Future Strategy 2006 – Employers face overriding car liabilities

The rise in personal car usage doesn’t abate as organisations still shoulder onerous responsibilities if private vehicles are used for work purposes, says Curtis Hutchinson

Article in full

Tales of the impending demise of the company car are as old as the benefit itself and are invariably linked to a change in benefit-in-kind (BIK) taxation. But while the appeal of the most emotive of all employee benefits is on the wane, it is still too early to be writing its obituary.

Employee Benefits’ eighth annual Fleet strategy research, published this month, found that only 35% of managers believed a company car was an essential recruitment tool, compared with 65% that felt it was vital for recruitment and retention in 1998. Furthermore, 37% thought it would always be part of the benefits package compared with 42% in 1998.

So how has the most contentious and coveted of benefits lost its sheen? The answer dates back to April 2002 when the carbon dioxide emissions based BIK tax was introduced. By removing the tax thresholds linked to annual mileage – the further you drove on business, the lower the annual BIK charge – and replacing them with a system which directly linked an engine’s CO2 emissions to personal tax, employees are now more likely than ever before to question whether they actually need a company car. If they find they do, then they expect to have a bigger say in the size of the car’s engine and type of fuel it burns.

Under the new regime diesel cars became more attractive overnight because their engines produce lower levels of CO2 than similar sized petrol units. The government tried to stop a wholesale switch to diesel, which has been linked to particulates that can trigger asthma, by imposing a 3% BIK levy on all diesels except those that meet the cleanest Euro IV emissions standards. Despite this, many employees have found they are better off financially with diesel cars because they save on both BIK liability, despite the levy, and the cost of fuel, because diesel engines are more economical than their petrol counterparts.

The result has been a massive surge in the demand for diesel-engined cars, which currently account for a third of all new cars sales – according to the Society of Motor Manufacturers and Traders.

Nigel Wonnacott, the SMMT’s head of communications, says: "There is absolutely no doubt that the growth in diesel was prompted by the CO2 tax changes and it has been powered by the fleet and small business sectors. Company car drivers have identified the tax advantages and are quite simply getting more bang for their buck with diesel cars."

In fact one employer, Panasonic, the Bracknell-based home electronics giant, which has a 300 strong user-chooser fleet, phased out its petrol cars in favour of a diesel-only policy. But is now amending that policy to include petrol-electric hybrid powered cars and has just taken delivery of three of the latest generation Toyota Prius hybrid models.

Sue Fuhr, fleet manager, says employees at both ends of the employee spectrum sourced the cars, the drivers being attracted by their tax efficiency, private fuel savings, green credentials and technology.

While the market for certain kinds of cars is growing the total fleet market is in decline. Recent figures published by HM Revenue & Customs show that between the 1999-2000 and 2003-2004 tax years the number of company cars on the road dropped from 1.6 million to 1.3 million. In contrast, the number of employees receiving mileage allowances on the use of their private cars has risen from 210,000 to 570,000.

Peter Cooke, KPMG professor of automotive industries management at Nottingham Trent University, believes this decline in the number of company cars and rise in private usage should be triggering some corporate alarm bells.

"Although the provision of company cars has reached a plateau, employers are beginning to see that the different alternatives may not give them such good value when they factor in their duty of care responsibilities," he warns.

According to Cooke, companies that have offered cash allowances but not put procedures in place to check that employees have sourced good quality cars which are regularly serviced and maintained could be exposing themselves to great risk.

"The Health and Safety Executive will bring a high profile company to book over the way cars are used for business and the scale of their fine will be related to their turnover or profits. Organisations can no longer wash their hands of their responsibilities if private cars are being used for business," he adds.

Cooke advises that organisations offering cash alternatives should consider linking them to employee car ownership plans (Ecops), which retain a large degree of corporate control and use a specialist fleet management company to police the administrative framework needed for compliance. The company car debate is set to continue as the sector evolves to address the broader issue of corporate responsibility in the workplace. The irony is that while BIK legislation drove many employees out of their cars, employers might find themselves trying to coax staff back into a more formalised scheme once they have weighed up the true costs of the alternatives.