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 T3X 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
Inland Revenue Approved Mileage Rates (IRAMR).
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 for 2007/2008 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.
