CORPORATES NEED TO CALCULATE THE TRUE COST OF THE CASH OPT-OUT
By Alastair Kendrick, Tax Consultant, Wilder Coe

In my experience as tax partner at Wilder Coe specialising in company cars, UK corporates may be paying too much money in the form of cash to employees who elect to opt out their company cars – a bold statement but one I fundamentally believe to be true.

We have seen increasing numbers of fleets include a “cash for car” option to increase employee choice and, make no mistake, there will always be an element of cash-electing employees within most fleets. However, many may well be paid on historical rates of cash that are no longer appropriate.

If you consider the whole life costs of a number of popular fleet cars on the market today – putting to one side the rising cost of fuel as, in an opt-out situation, the employee is responsible for bearing the fuel costs – many have actually fallen in recent years.

But numerous corporates I visit and talk to are still paying cash allowances to employees entitled to opt out of company car provision on rates for cash set some years ago when capital costs were higher than they are today.

That leads many companies to actually pay too much cash to their employees, although, I accept, addressing this situation retrospectively may pose real HR and morale issues to try and reduce rates once established.

What companies should do, in my opinion, is to consider very carefully how they calculate the amount of cash they offer to employees in lieu of a company car, and identify and calculate accurately the total costs of providing cash compared to those of providing the car.
This means taking into consideration factors such as capital allowances, the expensive car leasing disallowance, National Insurance Contributions, and in many cases, on a straight cost of provision comparison, companies may actually decide that the car provides them with the cheapest mobility solution.

To allow for this, companies should hold regular cash for car reviews and should make it a point of the employment contract that cash rates will be reviewed on a regular basis and may be revised up or down. This removes the HR and morale issue mentioned earlier.

Companies should also consider that cash provision is not simply setting a benchmark such as a monthly leasing rate for the cash equivalent. Many also neglect to factor in the 40p per mile that employees can claim back for the first 10,000 miles they drive their own cars on company business and the 25p thereafter.

Indeed many drivers are encouraged to try and maximise their business miles to cash in on this apparently generous tax-free allowance.

This can make a serious difference to the amount of actual cash that is being paid over to the employee, especially when compared to the actual costs of providing a company car, but many companies overlook this point completely.

They need to take proper advice at this point to ensure they are not paying too much in terms of mileage allowance and the use of external agencies at this point can make a world of difference.

For example, the Cash Allowance Scheme (CAS), pioneered by Cheshire-based The Miles Consultancy in the UK benefits market, allows some or all of the cash allowance to be paid without the burden of income tax, employee national insurance and employer national insurance contributions, bringing major savings for the corporate customer.

CAS works by increasing the efficiency of the Inland Revenue’s Approved Mileage Allowance Payments (AMAPs), allowing the reduction of the employers’ income tax and national insurance bills and at the same time cutting drivers’ tax bills, and is a scheme, along with a number of others on the market, well worth considering.

With the increase in the number of employees using their own cars on company business, the issue of duty of care becomes a real one and companies need within their fleet policies a number of checks and controls to ensure employees are regularly servicing, maintaining and checking their vehicles.

To meet duty of care requirements, provision should also be made for the checking of opt-out drivers’ licences to ensure they are still qualified to drive and do not have excessive points on their licences.

Again external agencies can play a role here and The Miles Consultancy scheme, for example, includes ensuring drivers’ cars are maintained properly to adequate standards in line with manufacturers’ warranties, meeting corporate duty of care responsibilities, as well as validating business miles and checking drivers’ licences.

Cash for car is not an issue that is likely to go away – some 72% of UK companies are now believed to offer some form of cash alternative. But corporates can make the system far more efficient for themselves and their drivers by remembering and carrying out some of the basics already outlined.