Consider All The Options When Financing Your Fleet
As a company, there are many reasons why you may not be keen on your employees using their own private vehicles for business use. These reasons can include health and safety, and the difficulty of ensuring that vehicles are well maintained and serviced; ensuring vehicles are correctly insured for business use; and being less likely to have access to the use of relatively new, reliable and safe vehicles. As a result of this, many fleets decide it is better to offer some kind of company vehicle financing option.
However, choosing the right financial package requires a lot of thought about the size and nature of your business. You’ll need to think about everything from how much resource you have available to dedicate to administration to what is affordable and where you’d like your business to go in the future.
Here is an overview of the fleet financing options available to you.
PCP – Personal Contract Purchase
Personal Contract Purchase is not really a fleet product, but it is an option that allows the consumer to buy a car by paying a deposit and then a series of monthly payments followed by either choosing to pay a final lump sum payment if you wish to own and keep the car, or returning the car instead of the final lump sum payment. This is a choice for the employee, but could also mean that the business could rest happy knowing their employee has a relatively new, safe and environmentally friendly vehicle that could be used for business purposes.
Leased vehicle options for the employer include Contract Hire, ECOS and Salary Sacrifice
All three options mean that you pay the leasing company a monthly fee and they will cover the vehicle excise duty, and if you require, also handle the service and maintenance costs. As long as you return the vehicle at the end of the contract in a fair condition, then that is all that you will pay.
Contract Hire allows you to hire a fleet at a fixed monthly rate based on different terms such as an agreed annual mileage, and return condition of the car. This type of finance means you can benefit from a fleet of cars that might otherwise be out of your reach. You can benefit from fixed monthly payments in terms of budgeting, as well as claiming back VAT.
With Contract Hire arrangements, the employer gets tax relief on the rental based on the level of emissions and Class 1A National Insurance contributions. The employee pays Benefit In Kind (BIK) Tax based on the list price and emissions of the car.
With a Salary Sacrifice arrangement, the employee agrees to forego part of their gross salary for the employer to use this to pay a monthly lease on the vehicle and Class 1A National Insurance. If the employee chooses a relatively low CO2 emissions vehicle, then they will only have to pay a marginal amount of Benefit In Kind (BIK) Tax as compared to the alternative higher rate of income tax on a full salary. Salary Sacrifice is an employee benefit, as you only make savings with a low CO2/low list price vehicle.
For both Contract Hire and Salary Sacrifice, the employer is happy in the knowledge that their staff are driving a reliable and relatively new and safe vehicle, as opposed to driving their own personal cars for business use (grey fleet).
ECOS – Employee Car Ownership Schemes
Employee Car Ownership Schemes are currently less popular than other methods, due to not always offering savings and the complexity of administration involved; however they can deliver significant savings in some cases. In this situation, the leasing company sells the car under a loan agreement and then offers to buy it back at a pre-agreed price once the lease is up. The employer then needs to add enough to the employee’s gross pay to cover the loan repayment, but tax and NI don’t have to be paid on some of this. Because the title of the car passes directly to the employee, they then don’t have to pay Benefit In Kind (BIK) Tax. Also, as the vehicles are employee-owned they can benefit from AMAP payments on mileage.
ECOS were developed, as it was recognized that a normal leased car would often cost more to run than a privately owned vehicle, and BIK rising so high to make it no longer beneficial to have a company car. However, for some cars, the cost unfortunately rises in terms of tax savings. As a result of this inconsistency in savings, you often find that a company is offered a blended combination of Contract Hire and ECOS, and on an individual vehicle basis they can choose which option offers the best savings.
Finally, in addition to these different forms of financing your fleet, and considering what is affordable to your employees, it is also important to consider the whole life costs of your company vehicles which include maintenance, fuel, insurance, tax, etc. By offering a limited selection of vehicles to your employees, you can help to control the whole life costs and potentially save your business a fortune!