The way a fleet funds its vehicles has a major effect on its operation, impacting a variety of functions such as costs and flexibility.

Last year’s FN50 research of the UK’s largest leasing companies found contract hire (operating lease) is overwhelmingly the most popular funding method, with 91.3% of cars funded that way.

Next most popular was salary sacrifice at 4.9%, contract hire (finance lease) at 3% and employee car ownership at 0.1%. Other was at 0.7%.

It was a similar story for vans, with 82.3% on contract hire (operating lease), 14% contract hire (finance lease), and 2.7% other.

These figures do not take into account the number of vehicles acquired through outright purchase, which is a popular option for many organisations.

Historically, many companies have adopted a simple approach to funding for their vehicles – contract hire for cars, outright purchase for vans – believing that using more than those results in an increased administrative burden, not least the additional accounting treatment needed to cater for vehicles both on and off the balance sheet.

In contrast, using just one method requires just one management system while also generating minimal back-office work.

However, many experts assert that potential savings gained by introducing different types of funding to cater for a fleet’s individual needs – often called blended funding – can bring considerable benefits that make any increased admin burden worthwhile.

Any organisation considering blended funding should first think through the precise purposes for which it is needed.

Some of the questions that are worth posing to help determine the best funding solution include:

• Are vehicles essential for the job?
• Are they driven only on business trips?
• Are they deemed to be more of a job perk?
• Can they be classed as specialist in terms of the use to which they are put?

Companies should also think through their vehicle operating cycles, whether they can afford to buy them outright and the likely level of CO2 emissions.

The extent to which different funding methods work best as part of a blend will change from time to time depending on a range of factors.

These can include tax changes, funding terms, car choices and mileage profiles.

Here we look at the main funding methods and their pros and cons.

 

Contract hire (operating lease)

This sees an organisation hire a vehicle from a leasing company for a set amount of time and mileage, paying a monthly rental in return.

The finance company will decide how much this monthly rental will need to be, based on the value of the chosen vehicle, the length of the contract and the expected residual value (RV) of the vehicle at the end of the contract.

The RV depends on expected depreciation and includes how many miles the vehicle has travelled over the contract term.

Pros: Contract hire (operating lease) provides low initial financial outlay, fixed costs, protection from depreciation risk and there is also the ability to reclaim some of the VAT.

Cons: Organisations have to estimate the contract term and mileage and there is no option to purchase the car at the end of the term.

 

Contract hire (finance lease)

As with contract hire (operating lease), the finance company will own the chosen vehicle and the customer will pay a monthly rental to use it over a contracted period of time

The monthly rental will again be based on the value of the vehicle, the contracted lease period and its RV at the end of this. At this point there may also be a balloon payment to the finance company.

The vehicle is then sold to a third party and if the achieved value is more than the predicted RV, the customer will be given a share.

If the business wants to continue to continue to use the vehicle, they can enter into a secondary rental period.

Pros: Contract hire (finance lease) can provide flexibility as they are not based on a fixed mileage.

Cons: The fleet takes the residual value and depreciation risk and there is no option to purchase the vehicle. It also appears on their balance sheet.

 

Outright purchase

Outright purchase is as it sounds: an organisation purchases the vehicle outright.

Pros: Outright purchase can deliver flexibility with no mileage or term restrictions.

Cons: As well as the need to be able to fund the vehicle upfront, the company takes the full risk of depreciation. Depreciation and other fleet running costs are shown on a company’s balance sheet, which has the potential to increase the admin burden.

 

Salary sacrifice

Salary sacrifice has been one of the biggest growth areas in funding in recent times, as it provides employees who are not eligible for a company car with access to a new vehicle at competitive prices.

Through it, employees can sacrifice a fixed amount of their salary each month in exchange for a brand-new car.

The amount is taken before income tax and National Insurance, so both employees and businesses can save on the contributions they pay.

The set monthly amount includes fully comprehensive car insurance, road tax, breakdown cover, MOT, maintenance, replacement tyres and accident assistance.

There are no upfront payments and after the initial exclusion period, there is usually no charge for early termination of the agreement if employees resign or are made redundant.

If an employee takes on a salary sacrifice car, then they will have to pay benefit-in-kind tax on it.

The amount of tax someone will pay will depend on a number of factors, including the P11D price, their annual salary and the CO2 emissions of the vehicle.

Currently, electric vehicles are subject to very low BIK tax rates, which means employees taking on a BEV through salary sacrifice can make huge savings compared to purchasing the car themselves.

Pros: There is potential for the salary sacrifice schemes to be used to replace, or run alongside, company car schemes cost-neutrally.

Benefits include income tax and National Insurance savings for employees and it can be provided at no cost to the business.

Cons: When being considered as part of a blended solution, thought needs to be given to financial risks arising from early termination of contracts.

 

Employee car ownership (ECO) schemes

ECO schemes differ from company car provision in one fundamental way: the car is owned by the employee and not the employer.

The switch in focus from the company to the driver means two further differences: the car is the driver’s choice; and, because the employee owns it, there is no benefit-in-kind tax liability.

An ECO scheme works by giving employees a monthly salary allowance to spend on a car of their choice.

The allowance is worked out individually for drivers and is based on their car grade, tax bracket and business mileage. For this monthly fee, the driver also gets benefits such as servicing, maintenance and breakdown cover.

One additional feature of an ECO scheme is that employees are given a much wider choice of cars and they may be given the further option of trading up (with a cost) or trading down (with a saving)

ECO is not the same as offering employees a cash allowance instead of a company car. It places control of how the allowance is spent and supports the employer’s duty of care.

This differentiates ECO schemes from the grey fleet of employees who use their private car for business.

Employers may introduce additional controls for health and safety reasons, or they may choose to add incentives to drivers, such as additions to their monthly allowance if they choose more environmentally-friendly vehicles.

With an ECO scheme, there is no risk for the employee. Built-in insurances protect them from loss of the vehicle and changes in personal circumstances.

The final value of the vehicle is also guaranteed, allowing the employee the opportunity to renew his or her contract with the provider for a completely new car, as well as offering the choice of either handing the car back or buying the current ECO vehicle to keep or sell on.

Although ECO may not be suitable for every fleet – or for every vehicle in an organisation’s fleet – the HMRC has confirmed BIK does not apply. This means it may be worth exploring as a tax efficient driver solution for today’s environment.

Pros: The organisation does not pay NIC (compared to a company car) and employees do not pay tax on the car. Employers can control the level of benefit and how much the employee pays.

The car is off balance sheet and the employee allowances incurred by the company are tax deductible.

Con: ECO schemes’ cost efficiencies can be impacted if AMAP rates fall – they are most effective for high business mileage drivers.

They can also be perceived as being more difficult for drivers to understand than contract hire. In addition, HMRC has to approve each scheme; monitoring business mileage is critical; administration can be complex; vehicles cannot be reallocated; and ancillary costs are a taxable benefit.

 

Rental

Vehicle rental is seen by many fleets as a stop-gap transport solution – essential, but only as a short-term problem fix.

But some fleets can have a significant volume of vehicles on rental on periods of time ranging from days to years.

It provides flexibility in providing the ability to meet service contract needs without the expenditure and commitment of outright purchasing or leasing – and they can be sourced where they are needed.

Typically, vehicles sourced from rental companies are among the newest on the roads which means they are usually low CO2 and equipped with the latest safety features.

The rental market has evolved rapidly in recent years and instead of being limited to daily rental  -perhaps the best known form– the length of time a vehicle can be hired is much more flexible and can range from as little as one hour to as long as a vehicle needs it.

Here we look at the most common forms of rental and how they can be used.

 

Corporate car sharing/car club

A dedicated fleet of pooled cars or vans is provided by a rental or leasing company and kept at an organisation for the shared use of employees.

They can book the vehicles at any time using a number of different booking channels such as a phone, website or app.

Drivers normally access the vehicle either by entering a code on a windscreen keypad or by using a swipe card, with keys frequently being kept inside the vehicle.

Corporate car sharing is ideal for organisations looking to reduce grey fleet use, as it provides an on-the-spot available to an employee using their own car on business journeys.

 

Daily rental

Vehicles are rented for multiples of 24-hour periods directly from a provider, with fleets historically using daily rental for their temporary vehicle requirements to keep employees mobile when they don’t have access to a company vehicle, or when their company vehicle is not available or not fit for purpose.

Most rental companies offer programmes to ensure daily rental is optimised for businesses of all sizes.

It is also a way to reduce employees’ expense claim paperwork and ensures companies meet their duty of care responsibilities.

Daily rental is the optimum solution for fleets who require a short-term increase in their fleet or convenient transportation in a different area or abroad, and allows businesses to tailor their fleet to their exact needs without being tied to long-term contracts.

 

Flexible rental

Also referred to as flexible commercial vehicle rental, long-term flexible rental enables businesses to access any type of commercial vehicle, including bespoke refrigerated and accessible transport, on flexible terms.

Long-term flexible rental means businesses don’t have to commit to long-term contracts or a major capital expense on buying those vehicles.

But this method still gives them an opportunity to obtain the vehicles they require, with the right equipment and livery.

They can get the vehicles they need, for as long as they need them, and return them without penalty.

 

Long-term rental

Regarded by many to be a flexible alternative to leasing, this rental method ensures employees have access to a fully-maintained vehicle for longer periods – frequently more than 28 days.

Unlike leasing, businesses can reduce their financial exposure to long-term contracts and changing circumstances as these rental contracts can normally be cancelled quickly.

Long-term rental allows businesses to obtain specific vehicles for longer periods at a more cost-efficient rate than other types of rental and without the long-term commitment of leasing.

It is ideal for companies that need to satisfy seasonal or contract-based demand without being tied to a long-term lease.

It also means new recruits also have immediate access to a vehicle during their probationary period without the employer being committed to a long lease.