What
if I offer a cash option but also keep company
cars?
In most cases the exercise
to establish the cost of company cars will be
done by grade or by groups of similar drivers.
In other words a standard cost will be derived
for a benchmark car at a benchmark mileage.
Let’s say your managerial
grade staff are allowed a 1.8 Toyota Avensis and
their average mileage is 20,000 miles per annum.
This will set the standard for calculating the
cost of providing a company car, and therefore
the basis for setting a cash allowance for the
average managerial grade driver.
If a company offers a cash
option figure based on average mileage and therefore
average cost, what is the likely result?
In practice, your low mileage
drivers whose actual car running costs are below
the average figure will benefit from the allowance.
High mileage drivers may
find their standard cash allowance too low to
cover the true cost of running the same car as
the company currently provides. This would mean
either dipping into their own pockets to ‘subsidise’
the car they run privately, or downgrading to
a smaller car.
The logical outcome of this
situation will be that your low mileage, low cost
drivers take the cash alternative happily while
your high mileage drivers cling tenaciously to
their company cars.
What if I stop providing
company cars altogether?
In this scenario the focus
of the problem shifts from company to drivers.
With high mileage drivers,
their allowance may be inadequate to maintain
the levels of the car they’ve been used
to. Various potential solutions to this difficulty
do exist.
You could, for example,
pay a deliberately reduced standard cash allowance,
which is then topped up with special higher business
mileage rates (which cover more than just the
extra cost of fuel).
What is the Approved
Business Mileage Rates option?
As an alternative to providing
a cash allowance for drivers opting out of company
cars you could reimburse them using Government’s
Approved Mileage Rates (AMR).
The advantage’s
are…
• Provided the rate
does not exceed the figure approved by the Inland
Revenue, then all payments are tax-free.
• The approved Mileage Rates are 40p per
mile for the first 10,000 miles and 25p per mile
thereafter.
The disadvantage’s
are…
• For low mileage
drivers, the Inland Revenue rates alone would
probably be insufficient to sustain the same level
of car that the company currently provides. In
the case of high mileage drivers the total reimbursement
is likely to exceed the actual running costs of
a company car, which in turn may increase business
costs.
• The Approved
Rates system actually encourages people to drive
more business miles. A rate of 40p compares with
the marginal cost of an extra mile of something
like 18p so drivers are better off financially
the more miles they drive.
