A few things to ponder about cash allowances…
Professor Colin Tourick reckons it’s time to re-assess your approach to cash allowances.
The Society of Motor Manufacturers and Traders’ (SMMT) international automotive conference is an impressive affair that brings together very senior people from motor manufacturers, dealer groups, government, trade bodies and others who are interested in the future of the automotive sector.
This year’s conference on 20 June included several sessions covering topics that were relevant to fleet managers, such as how Brexit is likely to affect the automotive sector and the overall UK economy, the rise of mobility solutions and how buyers and sellers in the sector are likely to operate in future (the long term outlook for motor dealerships in a world where people are increasingly buying things online).
Whilst different people had different views on the effect of Brexit on the economy and the sector, it was notable that these ranged from the cautious (“it’s going to be difficult to get a good deal, particularly given the short time available”), to the pessimistic (“the country has shot itself in the foot and we shouldn’t expect any good news in the short to medium term, and maybe not even in the long term”.) So the level of optimism ranged from perhaps two to six out of 10. No-one was expecting Brexit would be a roaring economic success and most spoke of the hurdles ahead, especially given the need to keep the EU together and discourage others to follow the UK through the exit door.
One presenter pointed out that one of the big challenges the sector faces when it tries to adapt to customer needs is that it operates in such deep silos. If you want to buy a fridge you can go to one retailer where you will see many brands. In most cases you can’t do that with cars. That fridge retailer might have a website where you can select what you want according to your own specification. You want a white, 90cm wide, 120cm high unit split 50/50 between freezer and fridge sections and an A efficiency rating? No problem; with a few clicks you’ll get a list of fridges meeting your requirements, across all manufacturers.
But if your company car driver is searching for a car costing no more than £350 per month (their allowance); with CO2 less than 110g/km (in accordance with your company policy); and any engine other than diesel (because they are worried about the possibility of HMRC knocking on the door to charge BiK tax, ERNIC and EENIC based on NOx emissions [and also because it gave me the chance to squeeze a ridiculous number of acronyms into one phrase]); with five doors and a low rear sill (to allow for easy loading of their child’s pushchair); a maximum length of four metres (to fit in their garage) and wing mirrors that fold in electronically (because there is a width restriction in their road), they will very quickly find that their leasing company’s ‘car configurator’ will only get them so far – they will have to start digging around manufacturers’ websites to find the car they require.
One day someone will come up with a website that can do this, and when they do fleet managers and their drivers will rejoice because it will make selecting a vehicle so much easier. Way too much time is currently wasted by user-chooser drivers carrying out research on which car to choose, or by fleet managers trying to work out which cars to add to fleet allocation lists.
This silo approach was also apparent when the presenters discussed mobility solutions. Manufacturers have committed billions of pounds over many decades to developing and manufacturing new cars, and they want people to buy them from dealerships that have invested heavily in their brand and then drive them away. However, people who grew up in the internet age really don’t get the idea of owning a car and prefer to use public transport, Uber or a shared car, and are waiting for a new operating model to emerge that will allow them to have a car when they need it and to hand it back when they don’t. A car club on steroids, integrated with other services.
This then is another challenge to the fleet industry, and one to which, to be fair, they are rising. It won’t be long before we see much more flexible solutions on offer, but it remains to be seen whether those will come from manufacturers or new entrants who will arrive and disrupt the market. My money is on the disruptors, though leasing companies should be well placed to pick up a lot of this ‘mobility management’ business soon, if they can find ways to marshal vast amounts of data gleaned from multiple sources (public transport operators, rental companies, car clubs, company fleets, etc[and maybe one day the actual cars themselves]) and turn these into solutions that deliver the optimum journey solution for each journey and each trip – lowest cost, shortest time, least CO2 – in real time. No mean feat, but companies that crack this problem will see their fortunes soar.
Talking of CO2, the BVRLA has produced its quarterly survey of members’ fleets and it makes interesting reading. The Association has been rightly proud that its members’ fleets have much lower levels of CO2 than the UK national average. The stats for the last few years show that emissions for new vehicles added BVRLA members’ fleets fell from 119.1g/km in late 2013 to 110.8g/km today, whilst the average CO2 for all UK new cars registered fell from 127.4g/km to 120.5g/km.
However, the emission levels of new cars added to BVRLA members’ fleets have stayed fairly static now in the 110.7-111.0g/km range for 15 months, which makes one ask the question – why?
In truth, it’s hard to tell. Part of the answer can be found in the growth of PCH contracts being written by BVRLA members. PCH has become increasingly important for them. Whilst new contract hire contracts grew by 21% in the last 12 months, PCH increased by 55% in the same period and PCH now accounts for 18% of BVRLA members’ fleets, up from 14% a year ago. PCH contracts have average CO2 levels of around 118g/km compared with 112g/km for contract hire.
BVRLA members write PCH contracts with small businesses (often sourced online or via brokers) but also through schemes set up with employers for employees who want to take a cash allowance rather than a company car. Do any of your employees use their cash allowance to buy a PCH contract? If so, and your company policy says you try to minimise CO2 emissions, it might be worthwhile for you to have a look at the emissions levels of the cars these employees are choosing. They are not subject to Benefit-in-Kind tax so the employee may think that they can choose a higher CO2 car because it will not affect their income tax bills. Whilst that’s true, it’s also true that higher-CO2 cars attract higher levels of vehicle excise duty, tend to be more expensive to insure and have poorer fuel economy, something you might like to bring to the attention of employees who use their cash allowances to fund PCH deals. Or it might be easier simply to introduce a cap and say that if a car is acquired using a cash allowance, and used on company business, it must have the same maximum CO2 limit you specify for company cars.
Another reason employees might now be choosing higher CO2 company cars is because of the Optional Remuneration rules introduced in this year’s Finance Bill. We looked at these in depth a few months ago so we won’t cover them in depth now. However, one of the changes – the ‘Type B’ arrangement – charges an employee to tax on whichever option generates the most tax; BiK tax on their company car or the cash allowance they might otherwise have taken. If your cash allowances tend to be pitched generously, an employee could easily find they are paying a lot of tax (on the cash allowance) even if they choose a car with a modest CO2 output. There is therefore little incentive for them to choose a low-CO2 car. They’ll choose the one they fancy up to the maximum value of their allowance, regardless of CO2 levels. This was the unintended consequence of this legislation.
These changes were only introduced for vehicles delivered from 1 April 2017, so they will not yet have sown up in the BVRLA’s stats but they are likely to have an impact soon. Now might be a good time to have a look at the cash allowances you are offering – the amounts and whether indeed you should be offering them at all – particularly if only a small proportion of your drivers actually opt for the cash allowance.
Professor Colin Tourick MSc FCA FCCA MICFM
University of Buckingham