The expert's view: David Rawlings Senior manager, automotive tax, Deloitte “Businesses frequently make the mistake of jumping into a company car review by tweaking policies they already have in place or following the latest industry fashion - instead of beginning with a blank sheet of paper. Successfully resolving vehicle funding to the satisfaction of both employers and employees - who have different and often conflicting requirements - is undoubtedly more of an art than a science.

Within any company, the heads of departments will have differing needs. These must then be balanced against the aspirations of the drivers, which can vary dramatically from individual to individual.

Solutions should be introduced that are cost-effective, manageable and (where possible) acceptable to all concerned.

Therefore most companies should start the process by looking at the cost side. They should analyse numerous options and ‘slice and dice’ all possible variables in a multitude of ways to find the optimum solution that satisfies the company and hopefully wins the approval of its employees.

To illustrate this process I have used a company that operates 250 company cars, with staff covering a wide range of business and private mileages. No cash allowances have been offered. The car scheme has evolved due to a succession of company mergers and acquisitions and so some vehicles are purchased outright, others are leased and some are acquired via a deferred purchase scheme.

By using the Deloitte Fleet Choice software we have considered some alternatives to the current position but, in practice, we would bring more options under the microscope.

Have a more detailed look at Fleet Choice here.

The first scenario, suggested by the sales manager, is to introduce a cash alternative of £375 per month plus 15p per business mile. The car fleet is divided into three distinct employee grades - Field, South and North.

"By using the Deloitte Fleet Choice software we have considered some alternatives to the current position but, in practice, we would bring more options under the microscope."

Figure 1 - Click for larger image

Figure 1 shows a chart with four distinct segments containing coloured dots that represent the individual employees, with the grades represented by different colours. Employees falling within the top right segment result in a win-win position for both the company and the driver, compared to the current situation i.e. company cars. Conversely, those employees falling within the bottom left segment result in a lose-lose position for both sides. The two remaining segments show where the company wins and the employee loses, or where the employee wins and the company loses.

The trick for the company is to move the dots into the position that best suits the business needs.

Looking at only the numbers, the company would save £195,065 (see figure 1 - top right) if all the employees opted for the cash alternative, and the employees as a group would save £85,852. A superficial glance would appear to show a win-win position and your job is over. However it is obvious, from simply looking at the chart, that all the employees to the left hand side of the vertical line (the two “Employee LOSES” segments) would not take the cash alternative if they were able to work out their own numbers correctly. Meanwhile the employees to the right would all take the cash alternative.

By the time the employees have all finished “cherry-picking” the company will actually lose money compared to its current position.

To avoid the company losing money we then allow Fleet Choice to pick the optimum cash alternative for each grade, which includes using the maximum Approved Mileage Allowance Payments (AMAPs) - see figure 2 - which maximises the amount of money the company can save.

Figure 2 - Click for larger image

"The employees will still “cherry-pick” and the company will not save the very appealing £1,256,998"

The employees will still “cherry-pick” and the company will not save the very appealing £1,256,998, but the company’s savings from those employees falling within the win-win segment increases from £79,311 to £200,985 if it sets the cash alternatives at £13, £141 and £86 as appropriate.

Fleet Choice allows you to view the specific circumstances of any employee by moving the mouse pointer over any dot. The company can then alter the payments on a case by case basis if appropriate (see figure 3).

"We therefore always recommend that a margin of safety in the employees' favour is built into the numbers."

Figure 3 - Click for larger image

The Human Resources Director then fashionably decides that the company should adopt an Employee Car Ownership (ECO) scheme with payments based on keeping each employee neutral. The Fleet Choice calculations show that the company would save £183,226 (see figure 4). Note that all the employees fall on the vertical line. This is as expected because, under the standard ECO scheme, the employees should neither win nor lose compared to having a company car.

Figure 4 - Click for larger image

Although the company is saving money there are a few important points to note:

• The savings may be negated by the extra administration burden of running the scheme.
• Forcing the scheme on all employees requires careful HR handling.
• Changes to employees’ circumstances can result in some employees being unexpectedly worse off.

We therefore always recommend that a margin of safety in the employees’ favour is built into the numbers.

Looking again at figure 4, you can see that a number of employees are below the horizontal line, meaning that the company is losing money when those employees move into ECO. Can we do better?

To maximise the company’s profits while keeping the employees neutral, Fleet Choice takes all the drivers that fall below the horizontal line and puts them back into a company car funded in the most cost-effective way. Fleet Choice then sorts the employees into new grades. Now the savings to the company have increased to £488,501 (see figure 5).

Figure 5 - Click for larger image

"It must not be forgotten that cash alternative schemes are by no means the only option that companies should be considering."

The calculations show that a mix of company cars and cash alternatives may be the optimum answer for this company.

However finance is not the only consideration and the company should then consider the non-financial implications of each scenario. This may mean that it decides that the headaches involved in running a cash alternative scheme are not worthwhile.

It must not be forgotten that cash alternative schemes are by no means the only option that companies should be considering. Many companies would find that moving from a purchased to a leased fleet could save significant amounts of money, which could be realised even more quickly by entering into a sale and leaseback transaction.”

Have a more detailed look at Fleet Choice here.