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Feature: Should we move from contract hire to PCP?

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Attractive monthly rates could hide a multitude of complexities for fleets, explains Professor Colin Tourick.

Professor Colin Tourick discusses whether fleets should move from contract hire to PCP

Professor Colin Tourick discusses whether fleets should move from contract hire to PCP

5,000 leasing industry executives just shuddered in unison.

I can almost hear what they are thinking. ‘Contract hire offers so many advantages. How could he even write that heading? It’s sacrilege!’

But a fleet manager just asked me this question so it must be legitimate to ask. It’s also very interesting question to answer. So here goes.

She actually said ‘I’ve seen a PCP advert on a broker’s website for a Peugeot 108 Hatchback 1.0 Active 5dr at £119 per month including VAT. That’s nearly £40 per month less than we’d pay on contract hire. Should we move to PCP? We could just give our drivers a cash allowance and they could get on with it.’

On closer inspection the quote wasn’t all it seemed. It was for a three-year PCP deal with six instalments being paid on day one, followed by 35 monthly payments. That’s 41 payments in total compared to the 36 the client normally pays on contract hire. There was also a £150 setup fee. And the deal was for 8,000 miles p.a. whereas the client’s cars ran for 12,000 miles p.a. Big differences.

PCP and contract hire are wildly different products. Under a contract hire arrangement the employer sets out the rules of the car scheme – how the vehicles are to be funded, who is entitled to what car and so on – and the car is handed to the employee.

Under a PCP agreement the employer would give the employee additional salary every month and the employee would then go out and get the finance.

There are some good deals available on PCP from brokers but the best deals arise when manufacturers offer special deals to brokers. These deals change frequently, so you could easily find that one employee got a great PCP deal one week which was not available the following week to a colleague of the same grade doing the same job and getting the same allowance.

And how much time do you want your employees to spend shopping around on multiple leasing companies’ and brokers’ websites, rather than doing their day jobs?

If 100 employees sign up for PCP deals with 100 different leasing companies, each contract will be different. No employer will read through all those contracts, so the employees – who probably have no expertise in reading PCP agreements – may well just sign the contract after a cursory glance at the small print.

If many leasing companies were involved consolidated reports and services would not be available. So the employer would need to start keeping their own records, for example to comply with health and safety legislation (confirming that the vehicles had been serviced, MOTs obtained, etc).

With contract hire the employer can use their buying power and can pool excess mileage. With PCP sourced from multiple suppliers this would not be possible.

Employees gladly choose lower-emission company cars in order to reduce their Benefit-in-Kind tax bills. But under a PCP arrangement the tax the individual pays and the CO2 emissions of the car they choose are unrelated, so CO2 emissions may in fact start to increase. Not great for your ‘green’ credentials.

Under a PCP arrangement the employee’s cash allowance is taxed at their marginal rate of income tax, and under most schemes the driver would be reimbursed for business mileage under the normal 45p/25p arrangement. So rather than simply paying a standard rate of BIK tax the actual cost of private usage would vary wildly, depending on how many business miles the driver covered. Former company car drivers opting for PCP could well find that the cash allowance the company is prepared to pay leaves them out of pocket.

The cost to the employer would also be wildly different. Most businesses get tax relief on a proportion of the lease rental and pay Class 1A National Insurance on company cars. Employers get tax relief on the cash allowance but have to pay employer’s national insurance. This is not to say that they employers’ costs would automatically rise if they moved from contract hire to PCP, just that the costs would be different and would need to be modelled.

Under a contract hire arrangement the supplier normally manages servicing, duty of care checks etc. As the employee would be contracting with the supplier under the PCP arrangement, things would be very different, particularly if dozens of leasing companies were involved. Management control by exception would be particularly difficult.

As discussed in previous articles, if an employee has the option of receiving a cash allowance (PCP) or a company car, the optional remuneration rules apply. The employee would be taxed on whichever generated the highest income tax liability. Ouch.

At the end of a PCP agreement things get tricky. Normally under PCP the client has a number of options: hand back the car; pay a lump sum and take title to the car; or use any ‘equity’ in the car as a deposit towards another PCP deal. There will be equity in the car if it is worth more than the guaranteed minimum future value – an amount written into the contract on day one.

If under a PCP agreement there is say £500 of equity left in the car (effectively an employer-funded profit – hmm…) will you as employer expect them to put this down as a deposit on their next car, or require them to return it to you, or take it into account when deciding how much cash allowance to give them for their next car? And what if they’re happy to just keep on running the existing car, or need to run it because they have to wait three months before the replacement arrives? The funder will be expecting to receive the final balloon payment. Who will come up with that cash, and how does this all play into the OPRA rules? Nightmare.

The bottom line…

Most fleet managers who read Fleet World run fleets in excess of 100 vehicles. If it was possible to put together an employer-sponsored PCP deal with just one supplier, using the employer’s buying power and one standard form of employer-negotiated contract, with consolidated reporting and management tools and where the supplier managed the ‘fleet’ on one set of rules on behalf of the employer, it might just be possible to how PCP could supplement contract hire, though whether it would actually deliver any savings is another matter.

Maybe one day a leasing company will come up with a PCP/contract hire hybrid product that optimises product selection in much the same way as some for years have offered ECO/contract hire hybrids.

Until then, best to stick with contract hire.

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