The recession could give a new lease of life to company cars as part of
employees’ remuneration and benefit packages, according to the boss of Britain’s largest independent fleet management company.

The last decade has seen a surge in businesses providing cash alternatives to company cars for employees, known as personal contract purchase.

Many employees taking a cash option have used the money to fund a car through a personal leasing scheme.

However, nose-diving residual values are leaving many drivers facing negative equity on their vehicles.

Geoffrey Bray, chairman, of Fleet Support Group, who is witnessing his third recession as an industry boss, said: “Companies are being irresponsible when expecting staff to take-up cash alternatives in the current climate.

“Cash-for-car is nothing but financial engineering from the corporate viewpoint.

"Businesses that value their staff should not be encouraging the take-up of cash alternatives in the current economic climate.

“Employees who are coming to the end of a PCP-style contract are going to be in for a massive shock when they return their car and discover its value is massively below the sum they anticipated.

“As a result they will more than likely hand the car back and walk away and look to return to their employer’s company car scheme.

"Meanwhile, employers that have shelved their traditional company car schemes in favour of cash alternatives may want to reintroduce them.

"Employees, typically a company’s most valuable asset, will in the main be loath to risk the prospect of negative equity in the future.”

CAP figures suggest the shortfalls between the predicted value and the actual value in the economic downturn could top 14%.

According to the car data analyst, in December 2006 the predicted value of a Volvo XC90 D5 S two years later was £18,775. But this car is now estimated as being worth £12,600.

The driver could pay £6,175 more than the car is worth or hand it back to the finance house.

But CAP argues the real issue is ensuring the driver understands the implications of personal contract purchase.

 

"PCP is only a risk to the finance company," said CAP's Mark Norman.

"A fully-informed motorist will realise PCP is only a type of rental with the benefit of not having to worry about the residual value. The car will be under warranty and the driver can hand the car back and have it replaced with a new one at the end of the initial contract. It's like having a mobile phone on contract.

"I can actually see PCP's growing in popularity as long as people see them as a rental, not an ownership, arrangement."

Personal contract purchase schemes typically involve drivers making a series of monthly payments for their car over a pre-determined contract period, usually two or three years.

A final ‘balloon’ payment is made to secure ownership of the car at the end of the contract period.

This payment is based on the predicted end-of-contract value of the car at the time the agreement was taken out.

The growth in popularity of 'cash-for-car' has contributed to the number of company cars in the UK falling to about 1.1 million - 500,000 fewer than when the emissions-based benefit-in-kind tax was introduced in 2002 - according to HM Revenue and Customs’ figures.