CIPD - Company car policies

Pay and reward

Revised September 2008

This factsheet gives introductory guidance. It:

examines current options in company car policies
looks at possible future options.

Background

The provision of company cars has long been used as an incentive in recruiting and retaining staff. The majority of large organisations provide company cars, either for essential use or as a status reward or both. Figures on the number of company car drivers vary, though it is apparent that the number of company cars has fallen in recent years - the Department for Transport’s figures indicate that in 2006, 5% of household cars were company-owned, a fall from 8% in 1998/2000¹.

In April 2002 the tax position changed from one based on size of engine and number of miles travelled, to one based on carbon dioxide emissions.

Advantages of providing company cars

For the employer

It is a visible reward and confers status.
It is recognised as an essential part of the benefits package for recruiting and retaining quality staff.
It is a controllable reward scheme that does not increase the wage and pension bill (although there will be National Insurance implications for employers - see below - there are no NI implications for employees).
With a restricted choice of vehicles, it can reinforce a particular image of the company.

For the employee

Having a company car is very convenient as it removes concerns about servicing, replacement, etc.
It is a visible reward and it confers status.
In spite of considerable tax implications (see below), a company car still has a significant financial value, which is independent of salary limitations.

If there are so many advantages, why change?

The 2002 tax changes have made a company car economically less desirable for some employees.
Running a large fleet has become increasingly complex and costly for the employer.
New, flatter organisations and more openness are antipathetic to cars as status symbols.
A new, less rigid approach to employment and reward allows for a more flexible system of benefits.
Greater concern for the environment.

Considerations in traditional company car policies

Who is responsible for company car policy?

At its simplest, ownership of the policy may lie either with the personnel group, who want to use it as an employee benefit and incentive, or with the purchasing group, who see it as a direct business expense and want to manage the cost. In reality, the situation is much more complex and depends on other factors such as:

the size of the company, the nature of the business and what benefits are offered by its competitors
the size of the fleet and whether the cars are bought outright or leased (because of its flexibility, contract hire is becoming more popular than purchase)
distinguishing between the management of the policy and the overall strategy.

In many organisations, the traditional role of the fleet manager has virtually disappeared, with the function now performed either by an outside agency or from within the personnel group.

Outsourcing

An alternative to in-house control of the car fleet is to outsource, wholly or in part, to a specialist fleet management agency. This is especially valuable in companies with larger fleets where there are the advantages of economy of scale. Fleets of fewer than 20 are still almost always managed in-house, but even these smaller fleets are increasingly turning to outsourcing because of other advantages such as having replacement vehicles readily available.

The main benefits of outsourcing are:

it is guaranteed to meet the business requirements of having a fleet of reliable and easily replaced cars
outsource agencies are able to keep up to date with changes in legislation and with best practice.

What to offer company car drivers

Regardless of whether the fleet is company-owned, leased, or supplied by an agency, you have to decide on:

model choice - in an approved car list you need to decide between the financial advantages of a limited choice of models (a single- or dual-badge deal) and the incentive benefits of a much wider choice based mainly on value (although there may be some restrictions on inappropriate models)
replacement policy - the vehicle will be replaced after a stated number of years or a specific mileage or whichever of the two is reached first
allowing all those entitled to a company car to trade up or down (within the approved list) with an appropriate salary adjustment
offering a cash alternative to all drivers (see below)
offering incentives for company car drivers to switch to other forms of transport (see section on green issues).

It is also important to be explicit on the insurance cover provided.

Company cars and contracts of employment

Because the use of a company car may become an emotive issue, it is important that the scope of its use is covered in the contract of employment.

The contract should state:

what type of vehicle the employee is entitled to
whether it is available for private use and whether there are restrictions on its use
who is allowed to drive the car
when it will be replaced (typically based on age or mileage)
who is responsible for the cost of fuel, maintenance, tax, insurance and repairs
whether the car user is required to make a contribution in return for private use of the car
whether there are circumstances (such as extended leave or during a driving ban) when the vehicle may be withdrawn
the car user's responsibilities in respect of the vehicle.

Status versus essential user

The policy must clearly state the eligibility guidelines for each company car in either of these categories.

Status cars:

pay level - in an IDS study², the minimum qualifying salary ranged from £25,000 to £49,500, with £30,000 to £35,000 being the typical level
specific grade or position in the hierarchy.

Essential-user cars:

certain jobs eg in sales
more than a certain number of business miles per year (again in the IDS study², this varied from 3,000 to 18,000 miles, although 10,000 to 15,000 was more typical).

Alternatives to traditional company car provision

The aim of replacing, either voluntarily or compulsorily, existing company car provision with something different is to provide a scheme which is:

cost effective for the company ie easy to run and economical (preferably costing less than the existing scheme)
good for the company car driver (as a minimum, they should be no worse off)
seen to be fair by other employees
environmentally sound.

The basics

Although it is not mandatory, extra money is generally given in lieu of a company car. The choices are:

extra salary (typically for status car drivers): this is normal salary for all purposes including tax and pension
a cash allowance (typically for essential car users): this is not part of the employee's salary for the purpose of bonuses, pension etc and is subject to specific tax rules. In these circumstances, the organisation usually requires the employee to make available, and insure, a car for business use.

Cash alternatives

Many organisations offer a cash alternative to the company car. Although this often leaves the employee with the responsibility to fund, insure and run their own vehicle, in many cases (such as SMEs), a simple, well structured, well communicated cash allowance can be very attractive to both the employee and employer. From the organisation’s perspective, it reduces the administration involved in running a company car fleet, whilst the employee benefits from no longer being subject to company car taxation. Usually the cash allowance is paid in monthly amounts through payroll and is subject to tax and National Insurance Contributions (NICs). In addition, the employee is able to receive tax relief for business mileage travelled in their own vehicle by way of the Approved Mileage Allowance Payments (AMAPs). More details are provided below.

However, a word of caution is needed. There has been much recent publicity regarding the responsibility of company directors in relation to the health and safety of employees who drive on company business. It is important to note that this applies equally for those employees who take the cash option and those who opt for a company car. In both cases it is important that the organisation has effective controls that are properly communicated to ensure that employee safety is treated as a priority.

Approved mileage allowances payments

Approved mileage allowances payments (AMAPs) can be paid to employees who cover business mileage in their own cars. AMAPs are intended to cover all the business costs incurred in running a vehicle. For the first 10,000 miles employers can pay employees 40 pence per mile free of tax and National Insurance and then 25 pence per mile thereafter.

Because of the tax-efficient nature of AMAPs, they are also a key part of employee car ownership schemes. Such schemes typically replace the traditional company car scheme. As ownership is passed to the driver, the employee does not incur company car tax.

Employee Car Ownership Schemes

Some organisations have begun Employee Car Ownership Schemes (ECOS). ECOS allow employers to transfer the ownership of the car from the organaisation to the employees who are not taxed on the benefit of a company car. The employee enters into an agreement with a leasing fiorm for the purchase of the vehicle over an agree period and mileage. At the end of the period the car can be sold back to the leasing company with nothing more to pay, as long as the car is returned in an acceptable state. Alternatively, the employee can be offered the opportunity of retaining ownership of the car by making a single payment. The tax rules are complex, so specialist advice may need to be sought.

In certain circumstances, ECOS can offer financial savings to both the organisation and the employee. In a structured ECOS, there is usually one provider of vehicles which means the employee benefits from both better deals and also reduced hassle in sourcing and running their own vehicle. This combined with.cash payments and AMAPs can mean that those who cover many miles may be better off than if they drove a company car.

However, weighed against this, a structured ECOS tends to be more complex than a cash allowance arrangement. As a result, in some cases, employers have moved away from such schemes and back to providing company cars as they have found the costs, the amount of administration of such schemes and reporting to HM Revenue and Customs (HMRC) burdensome. HMRC hae recently reviewed AMAPs but have decided to leave the current system as it is.

Also care must be taken as the tax rules relating to ECOS are complex. For example some PCP arrangements do not involve ownership passing to the employee on day one. As the company is ultimately funding the arrangement (and particularly if there is any form of employer guarantee involved re default payments etc) then HMRC is likely to contend that the vehicles still falls within the company car tax legislation.

Employee consultation

Ideally, employees should be consulted before changes are made to a company car scheme, to find out what their preferences are but, whatever scheme is chosen, it must be explained fully so that company car drivers understand the reasons for the changes. If employees are not properly informed and, as a result, believe that a new scheme is solely a cost-cutting exercise, this may cause problems with motivation and staff retention.

Green issues

From 6 April 2002 the tax charged on the benefit of a company car is linked to carbon dioxide (CO₂) emissions. A growing number of company car fleets are now starting to review what cars are made available in order to get at the tax savings which in turn is helping to improve the environmental and support the organizations green objectives.

New cars can be checked on the Vehicle Certification Agency's website and older cars can be checked on the Society of Motor Manufacturers and Traders website (see ‘Useful contacts’ below for the links). The government is also considering other proposals such as taxing the provision of workplace parking to encourage work journeys using public transport.

In addition to meeting their legal obligations, it is desirable for organisations to support environmentally-friendly initiatives. Consider whether it would be possible to do some of the following:

encourage the use of greener cars (eg smaller and/or more fuel efficient) through your approved car list
severely limit the provision of free fuel
encourage the use of video conferencing etc in order to reduce the amount of travel to business meetings
organise and support a car sharing system
provide a works bus or subsidise park-and-ride tickets
give vouchers or loans to encourage the use of other forms of transport such as bicycles or public transport
provide free (or pool) bicycles and safety equipment
make good provision for cyclists by having secure and convenient bicycle parking areas, and shower and changing facilities for people who cycle to work.

One concern with cash allowances is that employees may opt for less environmentally friendly cars, such as second hand vehicles rather than new ones. However, it is possible to counter this by drafting the cash allowance policy to place controls over the vehicle which the employee drives for business purposes.

The Campaign for Better Transport (formerly Transport 2000) is a national campaigning organisation dedicated to encouraging sustainable environmentally-friendly transport. As an umbrella organisation, it brings together a range of over 40 groups whose aim is to provide real solutions to transport problems. They lobby government, seek solutions to transport problems that rely less on cars and more on public transport, cycling and walking, and develop green transport plans for employers.

Health and safety

Health and safety is a major consideration with both company cars and employee-owned cars, particularly the corporate manslaughter issue. There is a common misconception that this does not affect employees who take cash. In reality, an employer's responsibilities are the same. In an attempt to reduce this risk, some employers are moving back to providing a company car. However, there is no reason that effective driver safety polices cannot apply to employee-owned cars. This is now being recognised by a number of health and safety advisers who offer driver training and vehicle inspection training services that apply for both company cars and employee owned cars.

Company cars and fuel as a taxable benefit

When considering whether to provide company cars and fuel for private use, it is essential to consider the tax implications, since this provision results in significant additional taxes for both the employer (in the form of NICs) and employee (in the form of income tax). In particular, the provision of fuel for private motoring has become far less common due to the associated tax burden.

Tax on a company car is based on the value of the car and its CO₂ emissions. Since 6 April 2003, car fuel benefit has been based on a percentage of a set figure according to the car's CO₂emissions. There is growing interest in voluntary salary sacrifice arrangements to allow any employees to get a company car at zero cost to the company. The employee sacrifices the salary needed to fund the company car and pays tax on the company car benefit. However, it only really works for cars with low CO2 emissions (120g or less). In cases where employees are doing low or no business miles it often works out better than buying a car themselves out of net pay.

Further information on income tax and NICs including an online company car and car fuel benefit calculator is available on the HMRC website (see ‘Useful contacts’ below). They also publish a range of booklets and guides.

Workplace parking

This affects all drivers, not only those with company cars, but clearly an over-generous company car policy will have implications for the pressures on workplace parking. Workplace parking is an attractive benefit.

Providing a parking space is not a taxable benefit but providing vouchers or reimbursement of parking expenditure is, so the costs or problems of workplace parking should be taken into account when considering the overall cost of your company car policy.

Congestion charging

Congestion charging was introduced to London in February 2003. Companies may need to make clear if they will reimburse employees for journeys undertaken for business into the central zone.

Useful contacts

HM Revenue & Customs (formerly the Inland Revenue) This section of the website gives information on calculating company car benefits. You can also see their publications on company cars.

AA website
It is possible to check your own tax position on this website.

Society of Motor Manufacturers

Campaign for Better Transport (formerly Transport 2000)

Vehicle Certification Agency

Organisations offering Personal Contract Plans can be found under 'Car leasing & contract hire' in the Yellow Pages.

References

DEPARTMENT OF TRANSPORT. (2007) Transport statistics Great Britain. London: DfT. Available at: http://www.dft.gov.uk/pgr/statistics/datatablespublications/
vehicles/
INCOMES DATA SERVICES. (2006) Company cars & business travel. HR Study 817. London, IDS.

Company car policies