Jamin Robertson asks if cash allowances encourage drivers to do high mileage
Case studies: Chard, Whitbread
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Questions have been raised about drivers who receive cash allowances using attractive fuel reimbursement rates to run up excessive amounts of mileage.
Employees who have transferred into haphazard cash alternatives may envisage a profit from the wedge between reimbursement rates and their actual fuel costs, and so see an incentive in claiming excess miles.
According to Employee Benefits fleet strategy research 2006, 65% of employers offer cash allowances as an alternative to company cars. So despite the drive to cut carbon dioxide emissions, are cash allowance arrangements having the opposite effect?
Graham Rees, managing director of fleet consultancy Fleetworx, outlines the problem: “Employers are looking rather more simply at cash allowances, perhaps using lease rates as a basis for the amount of cash that they pay people. The dilemma for the employer is that the most efficient way to build a cash alternative is to provide as little as possible in terms of cash and as much as possible in terms of business mileage.
“The catch is that because of the huge variance in mileage from one driver to the next, compensation will be quite different [so] some will come up short against what they need and some will be over-compensated.”
Employers often have a varied approach to approved mileage allowance payments (Amap), the HM Revenue & Customs (HMRC) facility which allows employers to reimburse staff up to 40p per mile for the first 10,000 miles and 25p thereafter, tax free.
Careful treatment of these payments is intended to smooth the transition to cash allowance and, at the same time, ensure employers comply with environmental aims.
But there may be a large variance in after-tax pay among staff in the same salary grade. Alistair Kendrick, tax partner at accountancy firm Wilder Coe, says costs can rapidly spiral. “You’ve got to keep everyone happy in that grade, so you come up with an average and it costs you money. People with 40p a mile think they’re better off using cars rather than public transport, so they use cars more, and the average increases.”
Gerry O’Neill, commercial director of consultancy Car Benefit Solutions, says that when the reimbursement of business mileage at Amap rates is done within employee car ownership plans (Ecops), the tax-free shelter afforded by the Amap is captured. Therefore, extra gross-up costs are avoided. That is, funds are not unnecessarily soaked up in taxation.
To avoid the potential incentive for unnecessary travel, O’Neill recommends employers cap payments at the employee’s equivalent monthly net cash allowance.
But while Kendrick believes the current HM Revenue & Customs-approved 40p per mile reimbursement rate is at a realistic level and should not encourage overuse, he adds many drivers perceive it as a generous rate and so they clock up the miles anyway. “The idea that it’s a simple solution to cash out and save money is a misnomer.”
So should employers stick with company cars? “It’s difficult to come up with a solution that makes everyone happy. Employers that haven’t done the sums should be taking advice. Those that [would like to] cash out probably ought to consider whether that’s something they ought to do,” he adds.
Careful control is also required to prevent employers paying too much money to fill up cars where owners would reconsider if it was their own cash paid at the pump.
The abuse of employer-paid fuel also works against corporate social responsibility policies. The problem is partly offset due to punitive tax charges that deter all but high mileage drivers clocking up more than about 16,000 miles per year. There is no incentive for low mileage drivers because they pay more in tax than the benefit is worth. But despite this limitation, Employee Benefits fleet strategy research 2006 found 43% of employers offer free fuel to at least some staff.
Kendrick suggests employers could limit mileage to offset unnecessary travel. “This must be the only benefit where it’s a blank cheque. There is no limit. The petrol allowance is however much you want to put in your tank.”
Others, however, are less concerned, suggesting such behaviour represents a minority. Stewart Whyte, a director of the Association of Car Fleet Operators (Acfo), the representative body for employers running car and light van fleets, believes there is little likelihood of large-scale misuse. “There are a few people who will say ‘let’s go to Blackpool for the weekend because the company’s paying for it’. My view, and to a large extent what has been found within Acfo, is the people who have fuel for private use are generally pretty well-paid individuals. To say as a generalisation that relatively affluent people high up in the management tree can’t wait for half past five to get in their company car and drive all over the country because it is free is just nonsense.”
Whyte points out that behavioural patterns of employees who have taken cash alternatives after an employer-paid fuel deal show that mileage patterns are fairly consistent regardless of who pays at the pump.
Aside from the debate around excess mileage, employers looking to make a statement about their work to reduce CO2 emissions have begun to realise the high-profile mileage to be gained from investing in hybrid cars. Electricity supplier E.ON UK is one example, with its plans to introduce 70 Toyota Prius cars to its pool fleet.
It’s a proposition with potential, according to Andrew Cope, chief executive of Zenith Vehicle Contracts. “With diesel, good miles per gallon performance and engine performance mean it is hard to see how that preference will significantly change in the near future, but we predict petrol/electric hybrids will start to make in-roads. These provide the same kind of CO2 benefits and improved mileage performance as diesels, and there is no reason why in the future there shouldn’t be diesel/electric hybrid alternatives. They may very well change the split between petrol and diesel. At the moment, it is diesel all the way, accounting for around two-thirds of our fleet orders,” he says.
The incentives to be had from running environmentally-friendly cars lost some of their lustre recently with the loss of the benefit-in-kind tax concession on CO2-friendly diesels. But for Nigel Trotman, business and development manager at hospitality and leisure firm Whitbread, it is hardly a blip on the radar. “It’s like when anything changes. We make sure we communicate properly to drivers to make sure they can make an informed decision. I read about companies who desperately tried to get people into new cars before 1 January so they could benefit from the tax. That’s probably a false economy. You never know what’s around the corner.”
Case Study: Chard
West London estate agency and lettings firm Chard has taken a greener route when ferrying potential buyers and tenants around available properties in Notting Hill, Kensington, Brook Green and Fulham.
The company has plans to eventually replace about 50 Toyota Rav4 vehicles with petrol-electric Toyota Prius cars.
Jim Pike, fleet manager, expects the petrol/electric Prius to be three times more economical than the previous model, achieving up to 65.7mpg. So far, it has bought five.
Pike hopes West London customers and residents will be sold on its low CO2 emissions and quiet engine. Property negotiators should also face a lower tax bill.
Case Study: Whitbread
Hospitality and leisure firm Whitbread runs 600 company cars and has reduced the number of cash alternatives it offers.
The company has two fleet systems, a car benefit scheme for status and perk drivers, and the company car scheme for business drivers.
Nigel Trotman, business relationship manager, believes retaining company cars allows the company to better meet its duty of care obligations. “We’ve changed our policy for the majority of drivers. Now they don’t get the cash allowance any more, they get a new car more often. There’s a trade off there.”
Trotman says the firm has no truck with excess mileage from drivers powered by employer-paid fuel, with only a small number of senior staff opting for the benefit. “When they’ve done the figures they don’t stack up so they haven’t bothered. We calculate carbon dioxide usage and people are doing less miles per annum anyway because we’re giving them the technology to work from home or out of hours.”