Which one for you? Which one for you?
Every main group, and all their derivatives, has a place somewhere in the fleet market. All of them come with a range of features, advantages and disadvantages. Although all of them try to deal with the serious issue of funding some very expensive assets, they do it in a whole range of different ways which can have significant implications on the business.
The list of the main factors which need to be considered when you are looking at any particular funding method includes:
- Overall Cost of the method, as set within the full whole-life cost computation
- Cash Flow Implications
- Balance Sheet Effects
- Taxation on employer - Corporation Tax
- Taxation on employer - VAT
- Taxation on employee - Driver company car tax (as shown on an P11D)
- Flexibility to the business
- HR/ Personnel implications
- Risk profile
- Internal administration and resource costs and implications These represent the broad issues, and most of them relate not just to the vehicles
These represent the broad issues, and most of them relate not just to the vehicles and the fleet choices themselves, but also how the business operates. The fleet needs to be run to meet the needs of the business, even if that means that some parts of the fleet policy are less than optimum.
Looking at the list, it is obvious that many of the points which need to be considered are to do with accountancy, finance and taxation. These are big and important topics which need to be handled by the responsible experts within the organisation. However it is important that the fleet manager has at least some understanding of these issues, to help build expertise through experience, and bring better fleet management into play.
Evaluation of the funding factors
The key aspects of each of the factors can be summarised as follows:
- Overall Cost - This seems so obvious, yet often has to play second fiddle to other factors.For example, if it can be shown that outright purchase gives the lowest overall cost for any given situation, but the company has no cash to buy its vehicles outright, then it is always going to have to settle for second best.
- Cash Flow Implications - In many organisations, cash flow is considered to be more important than actual cost. Matching overall income to expenditure is critical. Any of the funding methods will generally offer some cash flow benefits for each individual vehicle. However, what really matters to the business is the overall cash flow within the fleet. Here, the evaluation has to look at the differences between buying and selling one or two vehicles a month, and paying a rental/ instalment on every vehicle, every month.
- Balance Sheet Effects -This can be extremely important to some businesses, and completely unimportant to others. Usually, when a business wants to look as attractive as possible, particularly when measured on the Return On Capital Employed, there will be a major effort to keep the vehicles off the balance sheet. This is a complex area, and the fleet manager should always seek expert guidance.
- Taxation on employer - Corporation Tax - Naturally, this only matters where the fleet operator is liable for Corporation Tax. Many types of public sector organisation fall outside this range. The key factors are set out in the <Callout 1> on page 7.
- Taxation on employer - VAT - There are two VAT issues concerning fleet vehicles. One relates to whether or not vehicles have private use. If there is no private use, such as pool cars, then in most cases VAT-registered fleet operators (and leasing companies) can recover the VAT on purchase of a new car, but then have to account for VAT within the disposal price, when they sell it. The other issue is in purchase versus lease: all the forms of purchase including hire purchase, contract purchase etc, effectively fall outside the scope of the VAT; all forms of leasing attract VAT on the rentals. Where the vehicle is used for any amount of private use, only half this VAT on the rentals is recoverable by the fleet operator. Plainly, any fleet operator which is not VAT registered faces a significant financial penalty if they cannot recover any of the VAT on leasing rentals. However, leasing companies base all their rental calculations on the VAT-exclusive price (for both purchase and disposal), and this lowers the amount of depreciation they have to include in their rental calculations.
- Taxation on employee - Driver company car tax - Where an employee has the benefit of private use of a car "by virtue of employment", that benefit is taxable. It might sound complicated but it's really quite simple. Please see <Callout 2> on page 7 and 8.
- Flexibility To The Business - Anything which is based round a contract - hire purchase, contract hire, finance leasing etc - will almost certainly impose constraints about what the fleet operator can do to dispose of the vehicle. So if your business has a high turnover of drivers, and your HR policies give every new driver the option of a new car, you are likely to be faced with a significant administration burden and cost, as you deflect vehicles before the end of the agreement. As a separate issue, different funding arrangements bring different assumptions about the range of services which are included, or can be added as extras. The supply side of the industry has worked hard to increase flexibility, and provide plenty of choice in this area.
- HR/ Personnel Implications - The fleet must always be run to suit the needs of the business, so there is no point in trying to run the cheapest possible cars (such as 3 door diesel Polo) when the type of employee you need to attract and retain for your business can expect large MPV or estate models from competing employers. This is another example where the "cheapest" option is not necessarily the one you can adopt. The reasonable and realistic expectations of drivers and an understanding of the competitive environment, is necessary to get the right balance between cost of employment and driver delight.
- Risk Management - There are many more risks running a fleet, than just the insurance/road traffic accident ones. New car prices can vary significantly over a short space of time. Residual values can be strong in one period for one type of car and dramatically weaker in another period. There are risks associated with interest rates, and the type of agreement. Particularly for higher mileage vehicles, maintenance risk can be significant. And of course, road risks fall into this category.Different packages offer to take on more and more of these risks, by "experts" who may be better equipped to deal with them than the fleet operator. But risk transfer normally involves additional cost.
- Internal Administration Factors - If you elect to do everything yourself, you may well stop paying other people a profit, but you may not maximise the direct costs - and doing the job properly in-house will always require a time and management resource. Some funding arrangements build in a high level of administrative support. For example, contract hire should provide the majority of the fleet administration, leaving the fleet manager to concentrate on higher-level management issues. Plainly, if you choose this route, you need to make certain that the promises are actually delivered under Service Level Agreements within the contract terms.
These points have only been covered at a relatively simplistic level. But it is clear that to optimise the fleet funding, you as fleet manager and other managers in the business, need to know what the business actually needs from the fleet, and what range of funding methods are acceptable - and which are completely unacceptable. There is a huge choice in the market, and it can be confusing. Using the pointers given above, evaluated for the circumstances of the individual business, you should be able to narrow down the choice quite quickly.
This is not an area to be treated casually, and the whole management team has to be extremely careful about making changes in the businesses. You may think that switching to a new system makes perfect sense - your Managing Director, Finance Director or HR Director might see things quite differently.