Company cars - Take a back seat

Until recently, many businesses had to use their own staff to manage their fleet of company vehicles. Instead of concentrating on what they were good at, valuable employees were bogged down in stacks of paperwork and routine administration.

On top of that, it was expensive to build up a fleet in the first place.

Until two years ago, businesses were not entitled to claim VAT relief on the cars they bought – not even leasing companies.

Then, in August 1995, the relevant UK blocking order was dissolved for cars used purely for business. The tax rules now allow all companies to claim back half the VAT. And any that lease their cars from someone else can get the same relief on the costs.

There is a hitch, however, for organisations outside the leasing industry.

To take advantage of the VAT breaks, they have to be able to prove that the cars they provide for their staff are used only for business, and this has been impossible so far.

‘You have to prove that every mile you drive is for business purposes only and that your intention in driving the car is strictly for business.

There are a number of test cases at the moment which attempt to define business use, but it is difficult to prove,’ says Sue Rathmell, senior VAT manager at Deloitte & Touche.

This means that companies which manage their own fleets have to keep accurate records of every car’s mileage and the purpose of each trip. They also have to make sure that staff don’t try to sneak home in one at the weekend – on top of worrying about the costs of running a fleet, accidents, repairs and general day-to-day maintenance.

So it’s not surprising that more businesses are opting to shrug off all the hassle and to outsource their cars from another organisation. Fleet specialists are at a distinct advantage: since they lease the cars purely for business purposes, they can claim back half the VAT on the purchase price.

Fleet operators enjoy other privileges too. They can recover VAT on repairs, roadside assistance, replacements, and so on, and then pass an element of the savings on to clients. They also take on responsibility for insurance, breakdown services and all other administration.

A popular option among those looking to outsource is sale and leaseback, a scheme by which a business sells off its cars to a fleet-management company and then leases them back. This frees up capital which the financial controllers can either plough back into the business, perhaps by investing in new equipment or product development, or use to reduce borrowing commitments.

There are two stages to sale and leaseback. Companies can either enter a contract-hire agreement and simply lease vehicles, or they can take advantage of additional management schemes.

‘It’s certainly an easier way to manage the fleet,’ says Vince Parry, treasurer of NCR. The technology company sold its vehicles to the fleet management company Lease Plan and now leases them back.

Parry says this has helped NCR to ‘offer better services to employees’ because the fleet company can provide the senior managers with better vehicles.

Lease Plan also has enough expertise in its field to let its client get on with what it does best.

General Accident agrees. ‘We are good at insurance, not fleet management,’ says a spokesman. This explains why the insurance company agreed to a multi-million pound sale and leaseback deal with Avis Fleet Services.

Avis is part of GE Capital Fleet Services, the world’s largest fleet operator.

It will be covering some 3,000 vehicles for General Accident over the next two years: the scope for fleet management under sale and leaseback is very wide.

Another option is pure fleet management. This is where a client owns its own vehicles and an outside operator manages them. ‘Passing the problem to an expert is the best solution for your fleet,’ says Andrew Cope, sales and marketing director at Zenith Vehicle Contracts. Zenith manages outsourcing contracts for companies such as Singer & Friedlander, Hillier Parker and Arthur Andersen. It recently announced a 15% increase in profits.

‘I see a trend towards outsourcing management,’ says Cope. ‘We can give a better service to the driver. When we manage (a fleet) we can reduce costs by the kind of service and the type of car we use.’

The level of service varies. Fleet operators tailor packages to meet the needs of individual customers. Most offer administration services, accident management and hire cars, and can also buy and sell cars on your behalf.

Hillier Parker says it values the administrative role Zenith plays. The surveying firm has offloaded 90% of the hassle. The remaining 10% gives it the final say in what cars are ordered. Pensions and benefits manager David Thorpe says: ‘We probably save 10% by outsourcing and we wanted to outsource the job and reduce our costs.’

Fleet managers should be willing to state their costs up-front and most do. Lease Plan’s Open Calculation scheme gets everything out in the open before contracts are signed. Marketing manager Alicia Kavanagh says: ‘Other fleet managers tell you the price of vehicles to rent but they don’t often disclose what makes up this cost. We tell you exactly what’s included.’

Itemisation should include elements such as maintenance over the period of the agreement. ‘If, at the end of the term, the cost to maintain the vehicle was less than we quoted, the rest goes back to the customer.’ On the other hand, if Lease Plan underestimates the expense, it picks up the tab.

If for some reason you have to fill a short-term transport need – one car or a whole load of them – then consider contract hire. The main advantage is the lower cost: you get and pay for exactly what you want. Using contract hire, users can take a car for a day, or a defined longer period for which costs are fixed, and a rigid arrangement is agreed with the lenders.

For those looking to outsource the choice of fleet management companies seems to be growing all the time. The industry is bubbling with mergers and acquisitions between some of the biggest operators. This could be good news for users. GE, already a huge player, has bought both TLS and Smith Self Drive and plans to merge the two.

Larger fleet companies can often offer more flexibility at the top-end of the market and keep prices down for anyone looking for a cheap deal.

But customers on the look-out for such a deal must keep their options open and examine all the rival plans on offer before making a decision.

GE estimates that already companies can save between #10 and #15 a month on each car by leasing their fleet. And there are cases in the queue at the European Court of Justice which could alter the UK blocking order on VAT relief. That would make leasing easier and possibly cheaper.

If that happens, the steady flow of companies handing over their wheels for somebody else to manage could turn into a flood.