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

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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

 

Introducing … a tool to help you rethink your approach to pricing

[Article originally published in Fleet Leasing]

Next time you pop into a corner shop, have a chat with the owner behind the till.  In many ways they are the perfect business person because they know everything about their business: the cost of every item they sell, the local competition, how much they have to pay every year in rent, rates, insurance and so on and how much they have to put in the till every week to cover these fixed costs and feed the family. Armed with all of this knowledge the owner finds it relatively easy to decide how much to charge for each item they sell.

I asked a local shopkeeper about his business recently. He told me that he has a great relationship with his customers, many of whom he has known for years. “However”, he said, “I’m here to make money, not friends”.

As businesses grow, roles and responsibilities begin to get divided up between different people and very soon there is no one person who knows everything. People are slotted into silos. They become great experts on their part of the business but they are not particularly familiar with the details of the work being carried out elsewhere in the organisation. Management has to be careful to ensure that decisions made in one part of the business that look perfectly reasonable when viewed through the prism of that department’s responsibilities are still optimal when it comes to meeting the needs of the overall business.

Let’s talk now about leasing company pricing. In most contract hire companies someone is responsible for obtaining new vehicle data, someone else negotiates discounts with dealers and someone else obtains VRB details and negotiates tactical deals with manufacturers.  A team of people probably works on setting residual values, another team works on maintenance budgets and someone else works out the cost of funds for each period and deal profile. Taken together, these items form the cost elements for each vehicle for every term and mileage. Someone from each ‘silo’ pops their contribution into the pricing system. Given that each of these numbers has been arrived at by a process or negotiation or judgement, each leasing company has a different base cost for each vehicle. The sales director is then given a target volume and margin to hit and they do their best to ensure that they quote for each deal as well as they can.

There’s an analogy to be made here with cake-baking. If someone bought the flour they thought would be best for the job, someone else bought the dried fruit, someone else bought the sugar, someone else the butter, someone else decided the quantities to use and how to mix them up and someone else decided how long at what temperature to cook them, you might end up with the perfect cake. Or you might discover that it tasted absolutely awful, because no one person had an overview of what was going on and was thinking about the impact that each decision was going to have on the ultimate texture and flavour of the finished cake.

So, the trick for a contract hire company sales director is to gather together all of the information they can from inside and outside the organisation, assemble this in some way and use it to help them decide how much to quote in every situation. That’s quite a tall order!

All contract hire companies impose some level of control on their sales people to ensure they do not quote at suicidal prices. And all contract hire companies have some market knowledge available to help them to decide what rental to quote.

Here is an interesting tool that you can use to assess how well your company does its pricing. It’s called the Pricing Journey. For the purpose of this article, “price” means margin (which you might call “margin over cost of funds” or “overhead contribution”) plus cost (interest cost, maintenance cost and the other elements shown above).

For the purpose of this article, “price” means margin (which you might call “margin over cost of funds” or “overhead contribution”) plus cost (interest cost, maintenance cost and the other elements shown above).

 

This chart looks at two factors that will be present in every leasing company.

  1. Customer insight is the insight that you have into the way the client is likely to respond to your quote. Customer insight grows if you have a lot of market knowledge, a lot of experience in doing business with that particular customer and a real understanding of where your price sits in the market.
  2. Management control is the control that management introduces to minimise exposure to risk or sub-optimal decisions. So, in a pricing context, management exercises control by imposing minimum margins: the salesperson needs to refer to their line manager for approval to issue a quote below this limit.

If a company has low customer insight and low levels of management control, the result will be chaos. Salespeople will be issuing quotes ‘blind’, with no real idea whether they are pitching very high or very low. As there is no management control, this is a recipe for disaster.

Typically, management introduces controls to impose discipline. They try to gain greater insight into the prices that should be quoted so that opportunities are not being lost by quoting too high, whilst money is not being ‘left on the table’ by quoting too low. This is Pricing Order.

As management increases the amount of data it reviews and the analysis it carries out, it begins to recognise that it has information that it can provide to the salesperson that will increase the probability that the salesperson will be quoting optimum prices. ‘Optimum’ here means the price that maximises the probability of winning the deal whilst being as high as possible.

Management then develops ways to systemise this information, and can then start delegating some decision-making to the salesperson in the knowledge that quotes are being issued with the benefit of a good level of customer insight.

As the quality and quantity of data available to the salesperson at the point of sale improves, customer insight grows to the point that the salesperson can be empowered to issue quotes without very much management control or oversight at all. Management knows that the salesperson is so well informed about the company’s competitive position generally – and for each client specifically – that the salesperson can be empowered to make optimal pricing decisions.

This article is designed to provoke some thoughts. Where is your company on this chart? Are you in position 3, Pricing Order? What would you need to do to move to positions 4 or 5, Pricing Control or Pricing Delegation? Would it ever be possible for you to get to Pricing Empowerment? What would you have to do to get there and what would things look like when you arrived?

Many leasing companies have been looking at this issue. They have realised that all too often they issue quotes with no real idea of whether they are likely to be quoting £10 per month above the competitor’s quote, £10 below, or precisely where they need to be – a few pence below. They know for example that it makes no sense to apply one blanket margin to a particular client (“3% over cost of funds”) regardless of whether the client is ordering cars where the lessor’s RVs are high or low versus the market average. They also know that if they have recently issued 400 quotes on a particular make, model, period and mileage and won 80 of these, and issued 400 quotes on a different make, model, period and mileage and won 20 of these, this is probably telling them something about their relative competitiveness on those two deals and that they should use this insight to nudge up their pricing on one deal and nudge down their pricing on the other.

And they are coming to realise that it is necessary to have one person – one brain – sitting on top of all of the data and information at the company’s disposal in order to try to make sense of it and to use it to improve the way the business does its pricing.

Professor Colin Tourick

 

Great press review of Company Car and Van Tax 2016-17 in Asset Finance International Magazine

AFI

 

 

 

The indispensable guide for UK fleet lessors, and in fact any British organisation that runs company cars, has just had its most recent update – the sixth edition of Company Car and Van Tax written by Colin Tourick.

The book, which is a supplementary publication to Tourick’s book on leasing and fleet management –Managing Your Company Cars – sets out the detailed tax rules, rates and allowances for 2016-17 and will be of interest to all fleet managers, fleet industry professionals or even employees who drive company cars, or their own car, on company business.

In addition to being a complete update on detailed tax rules, rates and allowances, contents range from car sharing to the more complex world of salary sacrifice schemes.

Tourick explained that the book is based on the Budget presented to Parliament by the UK Chancellor of the Exchequer on 16 March 2016.

Colin Tourick is a management consultant specialising in vehicle leasing and management. He has worked in senior roles in the leasing industry since 1980 and for the last 13 years has worked for some of the world’s largest banks, motor manufacturers and vehicle leasing companies.

He is a co-founder of the International Auto Finance Network, which runs conferences, carries out research and runs awards programmes for the fleet and auto finance industries. He is the Grant Thornton Professor of Automotive Management at the University of Buckingham.

Company Car and Van Tax is available from Amazon, tourick.com and all good bookshops. 80 pages.

[Original article here]

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

 

Leave salary sacrifice alone, George

temp coverDear George Osborne,

I understand that Treasury officials are embarking on a review of the future of business car taxation, no doubt in part because the new lease accounting rules will in due course place operating leases (contract hire) on lessees’ balance sheets. Presumably at some stage a file will be popped onto your desk proposing changes to the current arrangements.

This note represent no more than the thoughts of one humble citizen that you might like to consider before signing off any changes.

Every student of accountancy is taught about the “Canons of Taxation”, which were first espoused by Adam Smith in his book An Inquiry Into The Nature And Causes Of The Wealth Of Nations, one of the fundamental treatises on capitalism. Smith said that to in order to be good, a system of taxation should meet four tests, or canons. It should be fair, certain, convenient for the taxpayer and economical to connect.

Adam Smith would no doubt have had quite a lot to say about the way tax is currently charged on business cars. In some regards the current systems stretches fairness and certainty to the limit, so perhaps now would be a good time to put things right.

Fuel benefit tax is inherently unfair. 200,000 company car drivers pay this tax via PAYE. It is meant to tax the employee on the benefit they have received because their employer has paid for their private mileage. The problem is that it is payable in full even if the employer pays the cost of only one private mile in a year. In many – perhaps most – cases, the tax these employees pay exceeds the benefit of the free fuel that they are receiving. Please take the opportunity to fix this. At the very least, HMRC could provide guidance to employees to help them calculate whether they are actually receiving any net benefit. And prompting employers to review this area might also be helpful.

Company car benefit in kind (BIK) tax is designed to charge the employee for the benefit of having a car that is available to use for private mileage. This is a piece of cop-out language that governments have used for years to make life easier for themselves at the expense of the employee. For in truth an employee doesn’t benefit from having a car sitting on their drive at night, they benefit when they actually drive the car. However BIK tax charges the employee the same amount whether they drive 1 or 10,000 private miles per annum. Can this be fair?

There appears to be a disconnect between the government’s desire to encourage employees to take up low CO2 cars and the steep rise in the BIK tax that will be payable on these cars over the next few years. The driver of a car emitting 1-75 g/km of CO2 was taxed on 5% of the car’s list price last year and in four years’ time this will nearly quadruple to 19%. Is this rapid increase consistent with your government’s environmental credentials, and is it actually fair?

The U.K. is currently breaching EU air-pollution limits as set out in the 2008 Air Quality Directive, and the government is facing potentially huge fines from the EU. This is a very serious matter. It has been estimated that poor air quality causes 29,000 premature deaths each year in the UK. London has one of the highest levels of nitrogen dioxide and NOx emissions of any major European city, well over the approved limits. If you are going to change the tax system for business cars, you now have a golden opportunity to base it on one than one emission, including carbon dioxide, nitrogen oxides and particulates. The whole system – capital allowances, lease rental disallowance, benefit in kind tax, national insurance and VAT – should  reflect this. And leasing companies should be given first year allowances to boost the take up of zero emission cars.

One thing that was definitely unfair – and breached the canon of certainty – was the reintroduction of the 3% diesel surcharge. Company car drivers have been told for some years that this surcharge would be dropped and they would have chosen their cars armed with this knowledge. They cannot now do anything about this but just have to pay the extra tax until their three or four year lease expires. They have therefore been trapped into paying this extra tax which in most cases will have increased their BIK tax payable by more than 10%. Drivers choosing new diesel cars now can make an informed decision in the knowledge that the diesel surcharge has been reinstated, but drivers already driving diesel cars – i.e. most company car drivers – cannot do so. Therefore the rapid re-introduction of this surcharge was certainly unfair.

When you make your decision about altering the current regime, please bear in mind how important it is that the new system should keep people in company cars rather than encouraging the use of privately owned (“grey fleet”) cars for company business. Otherwise we will have a health and safety nightmare, companies will have an additional administrative burden and there will be a rush to introduce Employee Car Ownership Schemes (which always add a significant administrative burden).

Should you decide to change the tax rules as a result of the lease accounting changes, leasing companies will almost definitely have to invoke the “tax variation” clauses in their lease agreements, adjusting the rentals they charge in order to retain their after-tax margins. Most UK lease agreements contain these clauses. It would be really helpful if you would grandfather the tax treatment of any existing business cars and allow these cars to be taxed under the old rules until their leases expire. Please don’t ask the leasing industry to recalculate the rentals on 1.3 million company cars. This will add a significant burden to them and also cause hassle with clients, many of whom will not understand the tax-based discounted cash flow analysis the leasing company has had to use in order to recalculate the rentals.

You said in the Autumn Statement that you plan to look at salary sacrifice for cars. When you do so, please take a holistic approach and look at the totality of the system rather than just the income tax and NI calculation for an individual employee, because there is some evidence that salary sacrifice is a net generator of income for the Exchequer. If you were to adopt a holistic approach I think you would discover that most salary sacrifice cars are acquired for use by employees who would not otherwise be entitled to a company car and who have never bought a new car before. This transaction therefore generates a new car purchase that would not otherwise have taken place. The Exchequer benefits in a whole variety of ways from this transaction. The car manufacturer (or importer) and dealer pay corporation tax on the profit they make on the sale; VAT is collected on the sale; BIK tax is payable by the employee throughout the period they have they use of the car and NI is payable by both the employer and the employee. Salary sacrifice also brings a new car into the UK car parc, one that will almost definitely be greener than the one it replaces. In addition, there are significant benefits for the employer. They know that when an employee drives their salary sacrifice car for business mileage they are doing so in a modern, reliable, low CO2, low NOx car rather than an older, less reliable, high CO2, high NOx car. There is much more to salary sacrifice than meets the eye.

And one final request. Please have a look again at the system for capital allowances on business cars. It is currently quite possible that if a company were to buy a business car for a 25-year-old employee today and sell it after three years they will still have not received tax relief (capital allowances) on the full depreciation of that car 42 years later when that employee retires aged 67. This is bizarre, unjustifiable and therefore unfair. You could resolve it by the stroke of a pen by allowing companies to claim balancing allowances when cars are sold. And if you fancy boosting investment and economic activity you might also like to look at increasing the current levels of writing down allowance, which at 8% and 18% encourage nothing at all.

Your humble citizen

Colin Tourick

Professor Colin Tourick is the Grant Thornton Professor at the 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