Company cars have historically been known as a perk across businesses. Traditionally, it has been a model that works for both employees and companies alike, but now, with tax on company cars continuing to rise, many businesses are considering alternatives. One of the most popular alternatives is to offer a car allowance, a cash alternative to a company car. Although this sounds favourable (for both employers and employees) on the surface, is it really a better option than a company car?
In this article, we are going to take a look at the pros and cons of each model to help you make an informed decision as to which could be right for your business
Company cars are either outright purchased, leased, hired or offered by salary sacrifice or an employee car ownership scheme by the company, and then provided to employees for business use and personal journeys. If the car is shared by employees, it is generally considered to be a pool car; only cars that are given to a specific employee are classed as company cars.
Although it is quite a traditional model, the company car is still considered effective and efficient for many businesses. Just last year, HMRC figures showed that the number of company car drivers hit a five year high.
So, what’s all the fuss about? And what are the downfalls? Let’s take a look.
1. You have total control
It goes without saying that when you own the car, you have total control over the type of car you choose. For some brands, image is very important and they want this to be reflected in the cars that their drivers use. For others, it is important for CO2 emissions to be as low as possible. A company car can give you this control.
You will also have more control over the reliability of the vehicle, seeing as the maintenance responsibility falls on the business.
You can ensure that your cars are being serviced regularly and are in the best health to avoid any unexpected problems.
2. Unparalleled transparency
Having total control over the vehicles in your fleet also means that you benefit from a greater level of transparency and insight into your cars than you would if they were owned by your employees.
As you control the maintenance of the vehicles, you can help ensure that your company cars are safe and reliable. Additionally, because you have control over which vehicles you buy (or lease), you also have greater transparency over their emissions and fuel efficiency – which saves you time and money in the long run.
3. A great perk for employees
A company car is seen as a great perk by employees. By advertising this, you can attract high quality staff and also increase your retention rates. According to the GE Capital Fleet Services study, 64% of company vehicle drivers said that they would be less likely to leave their current job because of the vehicle program.
Company cars are also convenient for employees, because they don’t need to worry about costs such as maintenance, tax insurance and wear and tear. The same study, which included 154 full-time drivers, found that employees preferred to use company-provided vehicles, citing “ease of use” as the main reason.
1. It can be costly
All vehicles are subject to depreciation, so owning your company cars outright can be costly. Leasing can alleviate this issue, but this then creates its own risks. For example, if you take out a lease on a car and then circumstances change for whatever reason (the employee leaves or their job role changes), you are likely to still be required to pay that lease for the full term of the contract.
Then of course there are the running costs to consider. If your employees buy their own car with a car allowance then they are responsible for covering the maintenance and insurance costs, but if you offer them a company car then you have to foot the bill.
2. Less flexibility
As touched upon above, if you purchase a company car for an employee who then leaves the company, you are left with an asset that is depreciating in value with each passing day. Similarly, you could be tied into a contract with a leasing company. The bottom line is, there is very little by way of flexibility.
This lack of flexibility is felt by employees too. According to ExpertHR’s company cars and car allowance survey, flexibility for employees was one of the reasons given by organisations increasing car allowance. With car allowance, employees have the flexibility to choose a car that best suits their financial capabilities.
3. Admin work
A noticeable disadvantage of company cars is all of the admin work that they come with. Your team could end up spending a lot of time filling out paperwork and making sure checks are done, which of course results in an added cost for the business because time costs money!
There are two ways that administration work can be lessened for a business: you could outsource it, or you could use a telematics system. By outsourcing your administration work, you can free up your internal team to work on more pressing tasks. However, you will still be paying for the work to be done by an expert. With telematics, a lot of your administration work becomes automatic. Important figures such as mileage, fuel, and maintenance dates are all documented easily and accurately.
A car allowance is a sum of money given to an employee by their employer. The money is given on the basis that the employee needs a vehicle to undertake their job role, however, dependent on your policy, they may not necessarily purchase a car with the money. If they already have a suitable car, they could use the allowance to help them run it.
Let’s weigh up the pros and cons of this model.
1. Flexibility for employees
The main benefit for employees when it comes to car allowance
is the flexibility. With an allowance, drivers are free to choose the car of their choice and this can help them to save money in the long run. After all, most drivers use their cars for business and personal use, so cost-effectiveness is going to trump image for them. On the other hand, image is very important to employers and this results in company cars not always being the most efficient for drivers.
2. Flexibility for employers
Car allowance can also increase flexibility for companies. When the company owns the car outright or leases it, they are essentially stuck with it, even if the need is no longer there. By offering employees allowance instead, they free themselves from this burden and increase cash flow through the business.
3. Less administration
A lot of the admin responsibilities fall on the employee when they opt for a car allowance over a company car. They need to keep track of their mileage, fuel consumption, maintenance checks, and all other administrative duties including arranging insurance with business use. This reduces the strain for the employer and also the time and money required to pay admin staff to do these tasks.
1. Less control over compliance
If one of the best “pros” of a company car is total control, then one of the worst “cons” of car allowance is the lack of control. As the responsibility for all things compliance: MOT, tax, insurance, and so on, falls to the driver, the company has less visibility and control over these processes.
One way of gaining some of that control back is with a fleet management system. Fleet management systems accurately track factors like mileage and driver efficiency to help you keep track of when vehicles are due maintenance checks.
2. Less control over image
When you allow your drivers to choose their own vehicles, there is no way to keep your fleet “on brand”. Drivers will be turning up to meetings in cars that are a range of shapes, sizes, and conditions. And, because the costs fall to the employee, they are likely to save money where they can, which not only impacts on image, but efficiency too.
According to BVRLA, grey fleet cars are an average of 8.2 years and they also have higher emissions on average too. Company car fleets have an average CO2 of 112g/km, while for personal lease fleets that increases to 118g/km.
3. Maintenance responsibilities
When the employee owns the car, all of the maintenance costs must be paid by them. However, this does not relinquish your company from responsibility. It is still the job of the employer to ensure that all cars in the fleet are safe and roadworthy. If any of your drivers, whether driving a company car or their own car for business purposes, risks the health and safety of themselves or another road user, then the company will likely be held accountable.
It is important to have regular checks in place to ensure that your employees are keeping on top of their vehicle maintenance, including MOT and servicing.
So: which is right for your business?
The bottom line is, there is no right or wrong answer. Whether you opt for company cars or car allowance all depends on what works best for your business. You need to weigh up the pros and cons of each and decide which fits best. The answer could even be a combination of the two.
Whether you opt for company cars or car allowances (or a mixture of both), you are still responsible for your fleet when they are travelling for business purposes. For more information about fleet management responsibilities, take a look at our free eBook.
*Please note: The information in this blog post is meant for reference only. TomTom Telematics does not warrant or imply that the use of this text or its products or services can in itself guarantee compliance with your tax or legal obligations. To ensure compliance with these obligations you must always seek individual advice from a legal counsel or a qualified tax compliance specialist.