Richard Hipkiss, Managing Director of Fleet Operations, outlines the pros and cons of company car options for you and your workforce.
The UK is returning to work following the extraordinary coronavirus crisis. But the impact of the pandemic on our daily lives has not gone away.
Social distancing has become embedded in our national psyche, and although the government has eased restrictions and softened its advice – including on the use of public transport – Covid concerns remain.
The car has long taken centre stage as the principal mode of passenger transport for UK businesses – and this looks set to be cemented in the weeks and months ahead, with many social distancing-conscious commuters being likely to favour car transport over packed trains and buses.
For businesses, car provision – in the form of either company cars or cash allowances – is an integral element of employee benefit packages, acting as an important tool for recruitment and retention.
But what should be offered, and what should be selected? These difficult decisions, for both employers and employees alike, are dynamically influenced by our ever-changing social, economic and fiscal landscape.
In recent times we’ve seen everything from the introduction of WLTP emissions testing and new company car tax rates to disrupted working patterns in the wake of Covid-19 and a government offensive to incentivising electric vehicles (EVs) as it looks to ban the sale of new petrol, diesel or hybrid cars by 2035.
There is no ‘one size fits all’, but by outlining some of the key considerations, we hope to help you to make the right decisions for your business.
The case for the company car
In his 2020 Budget, the UK Chancellor confirmed that company car drivers will face no benefit-in-kind (BIK) tax bills in the current financial year for zero-emission vehicles.
The introduction of the zero percentage BIK rate was a welcome boost for the company car, with orders for pure electric vehicles surging in the wake of the Chancellor’s announcement.
The market response was understandable. From an employee’s perspective, they are now able to drive a new, safe, gadget-packed and environmentally-friendly electric vehicle, without facing the financial burden of a weighty tax liability.
This is because there is now no BIK tax, as would normally be the case. Unlike those in receipt of cash allowances, which in some cases may lift them into the 40 per cent tax bracket, there will also be no additional national insurance (NI). Further savings may also be realised where these cars are provided via salary sacrifice arrangements.
And the case for the company car doesn’t end there. Under company car schemes, employees don’t have to shoulder any of the risk and reliability uncertainty that can come with new EV technologies. Maintenance and servicing is taken care of by their company –– along with their insurance.
For fleet operators that engage the services of an outsourced fleet management specialist, meanwhile, company car schemes can also be relatively easy to set up and administer.
Companies can claim back 50 per cent VAT on contract hire costs, as well as 100 per cent VAT on fleet maintenance costs. Furthermore, because there’s no BIK on EVs in the current tax year, companies face no employers’ NI bills. EVs, as a consequence, are increasingly finding their way onto fleet choice lists.
So the company car is a no-brainer right? Well not quite, an argument can still be made for the cash allowance.
Is cash still king?
Prior to the government’s recent BIK incentive for EVs, tax considerations, combined with the flexibility of cash allowances, led to increasing numbers of UK employees opting out of traditional company car schemes.
Cash allowances – additional sums of money added to employees’ salaries to spend on their preferred mode of transport – became the flavour of the day.
Let’s take a closer look at the reasons behind this.
BIK tax has continued to rise over recent years, with an additional four per cent added to diesel cars. Irrespective of what the vehicle of choice may be however, BIK holds no concern for those opting for a cash allowance.
Although tax and national insurance is still due, these apply at the normal rates as part of employees’ salaries. There is no requirement for employers to submit a P11D form to HMRC at the end of each tax year for every member of staff who’s benefitted from a company car – helping to make the process a straightforward one for both parties.
Freedom of choice must then be factored into the equation.
To a greater or lesser degree, company car choice lists will always be restrictive, even if companies offer some employees the option to trade up or trade down. The total flexibility for employees to buy or lease whatever cars they want – as long as they abide by company policies set in place to avoid business embarrassment – should not be underestimated.
Should their circumstances permit, they can even opt out of a car completely and instead put their money towards paying for public transport, taxis, bikes or other mobility solutions.
For those that already drive a good, reliable car, a cash allowance can be regarded as a welcome bonus to spend however they choose.
A third way?
The UK business ship is chartering a course through troubled waters. Many economic experts are not expecting activity and output to reach pre-pandemic levels until the summer of 2020.
The road ahead is uncertain and as companies focus on protecting their balance sheets, for many, long term plans and business commitments have either been scrapped or put firmly on the back burner.
While question marks linger over the future of the UK plc workforce, they linger over the prospects of employers bearing the cost of early contract terminations for longer-term contract hire vehicles, should they be forced to scale back their operations.
Some companies may be understandably wary of committing to long-term leases until their businesses and the wider economy feel more stable.
Short-term hire offers flexibility but can prove expensive if it’s not carefully controlled, and can result in an unanticipated administrative burden, with vehicles being regularly swapped by providers as they hit predetermined mileage or age limits.
Mid-term vehicle leasing bridges the gap between short-term rental and longer-term contract hire, offering a flexible third way.
For an assessment of, or advice concerning, your fleet requirements, please contact us on 0844 576 8000 or email firstname.lastname@example.org