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The company car: status symbol or tax nightmare?

As the tax changes begin to bite, the company car may be in danger of losing its pulling power. By Larissa Bannister

Provision of company cars can be a potential minefield for the hapless employer insurance, high accident rates among company car drivers, tax, maintenance, the possible introduction of congestion charges, falling resale values. And for the employee, ever-increasing tax on fuel and on the cars themselves has taken some of the gloss off the traditional status conferred by a shiny new company wagon.

Nevertheless, following a slowdown in the market for company cars in 1999, sales in 2000 were up again by 2.5% and despite economic uncertainty, analysts predict some market growth over the next two years.

Part of the reason for this buoyancy is the high number of business need users employees whose cars are intrinsic to their roles.

But as well as these users, there remain large numbers of perk car drivers, generally those at a more senior level, who receive cars as a measure of their status.

The emotional value of the car remains a factor they can be important tools for both recruitment and retention of staff. And the more junior the employee, the more likely they are to see their car as a status symbol and get enthusiastic about it. Meanwhile, for many senior management roles, provision of an expensive motor is seen as a prerequisite.

But now the company car market is facing its biggest shake-up for years. The new CO2 tax on vehicle emissions, which comes into force this month, penalises drivers based on the emissions of their cars rather than the amount of business miles they drive.

The likely effects of the changes are significant and raise a number of options for employers who want to alleviate the increased burden on their staff.

Perhaps the most obvious way forward is to ensure that employees have access to vehicles that are environmentally friendly and that they understand how the vehicles they drive will affect the tax they pay.

This is particularly important for business need users who will now face a significantly heavier tax burden but do not have the option of giving up their cars.

An employer must ensure that drivers understand that the increased tax burden is a government not an individual business initiative, and educate them as to ways that the burden can be reduced.

Gerard Gornall, market development manager, PCP, for Lex Vehicle Leasing, says that companies are already changing their fleet policies as a result of the new rules to include cars with lower emissions. We are seeing employees start to choose more environmentally-friendly vehicles, he adds.

Graham Rees, business development director of independent fleet management company Fleet Logistics, says the legislation will have a profound effect on the cars that people choose to drive.

It can even save the employer money, he adds. If, for example, drivers choose diesel cars then there will be savings on petrol costs. Another effect for employers will be that a large number of drivers will now make an effort to understand the tax laws because the car they choose will affect how much they pay, he continues. So employees will want more input on the manufacturers the company selects its cars from and will want to be more involved in fleet management generally.

Giving up performance for a greener machine is not, however, the only way to stop tax levels increasing. Another option for consideration is introducing financial compensation for drivers who will pay more tax under the new rules.

But business does not have a history of compensating drivers for increased government-imposed tax burdens and the financial cost would only increase every year, as cars with high CO2 emissions attract progressively higher taxes.

This could, however, be a short-term solution until the employer can alleviate the problem by making changes to its fleet.

These changes could involve provision of more flexible options. Personal contract purchase (PCP) schemes where employees use a cash allowance from the employer to purchase their own car avoid benefit in kind (BIK) tax because the employee rather than the company has ownership of the vehicle.

Lex Vehicle Leasing anticipates significant growth in the PCP market itself as a result of the new laws an increase of as much as 10%, according to managing director Jon Walden.

But variations on this theme are making PCP more attractive by offering company-wide PCP plans that retain economies of scale and, in some cases, employer control.

Although the details vary, these new schemes basically transfer ownership of the car to the employee. The employer, meanwhile, pays the employee a cash allowance which they can spend on funding a car through the scheme.

Like PCP, the schemes are flexible an employee can add to the employers allowance to get a better car, or choose a cheaper car and pocket the difference.

Fleet finance company Alphabet has introduced the Alternative Car Scheme. Unlike traditional PCP schemes, ownership is passed to the employee from the beginning, with the option that Alphabet will buy back the car at the end of the three-year term at a pre-arranged price.

The employees are assessed on an individual basis and dont have to arrange anything themselves. Mike Baldry, chief operating officer for Alphabet, says, From the drivers point of view, not only are they better off in terms of vehicle choice and tax payments, they also avoid exposure to the financial costs associated with private ownership, such as maintenance cost or falling residual values. A similar scheme called Driver Assured is run for Greene King by fleet management company CLM.

Some schemes even retain employer control over the type of car an individual purchases like Lex Vehicle Leasings soon to be launched Your Choice product.

Although the car belongs to the individual as with any PCP scheme, the company will be able to stipulate model and will arrange the funding and maintenance, explains Gornell.

But an individual cannot sign up to these new schemes on his own, as he can with PCP if an employer does not subscribe then neither can the employee.

The problem for the employer is that converting a fleet entirely is a costly and time-consuming business. According to HSBCs Business Car Expectations report 2002, just 15% of employers offer even a cash allowance as an option, let alone a personal purchasing scheme. And the benefit to the employer, in the main, is not financial its just that its better for the employee.

Which for some is enough in itself. Pat Turner, general manager for HR at the Norwich & Peterborough Building Society which has just converted all its cars to the Alternative Car Scheme says that the benefits of the switch are significant.

We wanted a scheme that offered choice and flexibility to the employee but enabled us to contain costs and make our car provision as tax-efficient as possible, he adds. This does all that and it enables staff to run the same sort of car that they had last year without being penalised.

Ian Bradley

Commercial Director

Rees Bradley Hepburn (advertising agency

Car Facts

  • Make: TVR Cerbera 4.5

  • Year: 2002

  • New car price: 46,500

  • Features: V8 engine, Hydratrak speed-sensitive differential

  • Employer pays: Purchase price, maintenance, insurance, petrol, NI

  • Employee pays: benefit in kind tax

  • Annual mileage: 24,000

    Ian Bradley is a bit of a car buff. Hes a big fan of motor sport and has owned three British racing cars over the past few years. Hes just had delivery of his new company car the impressive and sporty-looking TVR Cerbera.

    The Cerbera was originally devised in 1993 and like all TVRs is hand-built in Blackpool. Bradleys new company car will reach 60mph in 3.9 seconds, 100 mph in 8.1 seconds and has a top speed of nearly 200mph. He has chosen chameleon paintwork, which means the car changes colour from purple/black to dark green depending on the light.

    Its not a car for everyone, as Bradley himself admits. Although it is a four-seater, it is designed for speed rather than comfort and for fun rather than practicality. So if you drive 24,000 business miles every year, why choose this as your company car?

    Id always admired the TVR as a marque, explains Bradley, but they were never practical when I had a young family. Its only in the last four years that Ive been able to treat myself to a lightweight, powerful sportscar. It looks very special and even though its a pain to get into, once youve got in you dont want to get out again.

    As well as its impracticality, the TVR is a thirsty machine Bradley says he only gets 20 miles out of every gallon. Its also a noisy car to drive Bradley admits he rarely listens to the CD player because of the engine noise.

    TVRs have a reputation for being unreliable, he adds, but I did 36,000 miles in 18 months in my last one. I use it every day and it has let me down occasionally but its pretty good on the whole.

    Bradleys car is owned by his company, Rees Bradley Hepburn a top-three Midlands advertising agency. All directors, account directors, heads of department and some account managers have company cars. The directors cars are bought outright and appear on the company balance sheet as assets the remainder are on financial lease.

    As you would expect from an advertising agency, no opportunity for self-promotion is wasted a number of the cars also sport personal RBH numberplates.

    Distribution is based on need, says Bradley, and if you qualify, you can choose whatever car you want within a price band.

    Company cars are still a big perk for our employees even though they need them for work, he adds. My gut feeling is that people put a high value on them as status symbols.

    Because of the new CO2 emissions laws, Rees Bradley Hepburn is looking at alternative ways of financing its cars drivers will be hit badly because of high mileage and their high-performance vehicles.

    We are still working out whether to offer cash instead of cars or whether to increase salaries to compensate for the higher tax burden, says Bradley. The problem is that if we offer cash, people are likely to have to trade down which I know they wont be pleased about.

    Personally, Id be very unhappy if I had to give up my car, he adds. I dont really view it as a status symbol not many people want to drive TVRs but its important to me because of the link with racing.

    I will pay a big tax penalty next year although thats how it will be for most drivers of high-performance cars. Im not a special case and despite the cost, Ill be keeping the car.

    Ian Preece

    Assistant Managing Director

    Safeguard (health and safety consultants)

    Car Facts

  • Make: Toyota Prius

  • Year: 2002

  • New car price: 16,490

  • Features: petrol/eletric hybrid engine, DVD satellite navigation system, climate control, CD system

  • Employer pays: fuel, leasing, maintenance, insurance, NI

  • Employee pays: benefit in kind tax

  • Annual mileage: 25,000

    Ian Preece is one of the first company car drivers in the UK to choose to drive Toyotas new petrol/electric hybrid car, the Prius.

    The car has two engines, one normal petrol engine and one electric. When accelerating or going uphill, the car uses petrol normally. But at the same time, the engine, wheel and braking movements charge up the electric engine.

    Then, when the car slows down, the electric engine comes on and powers the movement. There is no need to plug in either the car itself or any batteries and the car looks much like any ordinary four-door saloon.

    It drives like any other car as well, says Preece. The only real difference is that its so much quieter when its slowing down, the engine is nearly silent and there is no air pollution.

    Preece used to drive a Toyota Lexus a meaty, powerful vehicle rather like a BMW 3 series. Last year, he agreed to carry out the first UK commercial trial of the Prius and was so impressed with it after three months that he decided to make the switch permanent.

    The major difference between the old and the new car is the running cost, he says. In the Prius, I managed an average of 54.1 mpg over the 7,000 miles I drove during the trial and the tank only costs 32 to fill on the motorway much less than my old car.

    I then worked out that a typical company car driver would save around 1,000 in petrol costs in one year, he adds. This could make a big difference to employers for a company that runs 1,000 company cars, the potential saving would be 1 million.

    The only downside to the Prius, he says, is the 1500cc engine. Its not a boy racers car, it wont accelerate at 100mph going up a hill, he adds. But it is a lot roomier inside than it looks and Im not a boy racer anymore anyway.

    Company car tax laws have got so prohibitive now, says Preece, that he no longer views his car as a perk, as he did 10 years ago.

    Its still worth having a company car because it removes all the maintenance and high mileage worries, he says. Its not a perk because I couldnt do my job without it like I couldnt without a computer, but my computer isnt taxed.

    He chose to trial the car in anticipation of the new CO2 rules. Now he has switched permanently, his potential tax savings are set to be significant.

    Under the old rules, he paid 3,225 in tax every year on the Lexus. When he got notice of his coding for next year, he saw that his tax figure had risen to 6,021 an increase of 2,796 on the same car.

    Changing to the Prius, he estimates, will cost him 50 less tax per month than the Lexus did under the old rules. The Prius is the lowest rated car in terms of CO2 emissions on the UK market other than purely electric cars which run from batteries.

    There really are no disadvantages and so many pluses, he adds. Im now going to make an effort to let people know how good the car is internally in the hope that a few of the staff will want to get one as well.

    John Roberts

    Group HR Director

    Greene King (brewery)

    Car Facts

  • Car: BMW 525 Touring

  • Year: 2000

  • Features: six-speaker CD player, in-car computer

  • New car price: 28,760

  • Employer pays: leasing, maintenance, fuel, insurance, NI

  • Employee pays: benefit in kind tax

  • Annual mileage: 25,000

    John Roberts chose his company car when he joined the company in October 2000 and just before he revamped company car provision across the business.

    Roberts selected a BMW for his family as well as his business needs. The car is luxurious, fast, fantastic to drive, he says, but it also offers great security and safety features and theres plenty of room for the three kids, child seats and their related baggage.

    Introducing more choice and flexibility to company car policy was one of Roberts first projects on joining Greene King. Previously, all cars were leased and staff were given few options.

    Employees can now opt out if they want to as long as they drive less than 8,000 business miles a year, he explains. Or they can choose to join a scheme we devised with our fleet management company, CLM, called Driver Assured. Its for high-mileage drivers who like the control of having their own cars but it gives them the option to bring those cars into our fleet management system. They avoid the tax and I dont have to worry about roadworthiness and other safety issues.

    Greene King employees are now given allowances dependent on their seniority. They then get to choose their car from around 3,000 vehicles. Drivers also have the option of contributing up to 20% above their allowance of their own money to get a better car or they can flex down to the bottom grade and take the cash difference.

    Why make all these changes? Company cars are an emotional subject, Roberts says. People do get het up about them and if they feel things are not right, you hear about it very quickly.

    In addition, says Roberts, having a competitive company car policy is important for recruitment and retention of staff. Its not a dealbreaker for me, but it can be for some people so its important to ensure that your car policy is competitive with or better than the competition, he adds.

    He also believes that different types of employees respond to company cars in different ways. People generally feel proud to have a nice car but there are some areas of the business where the type of car is more important than others, he says. Those in operational roles tend to be more concerned with cars than those in functional roles on the other hand, in my experience there is little difference in attitude between men and women.

    Personally, Roberts says, he is not particularly attached to his BMW. Its nice to have a good car with a nice badge but Id really prefer an off-roader. But when I joined they werent an option here.

    He anticipates that the new laws will have a widespread impact. I think itll work for the chancellor. Hes using an HR strategy reward for a certain type of behaviour. There will be a migration to smaller cars and diesel engines.

    The new laws presented Roberts with his own HR challenge. We did lots of presentations on the new policy, explaining that high business mile drivers would be paying more tax. Some of the staff were confused and had seen it as a company rather than a government initiative so we had to make it very clear that it was being imposed by the Government.

    The other problem facing Roberts and other HR directors is the delayed Budget Gordon Brown has moved it to 17 April, 11 days after the start of the new tax year.

    It struck me today that I will have to second-guess what the Budget is going to contain, Roberts comments. I dont know what changes the chancellor is going to make to tax on personal petrol, for example. If he does raise the burden, it might be better for a lot of people to hand in their fuel cards [which are used when filling up with petrol/diesel] and buy their own personal fuel. The problem is that by 17 April they will already have used them and so theyll be penalised for the year to come.

    What now for the company car?

    Tax changes

    Traditionally, company car drivers have been taxed on their cars as perks. Drivers were taxed on a percentage of the list price of their cars and the more business miles they drove, the less tax they had to pay.

    Under the new rules, drivers will be taxed on between 15% of list price for cars with the lowest emissions and 35% for those with the highest. Diesel cars attract an extra 3% on the tax percentage, although diesel models will fall into a lower CO2 band than their petrol equivalents.

    The effect on employees

    What this means for drivers will depend on the number of miles they do. Business need drivers, whose cars are essential to their work and who drive more than 18,000 miles a year, will now pay more tax than the 15% they paid before unless they drive cars in the lowest CO2 band. But in this band are vehicles like Ford Ka and the Nissan Micra not really practical for those long motorway trips.

    On the other hand, perk drivers, who receive cars as a measure of status, may well be better off under the new rules. If they drive less than 2,500 business miles per year, their old tax level was 35%. Now, only the most gas-guzzling machines like the Mercedes S Class - attract tax levels as high as 35%. So their burden is likely to be reduced pushing company car provision back to being an effective means of compensation.

    What if you fall between the two and drive between 2,500 and 18,000 miles a year? With previous tax levels set at 25%, Deloitte and Touche estimate that anyone in this band whose car emits less than 215g/km will be better off. So, unless your car is particularly high performance, your tax burden should remain largely unchanged. A BMW 3 series, for instance, will attract 25% tax under the new rules the same as it would have done under the old rules for drivers in this band.