Company cars are often seen as a significant recruitment and retention incentive by businesses. However there have been changes both in tax ruling and in the business environment which have meant that running a fleet of company cars might not be the most time or cost effective way for a company to provide such a benefit. Nicky Machin investigates:

So What's Changed?

• In April 2002 the tax position changed from measuring cars by engine size and number of miles travelled per year to putting them into categories dependent on their level of CO2 emissions
• Running a fleet of company cars can be costly and time consuming and no longer tends to be a role that sits neatly with any one department in a company
• Companies now tend to have fewer levels within the organisational structure and this reduces the need for and impact of a company car as a status symbol
• The increasing tax burden has reduced the value for money offered by a company supplied car
• Increased concern and regard for the environment has meant that cars with lower emissions are cheaper to tax. In addition, company cars have negatively impacted on Company environmental targets.

The result has been a steady rise in Car Allowances being offered as an alternative. So how do Car Allowances work?

• Car allowances are set by the company, usually in relation to salary or job ranking and then paid in equal instalments throughout the year. The allowance is taxed at source. The Company also has to decide how to reimburse expenses for business mileage
• The Company decides whether or not the allowance qualifies as part of the employee's salary for the purpose of bonuses, pensions etc.
• In addition to the car allowance, the employee can independently claim tax relief for business mileage, through the self assessment tax return, provided the appropriate receipts and records are kept
• Where a company already has a company car scheme in place, but would like to offer a car allowance as an alternative, it makes sense to ensure that the allowance offered to an employee makes the arrangement no less favourable to them. Employees will consider what the cash alternative will be worth after Tax and National Insurance and then weigh up the savings of giving up a company car against the costs of providing their own car.They would also consider the time that it will take for them to negotiate the purchase of the car, arrange insurance and maintenance, and set up a finance deal
• As employees can choose their preferred vehicle (using guidelines on suitability provided by the company) and the administrative burden for the employers is lifted, car allowances are increasingly being viewed as a favourable alternative to company cars by both

HR Advantage can advise on a number of areas relating to both company cars and car allowances. Call us for information on:

• Producing a clear company car policy
• Arranging lease cars for your employees
• Arranging personal leases for those employees opting for a car allowance
• Advice relating to employers' liability for recipients of a company car or car allowance

Key Points for Employers

• Well written policies are vital to making a car allowance or Company car scheme work
• Before you make any changes make sure you weigh up the benefits for both employer and employee
• When you are making any changes to Terms and Conditions of Employment remember that it is vital to communicate and consult about what you are planning to do

For further information, please contact Nicky Machin on 01494 435 310 or email nicky@hradvantage.co.uk

February 2005