Choices on fleet street.

Choices on fleet street.

Company car fleets can be expensive to run, but is your FD aware ofall the options? Nigel Greenaway discusses the changing world of contracthire.

Are you missing out on VAT savings that mean leasing vehicles could cut costs dramatically? Both accountants and their companies are missing out. If you can reduce a single car’s acquisition costs by u700 and retain the flexibility and control of being able to dispose of the car at any point in its lifecycle, for no extra cost or hassle, why aren’t you interested?

Many companies have yet to take advantage of the changes in VAT, dating back to 1 August 1995, which can make vehicle leasing a clear economic winner when it comes to fleet acquisition and running costs.

The new regulations allow the contract hire or leasing company to reclaim in full the VAT on the purchase price. Only a company which can purchase a vehicle and prove to HM Customs & Excise that it is solely for business use – with absolutely no private mileage – will be able to reclaim the VAT in this way. The result for the customer is lower monthly rentals through the lowering of capital and interest costs as the examples below indicates. *The contract hire rental is inclusive of VAT after 50% has been reclaimed by the lessee. The contract purchase price comparison has been included (left) because this is equivalent to the pre-August 1995 VAT situation.

The difference in the rentals is u19.18 a month, a 6% saving or u690.63 over three years. For a business that currently outright purchases its cars, changing to any form of leasing could have a significant impact on acquisition costs. The VAT savings alone could result in a fleet of 250 cars saving nearly u175,000 in three years.

Flexible leases

If the economic arguments alone are not enough, let’s take a look at the flexibility that leasing can provide. I believe that we are currently seeing a major re-organisation of the leasing market, with three clear divisions emerging between the types of companies offering contract hire.

Progressive companies are offering complete flexible solutions, where all elements that make up the monthly rental are openly discussed, including profit-share of pooled under-mileage credits and maintenance under-spend, to provide a tailor-made arrangement. This type of offer seems to appeal to the medium-to-large-sized client looking to make maximum benefit of regularly changing fleet requirements and perhaps used to seeking a more adaptable approach to business.

The second tier comprises companies who prefer to offer a standard ‘commodity priced’ package, but will become more flexible and provide profit-share options if pushed hard enough by a big enough client.

Finally, there are the traditional contract hire companies, offering no extras and aimed purely at the commodity market. It tends to be smaller businesses who lean towards this sector, perhaps preferring to deal with a similarly small and locally based firm.

Leasing methods

The degree of flexibility you achieve is now very much in your hands, depending on your choice of contract hire company. There are three methods which allow leasing companies to claim the VAT benefits and pass these on to you in the form of lower rentals.

Finance lease is a small step from outright purchase, giving all the VAT benefits and leaving almost every other aspect unchanged. Like outright purchase, the asset remains on the balance sheet, along with the risk and reward. Operating lease can benefit companies wanting to remove vehicles from their balance sheet completely or seeking protection from a residual value risk.

To totally remove the element of risk and put a ceiling on your budget, contract hire offers the final step, because it usually includes a guaranteed maintenance, service and repair package. Other popular financing methods such as lease purchase or contract purchase are not eligible because they contain an option to purchase.

So how do you go about choosing the right option for you? If there’s one message I can give you it’s to think long-term. Don’t be fooled by the immediate attraction of a slightly lower monthly rental price.

Shopping around

There are a whole host of questions you need to ask, including: is the contract hire company prepared to refund any unused maintenance money?

Does the reporting and management information meet your requirements?

In particular, what are the cost implications of an early termination of the contract?

This last question is crucial and too many people ignore it. The industry standard termination settlement is 50% of outstanding rentals. However, some companies will offer an actual cost early termination clause and the difference can be dramatic. For example, an Audi 100 Estate 2.6 Quattro terminated in month 18 of a 36-month agreement would result in a u2,054 refund with an actual cost early termination clause or a u6,120 charge with a 50% of outstanding rentals early termination clause – a net difference of u8,174 between the two clauses. So beware of the u1 a month cheaper rental charge that has an agreement that could bite back.

Talk to a reputable company, look at the figures, consider all your needs and make an informed decision. The savings on offer will make the effort worthwhile, as some companies are already discovering.

A recent survey confirms there has been a 10% rise in the popularity of contract hire and there is every indication that this trend is set to continue. Significantly, the survey reveals that 75% of those companies considering a change of acquisition policy would change to contract hire or leasing.

Since leasing can save you money and provide greater flexibility, you may find you can have your cake and eat it.

Nigel Greenaway is finance product manager at PHH Vehicle Management Services

Wheels on hire

High-profile executives, like Archie Norman of Asda, may be giving up the chauffeur-driven limo, but British middle management remains wedded to the company car, writes Rupert Saunders. Despite the best efforts of successive Chancellors to increase the benefit-in-kind tax burden, there is little evidence of a wholesale switch to public transport – let alone a drop off in corporate car buying.

This makes the UK quite unique in Europe. No other country sells almost 65% of its new cars to companies. No other country has a car market where the needs and desires of the corporate customer take precedence over the private customer. One certain result is that we have cars which are more highly specified and more expensive than many customers want.

Driving change

But things are changing. These days, the benefit-in-kind taxation is based on list price rather than the old engine size system and the artificial tax break at u19,250 has been removed. It means the cheaper your car, the less tax you pay (in broad terms). At the same time the private buyer has realised he is being ripped off and switched in large numbers to buying ‘nearly-new’ ex-demonstrator cars.

Now car list prices are being ‘realigned’ or, in plain English, cut.

New models are being launched at list prices less than the cars they replace.

Existing models ranges are being rebadged with better equipment – the current favourite is air conditioning – and sold at less cost.

A second fundamental change has been the greater flexibility of most company car policies. Out have gone rigid rules about type or model of car based on company grade and in has come the car list from which the user can choose from a band of suitable models selected on the basis of list price or leasing cost.

User choosers

This has led to a whole new breed of customer, the user chooser – courted by car companies and susceptible to all the traditional marketing messages of image and style.

In fact, list price has little effect on most sensible company buying decisions. Good fleet managers base their choices on whole-life costs where fuel consumption, maintenance charges, insurance and capital depreciation are taken into account over the projected life of the vehicle.

Of these, depreciation is by far the greatest single factor and its influence is reflected in lower leasing charges for certain makes. Honda, Mercedes and Audi are often cheaper than equivalent models from Ford, Jaguar and BMW (the latter company currently suffering with its 3-Series from oversupply of base models).

Diesel options

The growing importance of whole life costs has also fuelled the growth in diesel car sales over the past few years. Just over a year ago, one-in-four new cars was a diesel and, although that figure has now dropped back to about one-in-five, the lower fuel costs and lower depreciation of high-mileage diesel cars has been a significant factor.

Whether diesel cars will ever totally overcome either their image as smoky oil burners or the environmental scare stories about them remains to be seen. But they are much improved in recent years and well worth a test drive.

Ensuring the extras

In essence then, selecting suitable company cars has never been more fun. Prices are coming down, the pace of new car introductions is hotting up and manufacturers are eager to do business. But the taxman is always lurking round the corner and it pays to watch the small print of car prices.

Extras which you may consider essential such as a good radio, alloy wheels, air conditioning or a sun roof will push up the tax liability if you are charged for them. Equally, if you do less than 2,500 business miles a year you will pay heavily for it. In that case, the train and cash compensation from the employer may begin to look like an attractive alternative.

Go shopping armed with a good price guide and some leasing figures in mind. If you are buying across a range of price brackets it will always pay to stick with one or two manufacturers, but, on the open market, the cars you can see in the following pages are the current hot favourites.

Rupert Saunders is a freelance journalist

Small cars

FORD FIESTA

Small cars have never been better and the new Ford Fiesta shows that a top seller can also be a quality product. It rides and handles well, is quiet and comfortable to drive and is well built. There is a plentiful supply and dealers should be keen to get the business, so prices will be competitive. Go for the new 1.25-litre engine for best results.

VW POLO

Just as good, but in short supply so difficult to find at the moment, is the VW Polo. Volkswagen has adopted a value-for-money approach and high demand plus low depreciation means leasing costs should be low. Best of the engines is the new 1.4-litre.

Also worth considering: Peugeot 106; Fiat Punto

Lower medium cars

RENAULT MEGANE

A huge choice here so shop around. The Renault Megane range is very broad and benefits from modern styling plus good ride and handling. They are a little cramped in the back though, so look also at bigger cars if the budget will stretch.

Best Renault engine is the 1.6-litre.

FIAT BRAVO AND BRAVA

The Fiat Bravo and Brava range is attracting all the attention and the cars are certainly stylish. But drive before you buy; the suspension is rock hard and the firm ride will not suit everyone.

Also worth considering: Peugeot 306; Rover 400.

Upper medium cars

FORD MONDEO

The Ford Mondeo is a firm favourite with fleets and it certainly deserves its success. The latest version is even better then ever and has pulled back the ground lost to more recently launched rivals. As with all Fords, it’s easy to drive and in plentiful supply. There is a wide range of engines, try the 2.0-litre, and there will be no shortage of leasing deals for you to look at either.

Also worth considering: Nissan Primera (just relaunched and a much better car than previously); Peugeot 406 (smooth, quiet and stunning to look at)

According to a survey by Northgate Motor Holdings, almost half of the senior managers and directors interviewed said they had no particular vehicle policy. Most fleets also lacked the flexibility needed for cars which would be in a company for up to five years. Contract hire fleets with contracts running for three years – 66% according to Northgate – could lack the necessary flexibility to react to changes in the business, staffing or the market without the likelihood of incurring stiff penalties.

24% of UK companies offer their staff the option of taking a company car or the cash alternative, compared with an average of 19% in Western Europe. (Source: Watson Wyatt).

Only 24% of fleet purchasers consider the ‘whole life’ cost of a car before purchasing. (Source: Northgate)

Company fleet managers are most likely to be either the finance director or the company secretary. (Source: Tolley Dial Survey of Company Car Schemes 1996-97).

Executive cars

BMW 5-SERIES

The executive car that everyone wants right now is the BMW 5-Series – so much so that most models are in short supply and there is a waiting list. Unlike the 3-Series, the larger model is still considered desirable and has received rave reviews since launch. The engines are smooth and silent, the ride and handling are impeccable, and the build quality is second to none. The best value for money is the 523i SE where most items are standard, but watch out for the price of extras which could push up the tax liability on other models. This is the first BMW to have a radio fitted as standard.

Also worth considering: Saab 900 (particularly with low pressure turbo); Audi A4 (a bit smaller but holds its value well)

Luxury cars

MERCEDES E-CLASS

Buying a Mercedes says much about you. Despite a recent move into more popular markets with the C-class, the new E-class is still recognised as a symbol of success. It’s also a very fine car with superb ride, handling and comfort. Don’t bother with the small engines which are not powerful enough for the solidly built body. The 3.2-litre is about right. Watch out too for the price of the extras. A radio, air conditioning and an automatic gearbox will add more than u3,500 to the price of the car and push up the tax bill.

Also worth considering: Jaguar XJ6 (elegance and style with modern engineering); Lexus (Japanese build quality and superbly quiet but lacks charisma)

Software selections

Managing a company’s vehicle fleet can create vast amounts of information, writes Steve Pinchen. Unfortunately, this important task is often neglected even in larger fleets. A dangerous attitude, given that for many businesses the car fleet is second only to payroll in company expenditure. This neglect of fleet management and its delegation to the management periphery can mean insufficient administrative resources are allocated to it.

But help is available in the shape of software packages specifically developed to aid fleet managers in their daily administrative duties.

The software comes in many forms, from large mainframe systems (usually written in-house) which link with many other systems to form an integrated solution, to off-the-shelf PC software which is adaptable to any fleet and simple to use on most desktop computers.

One major headache for any accounts department is tracking and recording of business miles and vehicle list prices, where and when drivers have had what car. Software can retain this information throughout the financial year and provide the total benefit-in-kind calculation for each driver.

Some packages can also report on other taxable benefits, including mobile phones and private health schemes. The same software can also fulfill other legislative functions such as NIC calculations and the P46 (car) report – a list produced at least every quarter which details changes to the fleet, for example, new starters, leavers and change of vehicles.

Information on fuel and mileage can also be automated if the company uses fuel or agency cards to pay for fuel. Most if not all of these companies will provide this information electronically every month either instead of or as well as hard copy lists. The data is then imported into the package, giving not only fuel information but also mileage data, enabling easy calculation of fuel consumption. Rogue vehicles and/or drivers can also be highlighted along with replacement vehicle forecasts and budgeting information.

Electronic data is not restricted to fuel. Servicing information can also be tracked in this way, while monitoring organisations such as CAP have begun providing list pricing and residual value data, giving expected sale prices and new vehicle options.

How to fund a fleet is a never-ending debate. Whether to buy, lease or contract hire vehicles is a constant discussion. The merits of each or a combination of all methods also allows room for more specialist packages which cater more closely for this.

Functionally, many software packages will provide the information sought.

What sets the best software apart is ease of use and cost. Most importantly, though is the level of advice and support which is provided to enable businesses to gain the most benefit from what can be a very useful tool in the battle to control company vehicle costs.

Steve Pinchen is sales manager of Fleetlease.

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