Company car allowance: an alternative to giving company cars?

Giving employees a company car allowance instead of a car can help employers avoid company car tax. A company car allowance, also known as 'cash for car', is, put simply, cash paid to the employee instead of a company car.

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The company benefits by removing the cost term issues and administration of running a company car and the driver benefits because they will receive a pay rise based on cash they would have otherwise spent on company car tax. 

The shift to cash was partially driven by the 2002 changes in BIK (Benefit In Kind) tax, which removed many desirable status cars from companies’ approved lists.

Drivers can use the money to buy their own car, either by using conventional funding methods - outright purchase or hire purchase - or by choosing a personal contract purchase (PCP) or personal contract hire (PCH) agreement through a leasing company.

These involve paying monthly 'rentals' and a final balloon payment to either buy a vehicle outright (PCP) after a set term or hand it back after a set term (PCH).

Drivers using their own car for business can cover their motoring costs by claiming tax and NIC-free AMAPs (Authorised Mileage Allowance Payments). The government has set the target at 40p for the first 10,000 miles in a tax year; and 25p per mile thereafter. There is a risk that these payments provide drivers with an incentive to drive more business miles than is necessary.

Employee Car Ownership Schemes

An employer may transfer ownership of a leased car to an employee under an ECO (Employee Car Ownership Scheme). These came about in the 1990s because the old BIK tax system penalised low mileage drivers.

Under an ECOS, the car is owned by the individual but paid for by the company. It’s like a cash allowance scheme but employees don’t get to choose their own car. The structure of an ECOS provides an element of security in terms of occupational road risk, as the employer can ensure that the vehicle is fit for purpose.

ECOSs tend to be structured schemes, fully underwritten by the employer, usually funded through an interest-free loan. Those who operate these schemes will know the pain of the year-end mileage reconciliation. They are burdensome to the employer in terms of reporting to HRMC, and extremely expensive to underwrite and administrate.

“You need to run monthly checks and returns and annually complex tax computations, which require outsourcing to expert consultants. The set up costs of these scheme are huge,” says Roddy Graham, chairman of the Institute of Car Fleet Management. “In the economic downturn, which saw a fall in resale values of cars, it has proved difficult for companies with ECOSs to recover their costs.”

Areas in which cash schemes fail to deliver:

• Unnecessary mileage claims.
• Liability – inadequate insurance. Is the car insured for business use?
• Liability – vehicle safety. Employers have a duty of care over their business drivers, even if they are in their own cars.

During the recession, cash became more expensive, while the price of new cars fell in real terms. So many employers found themselves paying, for example, a £5,000 cash payment to an employee in lieu of a car that would have only cost £4,000.

Most employees will opt to buy a used car with a cash allowance, and it is generally larger and less fuel-efficient cars that offer the best value second hand. This could adversely affect any carbon footprint goals that a company has.

Mixed funding specialist Opticar provides the following example of how a cash funded benefit could save a company money.

Take a typical fleet vehicle – say a Ford Mondeo 2.0 Zetec, driven by a driver who records 20,000 miles per annum, 17,500 of which are business miles. Assume that the driver is a 40% marginal taxpayer, that the vehicle is a company car supplied on contract hire, and that the company pays for all fuel. The net cost to the company would be £10,700.

What if the same driver was funded differently? Utilitising AMAPs available for employees who use their own vehicle on business, via a structured cash allowance such as a Personal Contract Purchase, offering the same level of support to drivers, the cost to the company could be as low as £4,300 per year.

Managing your 'grey fleet'

An employer retains responsibility for an employee’s safety even when he or she is in their own car, as it is a designated workplace, but these vehicles are essentially ‘off-radar’ as far as being fit for purpose goes.

When many companies unwound their company car schemes, many failed to realise that they would still have duty of care responsibilities over their business drivers, or ‘grey fleet’.

These five tips should help you keep tabs on your 'grey drivers':

1. Support your drivers so that they make an informed choice about taking cash instead of a car. They could spend the next three or four years wondering if they have made the right decision. Show them exactly what each choice means in terms of their tax position.

    

2. Check licences. Make it compulsory for all business drivers to submit copies of their driving licences (you have to have this by law). Better still, use a third party to run a thorough check with the DVLA.

    

3. Restrict choices to exclude soft tops or old cars. Staff will be resistant to any policy that comes across as heavy handed but it’s fair enough to proscribe that the vehicle has four doors, four seats and is of a professional colour.

    

4. Invest in a robust mileage tracking tool, preferably with a payroll reporting facility.

    

5. Tighten up the management of a mixed fleet. Many companies offer a casual version of this by offering car allowances and company cars alongside each other, but a specialist mixed fleet provider will manage a mixed fleet in the most tax-efficient way, and take care of all the mile-logging, occupation road risk and general administration tasks. This type of scheme would only be suitable for fleets of over 50 cars.

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