Fleet Management - End of the road for prestige cars?
How we source, fund, run and pay company car tax is undergoing
How we source, fund, run and pay company car tax is undergoing
We’ve become so used to hearing that the company car market will be badly dented by the next Budget or some other change just over the horizon, most of us have grown sceptical of the wisdom of such statements.
After all, this major feature of British business life has survived – so why should such warnings have any more impact now than in the past?
But this time things do appear to be more serious. The state of flux in the fleet industry and the pressures being brought to bear on it may be too great for even the mighty UK company vehicle sector to emerge unscathed.
Probably the greatest change – and the one most likely to send drivers fleeing from their company cars en masse – is the revolution taking place on the ‘benefit in kind’ taxation front. For years, as anyone who operates a company car knows, we’ve been taxed on a notional ‘benefit’, the so-called P11D value, based on a percentage of the list price of the vehicle plus extras. Discounts have been allowed for medium and higher business mileage drivers, and it’s these discounts that are about to disappear.
The new system will also be based on the amount of carbon dioxide (CO2) emitted by each vehicle – measured in grams per kilometre – and a car’s list price.
The combination of these two factors will eventually chase drivers out of their company vehicles, or cause drastic downsizing. In the just-published 2001 Business Car Expectations survey, sponsored by HSBC Vehicle Finance, a number of drivers thought the changes were ‘hostile’.
But the word out on the streets is that many managers have failed to warn their drivers of this threat in time to make an informed choice about their next company car. The new tax will affect existing cars come a year next April. In other words, if a driver had selected a ‘gas guzzler’ as far back as April last year – expecting to keep it for three years – he or she faces a nasty shock come the start of the 2002/3 tax year.
And there is worse to come. For in 2003/4 and 2004/5 the tax ratchet will go on clicking away, meaning drivers will have to keep downsizing every year just to keep pace with tax rises, or learn to work ahead – choosing extremely ‘clean’ cars from the outset – which was of course the Chancellor’s intention all along.
Other factors affecting the company car market include the following: changing expectations by drivers and their families, the government’s efforts to bring about reform, the growing importance of environmental issues, hi-tech systems that allow fleet managers to monitor vehicle use, and an economic cycle which has remained positive for longer than anyone can remember.
So where is all this taking us? The changes in company car benefit in kind tax may cause a reduction in the take-up of company cars, or drastic downsizing. Even fairly modest cars will be taxed quite heavily by comparison with today’s rates. High mileage drivers in bread-and-butter cars may end up paying almost double what they pay now.
This frightening prospect has started to persuade companies, such as building materials giant Hanson and footwear firm Stylo, to consider getting rid of their fleets ahead of the tax changes.
Company car allocation rates have started to fall noticeably, according to the latest Business Car Expectations survey.
In the directors/partners sector, where there has traditionally been the highest rate of allocation, the take-up has dropped from 92% (in the year 2000 survey) to 87%, while in senior management, the figure has fallen to 83% from 91%. Other sectors showed fall-offs, with field staff allocation down from 80% to 78% and a larger drop for middle managers (down from 61% to 51%), while the technical specialists’ figure fell from 33% to 27%.
This reduction in the company car market has been accompanied by a trend towards more restrictive car policies by many fleets. Larger companies in particular seem to be edging back to pre-‘user chooser’ days, with more prescriptive allocation procedures. Among middle managers, choosing from a limited range appears to have become the most popular option (43% of companies), though 29% still allow any make/model within a set price range or a maximum monthly leasing allowance. Another trend is for more fleets to buy used cars (up from 25% to 33%).
Interestingly the supposedly scientific method of selecting cars according to their ‘whole life’ cost – said by fleet management gurus to be the backbone of cost-effective operation – hardly registered in this year’s survey, with less than 1% in each major employment band quoting it as a factor in vehicle choice (though the survey writers, from the Centre for Automotive Industries Management at Nottingham Business School, point out that using set monthly rentals may achieve the same result).
Not surprisingly more fleets expect to make big changes. The numbers anticipating altering ‘fleet structure and allocation’ in the next one to two years rose to 31% (from less than 25%).
Three areas were highlighted – although arguably they may all be interconnected: 56% were anticipating introducing a ‘cash for car’ scheme (32% last year), 25% expecting what they described as ‘CO2 considerations’, while 10% put down ‘downsizing’.
The two major acquisition methods seem to be maintaining their balance.
Of the respondents to the HSBC survey, 53% remained faithful to outright purchase (though not necessarily exclusively), while 50% continue to lease or contract hire their vehicles. In the 250-499 vehicle band, contract hire remains the most popular acquisition method.
Interestingly that stalwart of the retail sector, hire purchase, seems enduringly popular in the corporate market too, with 29% saying they use it for all or part of their fleets – while contract purchase was used by none of the fleets questioned (1% last year).
‘How often should we change our vehicles?’ is a question often asked by fleet managers, and it appears from the results of the survey that most still prefer to change over after a set time. 82% reported replacing after three or four years and very few put down mileage alone as an indicator.
Some fleets have ended up making savings by extending their replacement cycles (but watch out for higher maintenance bills in year four and greatly reduced saleability of high mileage vehicles in an already ‘collapsed’ second-hand market). Some 40% were thinking of increasing their replacement cycles, while 26% said they may reduce them.
Insurance buying was still chiefly the preserve of the FD or the finance department (50%), while company secretaries came second in this field (17%). Only 8% of fleet managers had responsibility for insurance. Some 92% of fleets still went for comprehensive cover. The mean average policy excess was #411.
Despite the huge amount of work involved in sorting out the aftermath of accidents, as many as 84% of fleets did not employ the services of an accident management company. Even more did not use a risk management specialist. (It’s just an idea, but if there was greater coordination within companies, ie the same person bought insurance and oversaw vehicles and driver behaviour, those companies’ costs could be far lower.)
Also looked at in the HSBC survey was an apparent lack of take-up for the internet. Two-thirds of executives still do not use it (at least not in connection with work). Those that do, employ it for checking on vehicle pricing and specification, while fewer use it for sourcing new suppliers and finance information. Only 3% use it for booking vehicle services.
The research was carried out in late summer 2000, before the round of vehicle price cutting in the UK. At this time, researchers reported ‘widespread’ importing of vehicles from Europe – but expect next year’s report to say whether companies’ experience has been positive or negative. Watch this space.
GREATER CONTROLS OVER DRUG ABUSE
An improvement in the level of control by companies over their employees’ use of company vehicles, especially where drugs and alcohol are concerned, is another aspect highlighted by the report.
Previously there had been rather less, though the researchers point out there has been a lot of publicity in the trade press over this issue in the last 12 months. Some 59% now report having a policy on drug abuse (previously 55%), while those with formal policies on alcohol have risen from 58% to 64%.
However fleets continue to be more concerned with the maintenance of vehicles than what is circulating in users’ bloodstreams, with 68% (61% before) giving formal instructions on how to look after cars. Interestingly, only just over half said they give advice on the use of mobile phones.
IN SEARCH OF CHEAPER CARS
Amidst consolidation in the car industry, fears about ‘rip-off Britain’ plus tax changes, the HSBC business car expectations fleet survey for 2001 found many companies are considering sourcing vehicles from outside the UK, writes Adriana Zea.
The report’s main author, Professor Peter Cooke, said two-thirds of companies surveyed had considered purchasing cars outside the UK.
At the time of the study, prior to the drop in vehicle prices in the UK, purchasing new cars abroad was widespread. The trend looks set to increase further, as many firms who were not buying elsewhere said they were planning to do so. Small and medium-sized companies prefer to buy abroad; for larger companies there is less incentive to do so as they already receive discounts from dealers.
The most popular points of purchase for cars on the continent were found to be Germany, the Netherlands – due to its favourable tax regime – and Belgium. One unexplored option that could have interesting consequences, according to Cooke, is that fleet operators can ask their dealers to buy outside the UK. This is not the only cost savings available to fleet managers.Currently, few companies put a great deal of planning into the disposal of their fleet and more than three-quarters do not prepare their vehicles to be re-sold.
The survey showed only 12% of firms surveyed plan on selling them to the public, while the majority sell vehicles to employees or return them to the lesser.
The researchers found most companies look for the simplest way of disposing of their cars without thinking of the loss of value, despite the fact that the second-hand car market in the UK is one of the biggest in Europe.
‘The full costs of car fleet acquisition are not fully appreciated,’ says Tim Holmes, director and head of HSBC Vehicle Finance. ‘Companies do not realise the potential savings involved (in reselling their cars.)’ Companies can save several hundred pounds per vehicle if cars are refurbished properly and not re-sold via agents who take commission.
But the companies seem to realise there is a problem in this area, as the survey shows 90% of respondents say they expect a drop in residual car value.
– The survey was conducted independently by Nottingham University late in the summer of 2000. Surveyors received 366 responses representing 77,000 units of operation, representing a cross section of the market and which tie in with the current industry.