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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.

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