains a good deal for most people. What is so often overlooked is that the company car is an essential tool for the vast bulk of employees.' It is in the interests of the company to have control over the cost and quality of the car. Even though company motorists are paying more tax than ever, using a car that is bought and paid for by someone else is still an irresistible attraction. Apart from not having to go through the torture of buying a car, there are none of the worries that beset a private motorist of the regular servicing bills or the major breakdown.

No wonder that Britain is curiously driven by the company car. There are obvious fleet-car users: sales representatives and the like. But the company car really became part of the industrial fabric during the 1970s when government pay restraints prevented firms from offering wage rises. Instead they rewarded staff with a car. Now it is an important part.of the pay packet in thousands of key jobs, with an estimated 3.5 million workers using a car provided by their company. According to the annual Monks Partnership study of fleet trends, 99% of chief executives, chairmen and senior managers are offered a car with the job. The incidence of company-car use does not drop under 90% until below departmental-head level.

There was little doubt that the company car was one of the most effective perks in industry, virtually a tax-free asset at the start of the '80s. And the rules for taxing personal benefit on a company car, based on engine size and miles covered, were a shambles.

That meant that an executive using an expensive Mercedes-Benz that went no further than the golf club could be paying virtually the same amount to the Inland Revenue as a hard-pressed sales rep dashing the length of Britain. In trying to tax the perk user, the Government ended up punishing those who most needed a company car. The result was the May changes which switched the personal-benefit calculations from engine size to 35% of the car's list price.

That change has swept away the inequities of the system and replaced it with a simple structure which is transparent: the more expensive the car, the more you pay in tax. A 25% taxpayer in a £12,000 Vauxhall Cavalier covering about 20,000 miles a year would have paid £374 to the Revenue in the 1993/94 tax year; this year, the bill has dropped by £13. But an executive driving a £76,000 Mercedes S500 coupe as a perk will either have to grin and bear the punishment or change the car. The tax bill has jumped in the same period from just over £6,000 for a 40% taxpayer to almost £11,000.

If not as dramatic as that example, there will be about 700,000 drivers contemplating tax increases of up to 40% this year, presaging turmoil in the fleet industry and considerable confusion among carmakers.

Manufacturers are still not sure whether drivers will 'downsize': that is, decide to choose a cheaper car to save on tax. There is no doubt that carmakers have built up successful followings for some mid-range models by filling them with a whole range of extras, from electric sunroofs to airbags, simply to attract company-car drivers searching for something cheaper to cut their tax bill without giving away the luxuries they enjoyed in a bigger car.

Judging the mix of cars is vital for manufacturers. One look at the sales statistics show some cars sell almost entirely to fleets with barely a customer to be found for them in the showrooms. Vauxhall had the best-selling fleet car last year with 77,918 of its Luton-built Cavaliers going to company users - three times as many as were sold to private buyers in retail showrooms.

But there is also evidence that company-car drivers are prepared to pay for cars they really want. Sales of executive and luxury models tumbled during the recession but are reviving as companies return to the marketplace, probably as they replace models that were given an extended life throughout the lean years.

Tom Purves, chairman of BMW (GB), says: 'The top end of the market is improving all the time. We may not see a return to the best years but we have no real idea yet of what the model mix is going to be. There are people choosing models such as a highly specified 3-series instead of a large car but there are many people happy to stick with a big car because that is exactly what they want.' If what they want is expensive, then the option of the company car is still best - for company and employee.

According to Lease Plan's calculations, the employer wanting to 'buy out' the driver of the Mercedes S500 would have to pay £20,000 a year - twice the tax bill and considerably more than the company leasing the car.

Not only is that an expensive option but probably not what the company wants anyway.

As Grant-Wilson says, 'Companies would not want a senior employee turning up for an important meeting in an old banger. The car and the employee are ambassadors for the company so the company is making a statement about itself with the car. And companies want cars to be reliable and safe.

They are part of the investment in the employee.' More companies are offering the cash alternative, he adds, but there is precious little evidence yet that employees are taking it up.

The Centre for Automotive Management Research at Henley Management College found that the truth is that more employees are going to want a company car in future. It also traced a new phenomenon: the rise of the two-company-car household. As more women take management jobs, they too get a company car to park alongside their husband's.

That has widened the choice well beyond the boundaries of the ordinary four-door saloon that most people expect as the company car. Vauxhall found, for example, that a third of orders for its chunky Frontera four-wheel-drive vehicle came from companies.

Ross Law, a marketing manager with pharmaceuticals company, Bristol Myers Squibb, is changing his BMW saloon. His choice this time is between a Ford Probe, a £16,000 coupe all slinky looks and fat tyres, or a 130mph Volkswagen Golf GTi. For most company car drivers, the choice would seem like an extravagance but Ross can afford to dispense with the sensible saloon - his wife drives that.

Diane Law, a management consultant with a company called Oasis based in Maidenhead, Berkshire has ordered a Mercedes C-class model as her next company car. Ross says: 'We both need to drive for our jobs and our companies provide a good choice of model. The fact is that there is no way we would have two cars like these if we had to find the money. We simply could not afford it.' There is the rub for the British motor industry. Without the company fleet, there is no motor industry because the economy is simply not affluent enough to sustain the level of sales it needs to flourish. Private buyers invest in used cars and tend to buy cheaper and smaller models. A manufacturer such as Jaguar relies almost entirely on fleet sales for its business in Britain, whereas sales in the United States - its biggest market - are almost all retail.

But then, there are more buyers in the US with Jaguar-sized incomes.

So the fleet customer is the prime target for the motor industry - often to the chagrin of consumer organisations. They complain constantly that the fleet business distorts car prices to the detriment of the private buyer. Discounts of up to 40% for the biggest fleet purchasers, says the Retail Motor Industry Federation, are being subsidised by ordinary buyers who have to pay 10% more for their cars - around an extra £1,000 on the average family saloon. That may be a fact they will have to live with so long as the motor industry depends on a few powerful purchasers who order half of all new cars sold every year.

But the May tax changes have had one beneficial effect for everyone. Carmakers are engaged in a price war the like of which has never been seen in Britain before. If they are going to win company-car drivers - who know that higher prices mean higher taxes - then they have to keep the showroom stickers as attractive as possible. That has led to a glut of low-priced but highly equipped new models at prices little different from three or four years ago which the private buyer can also enjoy.

Grant-Wilson sums up the current situation: 'The car manufacturers have really had to compete on price and that is showing in the number of attractive offers there are in showrooms now.

'The fact is that company cars have helped lead the way in improved specifications, particularly on things like safety and exhaust emissions, and now are having an effect on the area of price. So the benefits of the company fleet are being felt wider than ever.'

The best-selling cars of 1993

Top 10 fleet cars Top overall sellers

Vauxhall Cavalier Ford Escort

Ford Escort Ford Fiesta

Vauxhall Astra Vauxhall Astra

Ford Mondeo Vauxhall Cavalier

Rover 200 Ford Mondeo

Ford Fiesta Rover 200

Peugeot 405 Rover Metro

Rover 400 Peugeot 405

Rover Metro Vauxhall Corsa

Vauxhall Corsa Renault Clio

New car sales by fleet* customers

Total market (000s) % fleet share

1984 1,750.0 22.6

1985 1,842.2 23.6

1986 1,892.4 24.9

1987 2,024.2 26.9

1988 2,227.4 29.4

1989 2,314.3 29.2

1990 2,022.2 36.0

1991 1,604.8 39.0

1992 1,604.4 41.6

1993 1,788.0 41.4

1994** 821.5 48.4

*fleets defined as more than 25 cars **up to 31 May.

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