This article was first published in the November 2012 UK edition of Accounting and Business magazine.
Fleets tend to evolve rather than be created, but whether you have a handful of cars or a fleet of hundreds, it is essential – and possible – to manage them with an eye to greatest efficiencies. Before any company can decide how best to approach this task, it needs to define its fleet. ‘You need to know what you don’t know,’ says Roddy Graham, commercial director for Leasedrive.
‘Be prepared to recognise that there are many more indirect costs than direct costs. Do a detailed analysis of the vehicles you have and look around the business to see who manages the cost.’
During the initial stages, Albert Vissers, CFO of Alphabet (GB), recommends approaching the British Vehicle Rental and Leasing Association (BVRLA), the Association of Car Fleet Operators (ACFO) or the Institute of Car Fleet Management (ICFM). ‘They will put you in touch with experienced people who can help you get started,’ he says. First, establish why you need the vehicles and what you need them to do. Then, to decide how to fund a fleet, carry out analysis of whole-life costs, ie not just account finance and maintenance rentals, but running costs, residual values and tax liability. A good vehicle leasing company will help with this. In addition, a company will need know its VAT recovery, weighted average cost of capital (WACC) and corporation tax relief rates.
‘For many companies, several funding methods may be the optimum approach,’ says Ian Hughes, commercial director at Zenith. The most common among these are outright purchase, contract hire, contract purchase, employee car ownership (ECO) and salary sacrifice (see below).
Outright purchase will probably not suit most organisations, although it does give the owner total control and flexibility. ‘The market is generally moving away from that, cutting out capital expenditure and concentrating on core business activity,’ says Chris Chandler, consultant at Lex Autolease. It is also labour intensive: a company that owns its fleet has to negotiate with dealers or manufacturers, decide when to get vehicles serviced and repaired, when to sell as well as getting tax discs, insurance and working out how to fund fuel purchase.
In addition, the vehicles end up on the company balance sheet. This is also true of contract purchase, whereas the other funded options are off balance sheet. However, prospective changes to International Financial Reporting Standards may change this status for contract hire for plcs.
For the moment, however, Chandler says it is the single largest means of funding. ‘There is a fixed monthly rental rate and the leasing supplier provides additional services so it is the least-hassle way of having an expert manage a fleet. It removes residual value uncertainty and maintenance is fixed, regardless of what needs to be spent on vehicles,’ he says.
Horses for courses
Fleets tend to answer a combination of business objectives. There are aspirational cars used to motivate a sales force, workhorse estate cars or vans for carrying around equipment, and perks that come with seniority or status, or as part of an employee benefits package. There has been a shift towards German brands to fulfil the motivational brief – Audi, BMW, VW – not just because they are aspirational but because they have efficient engines and therefore attract lower benefits in kind (BIK). These brands used to be out of the reach of many fleet drivers but with the introduction of smaller models, they can be made available across the choice list. In some industries, pharmaceutical and financial services in particular, competition plays a part – a good package attracts and retains the best people. ‘We get involved in a lot of benchmarking exercises so that companies can ensure their benefits proposition is in line with the sector,’ says Matthew Walters, head of consultancy services for LeasePlan.
Perk cars are becoming increasingly common because they are no longer overtaxed, with BIK being based on the list price and CO2 emissions, according to Leasedrive’s Graham. As a result, people are choosing cars on the basis of emissions, rather than emotions. ‘The company car park no longer looks like a beauty parade,’ he says. This is also age-related: the generation of 20 and 30-somethings has been brought up with the environment as a focal point, whereas the rest of us have learned to worry about ozone layers.
Companies can also restrict choice lists according to emissions to ensure greatest efficiencies in capital allowances. Alphabet advises capping at 130g/km CO2.
A close working relationship with a fleet management company makes the task much easier, allowing companies to outsource all or part of the responsibility. ‘The fleet management supplier should provide a dedicated account manager (or team, depending on the size of the fleet), who liaises with drivers to provide advice and support, as well as acting as an interface between the other operational teams such as maintenance and accident management,’ says Zenith’s Hughes.
In addition, Mike Curtis, corporate sales director of Arval, says: ‘Communication is key in understanding what your provider can deliver for you and in conveying your expectations of them. This will ensure that you get the best from them and deliver the best results for the business.’
Fleet funding options
The following vehicle funding options are the most commonly used and are defined by Zenith.
- Contract hire delivers VAT benefits. For cars, up to 50% of the VAT can be recovered on finance rental and 100% on maintenance.
- Contract purchase provides the option to purchase the vehicle at the end with a ‘final balloon’ payment. VAT is charged only on the maintenance element of the rentals.
- Employee car ownership (ECO) is a mechanism whereby the employee owns the car and it is funded via a combination of tax-efficient business mileage reimbursement and a taxable cash allowance. No benefit-in-kind tax is payable as HM Revenue & Customs recognises the car as privately owned.
- Salary sacrifice enables a wider range of employees to drive a company car and is significantly cheaper than a retail arrangement because salary is exchanged for the benefit before it is taxed, giving national insurance and income tax savings. An all-inclusive package means insurance, maintenance and price inflation are also catered for and the employee receives enhanced manufacturer discounts thanks to the employer’s buying power.
Catherine Chetwynd, journalist