Extending the period or mileage of a fleet contract might seem a sensible cost-efficient measure, but increased maintenance and other factors could outweigh any savings, says Nic Paton
In March, telecoms giant Vodafone told its 10,000 UK employees that, along with scrapping pay rises and ditching bonuses this year, anyone driving a company car will have to keep it for four years rather than three, or cover 80,000 miles instead of 60,000 before they can get a replacement.
In a toughening cost-cutting climate, Vodafone is by no means alone in looking long and hard at how its company fleet can help to save money. John Lewis, chief executive of the British Vehicle Rental and Leasing Association, says: “It is definitely a trend we are seeing. About a third of contracts are being extended in one form or another, either at the end of a contract or sooner, typically for no less than six months.”
According to Lloyds TSB Autolease, employers that opt to extend their contract or leasing agreements could reduce their monthly payments by as much as 10% by doing so.
But this trend has raised questions about whether keeping cars on the road longer will prove a false economy. Older cars with more miles on the clock can require more maintenance; employee morale may be affected by not upgrading; and, if the fleet includes gas guzzlers, employers might be stung by the government’s new green car tax regime, which came in to effect on 1 April 2009. Cars bought or leased by employers are now being taxed according to their CO2 emissions levels.
The cost of leasing vehicles has been deductible against taxable corporate profits – subject to restrictions for cars costing more than £12,000 – but since 1 April, the disallowance has no longer been linked to the cost of a car delivered or leased on or after that date. Instead, it will be 15% of the rental cost for cars emitting more than 160g of CO2 per kilometre. Cars that emit 160g/km or less will have no lease rental restriction.
Health and safety issues must also be considered in case a driver has an accident, particularly in view of the tougher penalties that came into force under the new Health and Safety Offences Act in January. Employers must identify whether there is a point at which the increased liabilities of keeping a car for an extended period outweigh the cost savings. “Most modern cars are quite capable of doing 80,000-100,000 miles without much going wrong,” says Lewis. “It may not even be the mechanics that become an issue, but the seats and comfort. Once you go beyond 100,000 miles, you will often get into the realms of major component failure, such as the gearbox or the engine.”
But if drivers are covering fewer miles – and with less business out there, that may be the case right now – the arguments for extending the length of a contract, perhaps by six months to a year and/or raising the mileage limit can become persuasive, says Mark Sinclair, director at leasing firm Alphabet. “It is worth doing an analysis of the fleet because employers may not necessarily be able to extend [contracts for] everyone,” he explains. “They need to have a look at how much mileage people are actually doing. If someone has a high mileage, then they will probably not want to extend [contracts for] them, but if it is low, they might. A car that is four years old and has done 60,000-80,000 miles is probably not that different to one that is two years old and has done the same mileage.”
In this new age of austerity, there may even be value in using a fleet to project an image of careful financial husbandry, says Lewis. “If employers have had to make tough decisions in other areas, the last thing they want people to see is a new car in the garage or to knock on a customer or supplier’s door with a 2009 number plate,” he explains.
But it is important to make a realistic assessment of whether increased maintenance costs will offset any savings. The key to getting it right is the relationship employers have with their leasing company. With the used car market slumping along with the rest of the economy, extending contracts or leasing periods may be an attractive option for both sides. But employers do need to examine factors such as who is, or will be, footing the bill for maintenance; the leasing company’s attitude to damage when the vehicle has been returned; and how much wear and tear is taken into account.
Colin Thornton, sales director at Lloyds TSB Autolease, observes: “If employers have a good leasing company, it should manage the risks of extending, ensuring drivers are regularly servicing their cars, doing MOTs on time, and so on.”
If you read nothing else, read this…
- Do an analysis of drivers’ actual mileage because an organisation’s policy may be three or four years old, over-generous and in need of review
- Talk to the leasing company about what sort of support it can provide around wear and tear, liability issues, and so on
- Ensure drivers are happy with the change and aware that maintenance costs will increase.