It’s time to look at tax

Article published in Fleet World

Tax isn’t the most fascinating of subjects for most people. However, as a fleet manager a knowledge of tax is unavoidable because every decision you make – including whether you offer company cars or a cash allowance, which cars to put on your fleet, how to finance them, how to pay for maintenance costs, etc – has a tax consequence.

In this article we will look at two taxes that are about to increase sharply and discuss ways you might reduce these.

The first tax is vehicle excise duty. The system is due change from 1 April and there is still time (just) for you to take steps to make some savings.

This chart shows the old and the new VED rates:

 

Cars registered before 1 April 2017 Cars registered on or after 1 April 2017
CO2 emissions

g/km

First year rate Standard rate CO2 emissions (g/km) First year rate Standard rate for petrol or diesel*

 

Petrol and diesel Alternative fuel cars#
Up to 100 £0.00 £0.00 0 £0 £0 £0
1-50 £10 £0 £140
51-75 £25 £15 £140
76-90 £100 £90 £140
91-100 £120 £110 £140
101-110 £0.00 £20.00 101-110 £140 £130 £140
111-120 £0.00 £30.00 110 -130 £160 £150 £140
121-130 £0.00 £110.00
131-140 £130.00 £130.00 131-150 £200 £190 £140
141-150 £145.00 £145.00
151-165 £185.00 £185.00 151-170 £500 £490 £140
166-175 £300.00 £210.00
176-185 £355.00 £230.00 171-190 £800 £790 £140
186-200 £500.00 £270.00
201-225 £650.00 £295.00 191-225 £1200 £1190 £140
226-255 £885.00 £500.00 226-255 £1700 £1690 £140
Over 255 £1,120.00 £515.00 Over 255 £2000 £1990 £140

*£10 discount for non-electric cars emitting any CO2

#Alternative fuel includes hybrids, bio-ethanol and LPG

There is an additional £310 payable for five years after the first 12 months for cars costing over £40,000 that were first registered on or after 1 April 2017.

 

Fuel Standard annual rate Additional rate Total annual payment
Electric £0 £310 £310
Alternative £130 £310 £440
Petrol or diesel £140 £310 £450

After 5 years, the standard annual rate is payable, depending on which fuel the vehicle uses.

We now have a system that is more complicated than before. The first thing to notice is that VED is now going to be payable for the first time on cars emitting less than 101g/km of CO2. Quite a lot of VED, in fact: £680 over four years for a diesel car emitting 91-100g/km (first year rate plus standard rate). You can add another £930 to that if the list price exceeds £40,000. This will annoy fleet managers who made a conscious effort to move their employees into low emission cars.

According to the Department of Transport, the national average emission level for all new cars is 120.8g/km.

The latest BVRLA figures show that new cars added to their members’ fleets in Q4 2016 emitted an average of 110.9g/km. This falls by about 2g/km each year, so we can deduce that the average fleet car will probably be emitting just below 110g/km very soon. VED is currently £20 per pa for those cars or £80 over a four year life, but for cars registered from 1 April that £80 will become a whopping £700 (£1,630 if they cost over £40,000). That’s a hefty increase that won’t have been accounted for in most fleet managers’ budgets.

There is a very small window of opportunity left for you to save that extra amount – order new cars now and have them registered before 1 April. In fact, if you can get any new sub-120g/km car on the road before 1 April you’ll save hundreds of pounds in VED.

The other way you can save VED for a short while after 1 April is by buying (or leasing) a nearly new car, because it’s the vehicle registration date that determines the VED treatment rather than the date you take it onto your fleet. There are always lots of pre-registered cars in the market. Now might be the time to ask your dealer or leasing company if they can get hold of one for you. The lease rental will be quite a bit lower too.

The other tax to be aware of at the moment is benefit in kind (BIK) tax on company cars.

The general rule is that BIK tax is calculated by multiplying the list price of the car by the employee’s marginal tax rate and the ‘appropriate percentage’ shown in this chart.

 

APPROPRIATE PERCENTAGES FOR CAR BENEFIT CALCULATIONS

 

2016-17 2017-18 2018-19 2019-20
CO2

emissions

CO2

emissions

CO2

emissions

CO2

emissions

 

0-50

 

7%

 

0-50

 

9%

 

0-50

 

13%

 

0-50

 

16%

51-75 11% 51-75 13% 51-75 16% 51-75 19%
 

76-94

 

15%

 

76-94

 

17%

 

76-94

 

19%

 

76-94

 

22%

95-99 16% 95-99 18% 95-99 20% 95-99 23%
100-104 17% 100-104 19% 100-104 21% 100-104 24%
105-109 18% 105-109 20% 105-109 22% 105-109 25%
110-114 19% 110-114 21% 110-114 23% 110-114 26%
115-119 20% 115-119 22% 115-119 24% 115-119 27%
120-124 21% 120-124 23% 120-124 25% 120-124 28%
125-129 22% 125-129 24% 125-129 26% 125-129 29%
 

130-134

 

23%

 

130-134

 

25%

 

130-134

 

27%

 

130-134

 

30%

135-139 24% 135-139 26% 135-139 28% 135-139 31%
140-144 25% 140-144 27% 140-144 29% 140-144 32%
145-149 26% 145-149 28% 145-149 30% 145-149 33%
150-154 27% 150-154 29% 150-154 31% 150-154 34%
155-159 28% 155-159 30% 155-159 32% 155-159 35%
160-164 29% 160-164 31% 160-164 33% 160-164 36%
165-169 30% 165-169 32% 165-169 34% 165 and above 37%
170-174 31% 170-174 33% 170-174 35%
175-179 32% 175-179 34% 175-179 36%
180-184 33% 180-184 35% 180 and above 37%
185-189 34% 185-189 36%  

Add 3% for diesel cars, up to a maximum of 37% in total.

 

190-194 35% 190 & above 37%
195-199 36%
200 and above 37%

 

The appropriate percentages will rise substantially over the next few years, particularly for drivers of lower-emission cars. Whilst the actual tax paid by these employees will still be relatively low, the annual percentage increases will be high. So, for example, an employee currently driving a car emitting 99g/km will see their appropriate percentage rise from 16% to 23% in just over three years’ time, a whopping 43.75% more than they are paying today.

So what can you do when these employees start grumbling about this steep increase?

One option would be to see whether there are cars that emit lower levels of CO2 that might be suitable to put onto your fleet list.

Another interesting option would be to check to see whether there are savings to be made from encouraging employees to lease their own vehicles direct from your leasing company using a personal contract hire agreement. You would pay them a cash allowance and they could claim for business mileage at the HMRC approved rates. It is important – really important – that you don’t let this become a free-for-all with employees going off and doing their own thing, because very soon you’d find yourself doing more work to ensure that these cars are being taxed, insured and serviced on time.

Yet another option would be to look at setting up an Employee Car Ownership Scheme (ECOS). These have fallen out of fashion but it seems there may be a resurgence afoot, and at least one leasing company has just started offering these to relatively small fleets.

If you want the best possible solution – total control, lowest cost – you could opt for a hybrid ECOS/contract hire scheme. These represent the gold standard in cost-optimisation. They aren’t for the feint hearted but they really do tick a lot of boxes.

Every ECO scheme gets HMRC approval but there was some ambiguity around the treatment of AMAPs in the wording of the draft finance bill relating to salary sacrifice and cash allowances.  This should be resolved within the next few weeks so we won’t go into details here. However, if you decide to explore changes in your funding method, make sure you get professional tax advice.

 

Professor Colin Tourick

 

Britain Under The Bonnet report

Foreword 

Dealers have been under pressure for years. To maximise turnover they have to invest in large, expensive premises in prime locations and to hold large stocks. If they have a manufacturer’s franchise they need to invest heavily to meet the manufacturers’ standards. When they sell a new car to a consumer they come under pressure to discount the new car price or ramp up the trade-in price and when they sell to a business or a leasing company they make very little indeed. Servicing and repairs used to offer a good opportunity for revenue but this has been trimmed back with the rise of independent garages and fast-fits, whilst most manufacturers have lengthened car servicing intervals. Used car sales can offer good profit opportunities but here again the dealer is constantly under price pressure.

So dealers reading this report will be encouraged to note that consumers still value them highly and that, for nearly a half of the consumers surveyed, going to the dealer for advice was their first step in the buying process. Whilst most buyers tend to do their research online, those that went to a dealer instead spent on half as much time choosing their car. It seems that the internet is great for feeding up information but perhaps not so great as a seasoned car salesman at answering questions.

As the report says, the internet isn’t going to mark the end of car dealers any time soon, and it is encouraging to note that most dealers are positive about the next 12 months.

Another interesting insight from the report is that Millennials – those aged 19-35 – are 50% more likely to acquire a car using finance than older buyers. This is clearly driven by the fact that so many people start their working lives these days with £45,000+ of student debt and simply don’t have the cash to buy a car. This will be music to dealers’ ears because finance commission offers dealers a good revenue stream.

Pre-registrations continue to be a feature of the market, as the report makes clear. Dealers don’t like having to pre-register cars: it uses up credit lines and makes them take on additional risks. The fact is that if pre-registrations were to grow it would make it ever more difficult for manufacturers to sell new cars. Why pay list price for a new car when you can buy one 90 days old that has driven negligible mileage for 20% less?

As the report makes clear, Brexit is casting a shadow over the industry and making dealers concerned about a new recession.

Whilst the likely outcome of the Brexit negotiations is neither known nor knowable, the report offers food for thought for dealers as we move into uncertain times:

  • With so many buyers carrying out online research before entering a dealership, how can you alter your web presence to encourage those online researchers to take the next step and walk into your dealership?
  • With economic uncertainty, buyers are likely to defer replacing their cars. How might you reorganise your sales and marketing operation to make sure that you don’t end up losing volume? Better IT? Better use of data? A more proactive approach to selling?
  • The growth in new car sales in recent years is delivering large numbers of used cars into the market. Buyers will have lots of options so dealers will have to choose the right stock to hold, price it keenly and be proactive in trying to find buyers. (You sold a 3-year-old used car to Mr X 3 years ago? Now might be just to time to call him to see if he wants a replacement).
  • Women now account for a significant proportion of buyers. How could you tailor your sales approach to be more sensitive to gender differences?
  • Is now quite normal for buyers to walk into a dealership and find they know more about a car or a service than the salesperson. This reflects badly on your dealership and makes it less likely you’ll win the sale. Is your staff training up to scratch?
  • Consumers said that, when buying a car, engine size is the most popular consideration (56% of respondents), followed by the manufacturer (52%) and its efficiency (46%). Clearly, consumers don’t realise that brake horsepower and time to 60mph are better determinants of a good driving experience than engine size. Is this something your salespeople might tell prospective customers?

As you make your way through this fascinating report you will find valuable insights into steps you might take to ensure that your business thrives in the future.

Professor Colin Tourick MSc FCA FCCA MICFM

University of Buckingham

 

Mobility article: Asset Finance Pricing Review published by Asset Finance International 

img_4631img_4632

Annual Report to the Shareholders of Mega Mobility Ecosystem Holdings Plc for the year ended 31 December 2026

(as imagined by Professor Colin Tourick)

Dear Shareholders

It gives me great pleasure to report that 2026 was another great year for our company. As you will see from the financial statements our company has never been stronger.

In this my first annual report I wish to pay tribute to the far-sightedness of our Chairman who a mere 13 years ago started making the changes that turned this business from a modest player in the UK fleet leasing industry from the global giant it is today.

In was early in 2014 that he first recognised that new market opportunities were waiting to be explored and exploited, though initially even he didn’t realise where these ideas would take us.

For some years, people had noticed that young people had become less interested in driving cars than their parents’ generation had been. They were likely to have been to university and will have started off their working lives with significant levels of student debts. (How quaint it seems now to realise that there was a time, before the 2018 Education Act, when students actually had to pay their own tuition fees). They were also more likely to live in urban areas where a car was a bit of a liability.

There was talk of ‘mobility management’ but not much actually happened; mostly it was just talk, though the Chairman noticed that the ‘sharing economy’ was also growing and that people were becoming more willing to share journeys to work or to use car clubs.

It was when the Chairman began looking at developments in autonomous cars that he realised that the tectonic plates of vehicular travel were shifting and he set out to put the company at the forefront of those changes.

The Project started in early 2015. The first fruit of The Project was the development of a small online program to help clients manage their pool and company cars. A driver went online, said when they wanted to travel and the system allocated a vehicle to them. A simple client-specified algorithm optimised the cost and CO2 emissions of the journey.

In 2016 work started in earnest to expand the scope of this program dramatically, so that it could optimise not just the use of a finite group of cars but the travel choice for a whole journey. The mission was clear: if an employee wishes to travel from A to B they have multiple options available to them, including their private car, company car (theirs or a colleague’s), a car club car, train, bus, plane, private bicycle, public bicycle, taxi hire car or their own two legs. The system needed to deliver the lowest-cost, least emissions and the fastest journey, with the trade-off between these three variables being set in advance by the employer and any necessary payments (including fares, hire costs, tolls and parking charges) being taken care of automatically. The project involved connecting the company’s systems with multiple databases and proved to be incredibly difficult.

There were two problems. First, each database held data in a different way, so fields needed to be understood and mapped and there needed to be agreement between the various data providers not to change the use of a field without consultation. The second problem was reaching agreement with travel companies, airlines, hire companies and so on, each of whom could see the advantage in having a joined-up system – which came to be known as an ‘ecosystem’ – though many had to be persuaded to co-operate.

By early 2018 the company had cracked the major problems and launched Ecosystem One, the forerunner of Ecosystem Five that we have today.

The Chairman’s prescience was proved in 2018 when the government imposed strict pollution controls on cities, dramatically increasing the daily charges for all vehicles entering urban low emission zones. Suddenly companies stared looking for alternatives to the existing models of mobility.

2018 was also the year we launched Ecosystem Two. This allowed clients to tailor the system to their needs but also opened it up to anyone who wished to use it. We no longer had to go to businesses to pitch to win their business. If they wished, they could simply start using the system for free. We made our income by taking a small slice of the fares, hire charges, fees, parking charges etc levied by the suppliers of services. The Chairman had anticipated that Ecosystem Two would prove popular with private individuals as well as corporates, and of course he was right because it became the journey planning and booking tool of choice for a generation keen to get around as cheaply and effectively as possible.

Ecosystem Two also started taking data directly from connected vehicles and using it in a whole host of interesting ways, including for the first time making the decision about when a vehicle would be sent for servicing. By 2018 manufacturers had accepted that cars could monitor their own essential functions and could decide when they needed to be serviced. ‘Variable servicing’ had been in place for some years but this moved us up to a new level. Our maintenance controllers were still an essential part of our service, of course, especially as they could now interrogate each vehicle remotely to see what work needed to be done.

All of this of course was setting the path towards our integration with the autonomous taxis, which happened in 2019. Uber had been developing autonomous taxis since 2015 and, once they had managed to deal with all of the regulatory and insurance issues and were launched in earnest in 2019, we integrated with them. Deals followed with Gett, Lyft, Curb, Grab, Didi Chuxing and Ola, taking us for the first time into the USA, China, Southeast Asia and India.

When we launched Ecosystem Three in the UK in 2019 we became the first company to offer a full end-to-end journey service that included autonomous cars. Now in 2026 when most cars, many commercial vehicles and all taxis are operating autonomously, young people can barely remember the days when all vehicles had a driver. For them it is completely normal that when they book a journey using services such as Ecosystem Five, a driverless vehicle turns up, takes them to their destination then drives off to pick up the next passenger.

These developments of course shook the foundations of the motor finance and fleet leasing industries. As the need to operate fleets of vehicles declined, some motor finance and fleet leasing companies focussed exclusively on mission-critical fleets of cars and vans for the emergency services, delivery companies, service companies and so on – organisations whose mobility needs could not be met through the use of shared vehicles. Others have followed the lead we have taken and run their own fleets of autonomous cars. Whilst we are the market leader in the UK, with 270,000 vehicles, we do have smaller competitors snapping at our heels, some of whom didn’t even exist in 2016 and came along with solutions that disrupted the existing market.

In other countries we typically rank third or fourth and there are still many countries that have yet to embrace autonomous vehicles so we still have a lot of potential to grow.

Whilst Ecosystem is by far our largest division I must of course pay tribute to the great work being done by our Urban Realignment team which we set up only two years ago. They have just finished digging up their 25,000th domestic home driveway and replacing it with beautiful green landscaping. In 2016 few people would have realised that once all cars would no longer be operated by companies or owned by individuals there would be no need for domestic houses to have private driveways.

Urban Realignment have also recently won contracts to remodel the town centres in 12 urban areas, removing crash barriers, traffic lights dual carriageways etc. Now that cars always behave properly and ‘speak’ to each other there is no need to devote as much road space to cars or to segregate them so much from pedestrians: every car knows to stop if they see a pedestrian.

Urban Realignment have also just converted their 20th public car park into residential housing and are pitching for contracts to convert office car parks into either landscaped park or office space.

We are looking forward to 2027 being another record-breaking year.

Chief Executive

 

An economic briefing for fleet managers

In this article we will be looking at some macroeconomic indicators and the reasons they should be of interest to fleet managers.

I am grateful to Dr. Eleftherios Filippiadis of University of Buckingham Business School, whose recent lecture inspired me to write this article and who provided much of the background data.

There are many macroeconomic indicators affecting UK business. The main ones we will discuss are:

  • GDP growth
  • Interest rates
  • Consumer confidence and
  • The budget deficits

There is a strong correlation between GDP growth and UK car registrations. When GDP is increasing businesses are confident to take on more staff and business vehicles, and consumers feel secure enough to buy new cars. The government is forecasting a GDP growth rate of 2% p.a. from 2016 to 2020 (source: Office for Budget Responsibility), which is lower than the 2.9% in 2014 and 2.2% in 2015.

When productivity declines (strikes, failure by businesses to invest in new technology) this reduces the willingness of businesses to invest, and if real wages do not grow (inflation rises faster than incomes or there is an increase in zero hours’ contracts) this reduces disposable income in the hands of consumers. Either will threaten the projected GDP growth rate, making it less likely that employers will increase headcount or add to their vehicle fleets.

A possible Brexit would also threaten the GDP growth rate, as so little is known about what might happen if the UK voted to leave the EU. Markets hate uncertainty and if the electorate votes to Leave the economy might stand still whilst employers wait to find out what’s going to happen next. We would be in uncharted waters.

The official Bank Rate has remained at 0.5% for seven years, significantly reducing costs for UK businesses. There is no expectation of a rise in interest rates this year, though when it does come it will hit companies’ bottom lines and dampen demand in the economy (though savers will rejoice).

Consumer confidence is a key determinant of the state of the economy. If consumers are confident they will go out and spend, keeping the economy buoyant. The Consumer Confidence Index is currently high though it has fallen slightly since the peak in 2014.

The UK government has announced its intention to deliver a surplus on public sector net borrowing by the end of 2019-20 and in each subsequent year. If it fails to balance the books it will need to raise taxes (income tax, corporate tax, indirect tax or all three) which could slow down GDP. This is because higher taxes on companies discourage investment in, and by, businesses, and higher personal taxes reduce consumers’ disposable income.

So, as a fleet manager, what might these macroeconomic indicators mean to you? How might you respond if one of these numbers rose or fell?

Every company is different. Whilst most do well when GDP rises, others fare better when it falls.  Some businesses will do well from Brexit whilst others won’t. There are no rules that work for every company, so from this point on we’ll generalise.

If you see an increase in GDP growth and consumer confidence, things are looking up for the economy. You might expect business to grow. Your company may well expand. More cars, more responsibility, more issues to control. Could this be the time to outsource your fleet management or to invest in some fleet software to help streamline your fleet administration?

If the economy is growing there will be more competition for new recruits. Is it time to review your fleet policy to ensure the cars on offer will be attractive to job applicants?

Conversely, when GDP growth or consumer confidence fall, you may find your company is less willing to invest. This might be the time to think about getting more from your existing assets. Do you need as many company cars? Would you save money if you took on a few pool cars rather than allowing your employees to use their private cars for business mileage? How can you get more out of your fleet budget? Is it time to take more control over mileage claims, perhaps by introducing mileage claim auditing or telematics? Telematics might also reduce your insurance claims and help keep down your premiums.

If productivity in your business were to fall, you may find your fleet budget being cut. You may have to deliver the same amount of corporate mobility and the same number of cars for less. Could this be time to ask your leasing company to come up with a fleet list of attractive cars that staff will like and that will do the job but which will cost less to run? Here we are talking about fuel cost and Class 1A NIC as well as maintenance costs and the monthly lease rental.

At some stage, interest rates are going to rise. If the market expects the Bank Rate to rise, actual market rates may creep up more quickly than the Bank Rate. This will be reflected in the cost of three and four year leases, because leasing companies’ own borrowing costs will rise. It is worthwhile monitoring Bank Rate and leasing company cost of funds (they will generally tell you if you ask).

If you currently fund your cars from working capital, bank overdraft or variable rate finance deals (such as variable rate lease purchase, finance lease or HP) at some stage you will need to decide whether to move to a fixed interest rate funding method (fixed rate HP, fixed rate finance lease or contract hire) to lock in low interest rates for 3-4 years before prices rise.

Keep an eye on the budget deficit. If it doesn’t fall as fast as the government wants they may be tempted to increase taxes. There are no votes in company car tax and taxes on business vehicles. It seems that the best way to protect your business would be to keep on driving down the average CO2 emissions of your fleet. Low CO2 cars tend to be smaller and more efficient, and they cost less to buy, maintain and run than higher-CO2 cars. Zero CO2 cars are still relatively expensive to buy, though for some drivers the fuel cost saving makes the extra cost worthwhile. In any event by moving to lower-CO2 or zero-CO2 cars you’re likely to be protecting yourself and your employees from sudden increases in car-related taxes.

Fleet managers and economics. Four words you don’t often hear mentioned in the same sentence. But economics provides the background for all business decisions and can therefore drive fleet decisions too.

Professor Colin Tourick

University of Buckingham Business School

 

How good is your relationship with your contract hire company?

temp coverThe relationship between contract hire companies and their customers varies enormously. In fact someone should write a book about this topic one day. At the one extreme you have fleet managers who say “we’ve been doing business with them for years, they give us the service we need and we never give the relationship a minute’s thought”. At the other extreme you have the fleet managers who say ” they charge us a fortune, hefty unexpected  invoices arrive for all sorts of things we hadn’t budgeted for and we are wary of them”.

Most client/supplier relationships lay somewhere between these two extremes of course, but if you are a fleet manager and you recognise some elements of your own situation in the second situation described above – “we are wary of them” – this article is for you.

The core proposition of every contract hire company is that they will deliver a vehicle, let you run it for some years, renew the road tax annually, pay for tyres and service, maintenance and repair (“SMR”) costs and collect the vehicle at the end of the contract.

Delivering this ever-so-simple product (one supplier used to advertise “We look after everything – all you have to do is put in fuel and drive it”) is anything but simple for the contract hire company. You may see very little activity from them – it may seem that they just they deliver you cars, send in a monthly invoice and pay the bills. However, rather like a swan, whilst it all looks serene up top they are padding away furiously just below the surface.

They have to manage a cat’s cradle of relationships with manufacturers, dealers, roadside assistance companies, banks, data providers, technology companies, remarketing companies, daily hire companies, accident management companies, fuel card companies, the DVLA and others, to ensure that you get the service you need.

Where tension exists between leasing companies and their clients, as often as not it’s because the leasing company hasn’t explained adequately why it does some of the things it does.

It can be annoying when they ask you for financial information about your company. “Why do they need that? They can always repossess the cars if we don’t pay.” Well yes, they can, but they don’t want to and their pricing certainly doesn’t allow for that sort of cost.

It can be frustrating when one of your employees leaves, you ask how much it would cost to terminate their car lease and you’re told it will be thousands of pounds.

And – perhaps top of all fleet managers’ lists of gripes – it can be perplexing when a bill arrives for vehicle damage you didn’t know about and the driver insists the damage wasn’t really that bad at all.

Let’s look at the detail behind those last two items – early termination charges and end-of-life damage charges – because they probably generate more heat between leasing companies and their clients than anything else.

First, early termination.

There is one key difference between leasing companies and daily hire companies. When you order a hire car for a few days or weeks you probably aren’t that bothered what make or model of car turns up. So long as the car is in the right hire group – small, mid-size, estate, 4×4 etc – you’ll probably be happy.

However when you order the company car you’ll  be driving for the next three or four years you will be very fussy indeed about which car arrives, and so is every other company car driver. So the leasing company will have gone out and ordered that car specifically for you and by and large they will be unable to redeploy it once you hand it back. They’ll have to sell it, which causes a problem because the price they receive will depend on the age and mileage of the car when you hand it back, and the state of the used car market at that date.

You might decide that you want to know at the outset how much it would cost you to early terminate the car. Alternatively, you might prefer that they just sell the car and charge you the amount necessary to clear their books. Almost all leasing companies will allow you this choice, and will build it into your agreement. Incidentally, that’s something you really must do if you want to avoid shocks later: build the early termination method into your lease agreement.

If you want complete certainty as to the amount you will have to pay to terminate your lease early, your leasing company will probably offer you one of four methods: percentage of future rentals, a fixed number of rentals, the rule of 78 or the annuity method.

Percentage of future rentals [or the fixed number of future] are self-explanatory. “If you terminate in the first 12 months we will charge you X% of all future rentals [or 12 rentals], if you terminate in the second 12 months we will charge you Y% of all future rentals [or 6 rentals], etc.

We have covered the rule of 78 and annuity methods in these articles in the past so won’t go into detail here now. Suffice to say that these are ways to determine the balance outstanding on a financing agreement at any point in the life of the contract. If you know how a repayment mortgage works you’ll be familiar with this approach: each month’s payment is allocated mainly to pay off interest in the early part of the contract and mainly pay off capital later on. (If you would like us to explain this in more detail in next month’s article, please let us know).

The alternative approach is the actual cost method, whereby the lessor will charge you the balance outstanding in their books less the net price they receive on selling the car.

Any of these approaches might be more or less expensive than the other, for a particular car on a particular day. You just need to choose which method you prefer and this should help avoid any shocks. If you don’t like uncertainty, go for the actual cost method.

The other tricky area in relationships between customers and suppliers is end-of-life damage charges. Most UK contract hire companies belong to the British Vehicle Rental and Leasing Association and they have to comply with the BVRLA’s excellent Fair Wear and Tear Guide which defines the line between fair wear and unfair damage. If you haven’t seen the Fair Wear and Tear Guide, ask your leasing company for copies and make sure your drivers are familiar with the contents.

The best way to ensure your leasing company doesn’t charge for damage is to make sure the car is in an acceptable condition at the end of the lease. This means ensuring that your drivers keep their cars in reasonable condition, report damage as soon as it occurs and get it repaired. Make sure the work is done professionally, otherwise the leasing company may still charge for the damage.

Most leasing companies don’t send damaged end-of-contract cars for repair. They sell them at auction to dealers who can get cars repaired for roughly the same price as the leasing company would pay. The leasing company will charge you for the reduction in the value of the car but in truth this figure is very hard to calculate. The actual price a car fetches at auction on a particular day can be affected by all sorts of things, not just its condition, so they will do their best to calculate the diminution in value of the car. This calculation is part art and part science.

If you think a charge is particularly high, challenge it. Every leasing company will be prefer to explain something rather than leaving you dissatisfied.

Most leasing agreements say that the supplier won’t charge you for unfair wear or tear if the value is less than a fixed amount, often £100 or £150.

And if you really don’t want to eliminate the issue of damage charges, have every vehicle professionally inspected shortly before the end of the lease so that any necessary remedial work can be done before the lease ends.

Professor Colin Tourick

Grant Thornton Professor, University of Buckingham Business School

Lease accounting changes. What’s this all about?

 

The International Accounting Standards Board has published a new set of rules – an “accounting standard” – setting how companies should account for leases in their books. This standard has been nearly a decade in the making, though the need to change lease accounting has actually been on the radar of investment companies and academics for more than thirty years.

The business and trade press has been full of articles discussing how these new rules will affect companies’ reported results and the overall attractiveness of leasing.

In this article we will take a rather simpler approach and try to answer the question; At the most basic level, what’s this all about?

All companies publish two key documents annually: a profit and loss account and a balance sheet. The profit and loss account shows revenues, expenses and the difference between them – profits. The balance sheet shows assets and liabilities and the difference between them – shareholders’ funds (or ‘net worth’).

If a company buys a car it shows this on its balance sheet as an asset. In the old days, thirty or so years ago, if a company leased a car it didn’t disclose it on its balance sheet. It simply showed the lease rentals as an expense in its profit and loss account.

There are two types of leases; finance leases and operating leases. A finance lease is one where the risks and rewards of ownership are taken by the lessee (the hirer). The key risk we are interested in here is the risk in the residual value of the car – what it will be worth at the end of the contract. If the lessee bears this risk it’s a finance lease and if the lessor (the leasing company) bears this risk it’s an operating lease.

In the 1980s there was a debate between academics, investment companies and the leasing industry about the nature of finance leases. The academics and investment companies said that a finance lease was effectively a type of a loan that should be disclosed on the balance sheet as a liability, rather than the company just showing the rentals in the profit and loss account. The asset should be shown on the balance sheet as if the company had bought it and used a loan to finance it. The leasing companies said this was wrong and that balance sheets should only show the assets that companies actually owned. The leasing industry lost this argument and the accounting rules were changed in the UK (Statement of Standard Accounting Practice 21) and then internationally (International Accounting Standard 17), putting finance leases onto companies’ balance sheets for the first time.

Finance and operating leases have been treated differently ever since. As well as showing finance leases ‘on balance sheet’, companies also have to disclose details of their operating lease obligations in notes to the accounts.

But the investment companies were still not happy. They pointed out that the distinction between finance leases and operating leases was not particularly helpful to them. They wanted to know what assets were being used in the company, regardless of how these were being financed, so they were manually adjusting companies’ reported results.

Their argument went something like this. Imagine two identical companies that operate in the same market and use the same assets acquired at the same time. Company A buys its assets and funds them by borrowing money from the bank. It makes monthly loan repayments and then repays a lump sum after a few years when it sells the assets. Company B leases its assets from a leasing company, makes monthly payments and then hands back the assets at the end of the lease. The cash flows of these two companies could in fact be identical, but under the current rules Company A shows these assets on its balance sheet and Company B doesn’t. If an investment analyst wants to see which company is making best use of its assets they calculate ‘return on assets’. Company B will have fewer assets on its balance sheet so its return will look higher. So to get a realistic picture the analyst will have to trawl through the notes and try to work out a value for the assets.

There has been another protracted series of discussions about lease accounting lasting nearly a decade, and the academics and investment companies have once again prevailed. The result is a new set of accounting rules called “International Financial Reporting Standard 16, Leases”, which replaces IAS17. Listed companies, banks and some other ‘public interest’ businesses have to comply with IFRS16 for accounting periods commending on or after 1 January 2019 but many will need to change their systems to comply with the new rules well before that in order to be able to show 2018 comparative figures in their 2019 accounts. The vast majority of businesses won’t be affected unless we see a further change in the rules.

Under the new rules the distinction between finance leases and operating leases disappears. The standard-setters have said that even when a company leases an asset under an operating lease, can never own that asset and doesn’t do anything other than pay rentals then hand the asset back at the end of the contract, the lessee still does have an asset; the right to use the asset. It is this which has to be shown on the lessee’s balance sheet (where it will need to be depreciated) and there will be a corresponding liability on the other side of the balance sheet.  Lessees’ profit and loss accounts will have to include depreciation and interest cost on these assets and not the rental charge. As interest cost is always higher in the earlier stages of finance agreements than later on, lessees will now report greater costs in the early years of a new lease than before.

Short-term or low value leases are exempt from the new rules.

The review of lease accounting was a joint exercise between American and international standard-setters, but they could not agree on some points so it is likely that once the US Financial Accounting Standards Board publishes its new standard this will differ from the international standard, adding a degree of complexity for international groups quoted on multiple stock exchanges.

We will have to wait to see whether the European Commission approves of the use of IFRS 16 in Europe, and how (and whether) the tax rules will change following these accounting changes.

As it currently stands, most commentators don’t believe that these changes will have a significant impact on the attractiveness of operating leases (such as contract hire), because the vast majority of companies have chosen operating leases because they are a great form of financing rather than because of any accounting considerations.

Nonetheless, these changes will have a dramatic affect. The IASB believes that affected businesses have US$3.3 trillion of lease commitments, over 85 per cent of which do not appear on their balance sheets.

Professor Colin Tourick

Grant Thornton Professor, University of Buckingham

 

Colin Tourick’s article on mobility management

Fleet management – what’s next?

As a fleet manager you have some clear priorities. You need to: keep your staff mobile so they can do their jobs effectively; ensure that the cars and vans they choose are appropriate for the jobs they need to do; keep costs to a minimum; handle a lot of admin (parking fines, driver licence checking, etc); manage relationships with suppliers (which might include a leasing company, broker, dealers, manufacturers, insurance broker, etc); keep abreast of a wide range of regulatory issues (health and safety, tax, lease accounting, etc); keep drivers happy and strike the right balance between the needs of all your stakeholders including your company’s employees, shareholders, management, HR director and FD.

You probably outsource some of this work to expert third parties but being a fleet manager is still hard work.

The purpose of this article is to highlight a change that is beginning to happen and which could make your stakeholders happy. Though I’m not sure it’s going to make your life any easier.

Historically, a fleet manager would either buy or lease company vehicles and would probably outsource the maintenance and administration to a leasing or a fleet management company. A whole industry – the fleet industry – has grown up to help fleet managers in their role. Manufacturers, dealers, quick fit companies, roadside assistance companies and other suppliers are attuned to your needs and will do all they can to make your life easier.

If you lease your cars it is quite likely that your leasing company gives you access to online tools to help you do your job more effectively: obtaining quotes, downloading P11D information, keeping tabs on who is driving which vehicle, seeing which cars will need defleeting soon, and so on. These tools and services have been refined over decades and in general are very good.

However they were designed to answer one basic question that every fleet manager asked; “What’s the best way to fund and manage our company vehicles?”

Now there’s a new question that fleet managers are asking; “What’s the best way to meet our company’s mobility needs?”

Mobility – it’s a word that keeps on popping up in fleet circles nowadays and if you haven’t considered it now may be a good time to start.

Your employees need to use their company or private (grey fleet) cars for business journeys but you need them to think before they jump behind the wheel every time they go from A to B. Is this journey actually necessary? Is videoconferencing a viable option? Would it be realistic to go by public transport? Could they share a car or use a pool car? Or if they don’t have a company car and are thinking of renting a car, could they use another employee’s company car instead?  Would a car club car be a viable option?

It would be great if they could think through these options and then make the conscious decision to use their company car or personal car if – and only if – that was indeed the best option.

What do we mean by the ‘best’ option?

The best option is probably the one that offers the best trade-off between cost, emissions, journey time and hassle value. And the calculation of this trade-off will probably differ wildly between different businesses.

There’s no point an employee saving £5 off the cost of a journey if the decision-making process is so complex that they end up spending more than this in time-cost whilst making the decision.

And there’d no point saving a few g/km of CO2 by using a lower-emission car if the overall journey is going to take an extra hour (and risk leaving the driver stranded at a train station for another hour if they miss their connection). Though of course it may well be that a rail journey will be a more effective option than a car journey even if it does take much longer, because the employee can work on the train but cannot do so when driving a car.

For some companies (especially those in heavy industries where emissions are the subject of great scrutiny), CO2- or NOx-reduction might be very highly weighted in this trade-off calculation, whereas in other industries cost-reduction might be more important.

So there are all of these trade-offs that need to be considered in designing a system – a mobility system – to optimise cost, emissions, time etc.

Unfortunately there is at present no system out there that can help fleet managers automate this decision process and then organise the journeys. It would be great if a driver could go onto their company’s intranet, key in the details of the journey they want to take and be told the optimum way to travel. It would be even better if the system then gave the driver the option to click a button that would automatically book the railway ticket, reserve the pool car, book the car share or do whatever else was then necessary to make the journey happen, whilst simultaneously registering the cost-savings and CO2-reduction that had just been achieved. And whilst taking into account the company’s travel rules, which would include decisions on how to deal with the trade-offs referred to above.

Whilst there is no such comprehensive system available today, partial systems do exist and a lot of companies are working on comprehensive solutions.

A truly comprehensive solution would need to hold a list of employees (including their home and office addresses), details of the business and personal cars that are currently available to be driven on business journeys (including cost per mile and CO2), the current location of those cars (derived from telematics units), live links to external suppliers (eg daily hire company, car club, rail company etc) and links to live traffic and transport timetables (such as on Google Maps).

If you like the idea of such a system, have a chat with your leasing, car rental or fleet software company and ask how they can help you move forward in this new era of mobility management.

Professor Colin Tourick

Grant Thornton Professor of Automotive Management

 

 

 

 

 

 

 

 

Comment on the VW diesel scandal

AFI

 

 

Quote published in Asset Finance International

Colin Tourick, co-founder of International Auto Finance Network and founder of Colin Tourick & Associates said:

“This is the first revelation that could substantially dent VW’s fleet sales. If company car drivers think that VW’s CO2 emission figures are understated it might make them opt for another manufacturer when choosing their next company car. VW needs to clarify this issue rapidly to avoid any damage to sales”.

 

Article on fleet management software and data

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Colin Tourick’s contribution to an article in Fleet News:

Industry consultant Professor Colin Tourick thinks that, for the first time, suppliers will connect multiple data sources to give a new type of real-time, proactive service to fleet drivers.

For example, the system could send the following text message to a driver if a fault is detected:

“Fifteen minutes ago your engine generated a major fault code which has been transmitted to us.

“We have provisionally booked your car in to XYZ Services tomorrow morning. Mr Jones is expecting you and they have reserved the parts.

“You can continue your journey by taking the 686 bus from outside the garage to your office. They run every 15 minutes from 7.25am. The journey will take 19 minutes. The car will be available to collect from 5pm.” Not so long ago, that kind of service would have been considered futuristic fantasy.

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