The provision of company cars and/or car allowances is often a significant cost for employers and can play a key role in incentivising, recruiting and retaining employees. There is no one size fits all solution and the complexity of the decision making process should not be underestimated.
When an employer provides cars to its employees, the criteria used to determine entitlement and the cars offered can be an emotive subject. Some employers don’t consider company cars to be appropriate for their business, but these can play a useful role in rewarding employees and could help reduce employment costs.
We don’t provide company cars
If an organisation states that it doesn’t have a business need for company cars, it can be the case that their role and value has simply not been considered in detail. Company cars can be a useful tool in recruiting and retaining employees. If, for example, you are experiencing recruitment difficulties, the offer of a company car could provide an edge over your competitors.
We only provide cars on a business need basis
If this is the case, entitlement policies can sometimes be quite rigid; inflexibility can cause issues with drivers and it may not be a cost effective approach for the business. In addition, given that you are running a fleet, it is worth considering whether cost benefits can be achieved if cars are made available to a wider employee population. This does not necessarily mean that the company needs to bear the cost of any additional cars.
A reminder of the basics
The CO2 emissions rating of a car is used by HMRC to calculate the tax treatment. In broad terms, the tax charge for the employee, and the Class 1A NIC charge for the employer, rises in proportion with the list price of the car and its emission rating. The higher they are, the higher the liabilities that arise.
From an employer’s perspective, there are tax advantages for any leased car with a rating of less than 110g/km (the threshold is 50g/km for purchased cars) with a 100% first year tax deduction or capital allowance deduction respectively.
If you provide fully expensed cars, including fuel for private motoring, whilst this may be perceived by employees as an attractive benefit, very often the tax cost on the private fuel scale charge outweighs the cost of buying private fuel personally. In addition, for the business, with the added cost of employer’s NIC and VAT fuel scale charges, this is rarely a cost effective benefit. However, this does not apply to electric vehicles as electricity is not treated as a fuel for this purpose.
Why should I consider reviewing our current position?
If you don’t currently have company cars but do incur business travel costs, either due to employees using their own cars for business or other modes of transport, a cost analysis may show that introducing company cars could be beneficial, especially if part of the cost is borne by the employees personally.
If cash allowances are being provided, they may not be tax and NIC-efficient. However, they can in some instances be more highly valued by employees than a company car, eg if the fleet policy is restrictive.
If your employees use their own cars for business journeys, often referred to as a ‘grey’ fleet, introducing company cars can reduce the inherent health and safety risks. This would ensure that you remain in a strong position from a corporate responsibility perspective, as you will know that all vehicles are roadworthy and are fully insured.
If you do already run a fleet of company cars, allocation issues can be addressed and cost savings realised if cars are made available to all employees. This can be achieved without disadvantaging existing company car drivers and introduce a very worthwhile benefit to the wider workforce.
How can BDO help?
Given the ever increasing tax on company cars, the business case for looking at alternatives is certainly there. It is necessary to consider a wide range of factors in establishing whether company cars are right for your organisation. A number of solutions can be considered and there is no one size fits all answer.
We can help you consider the position for your business by:
- Accurately assessing costs and identifying potential savings arising from the introduction of a company car arrangement
- Helping design and implement a bespoke car policy to meet the specific needs of your organisation and, because we are independent, effectively evaluate the wide range of car and lease options available
- Liaising with HMRC to ensure that any new car policy is tax/NIC compliant, as well as cost effective.
For help and advice on the cost-effective use of company cars to reward your employees, please get in touch with your usual BDO contact or Andy Hamman or Shawn Healy.