May 23, 2012
CAR ALLOWANCE CAVEATS: WHAT IS BEST FOR YOUR FLEET?
How best to provide employees with a vehicle for business purposes is very often the subject of vigorous, sometimes heated, internal debate. Here, CAF asks fleet industry experts to weigh-in on the discussion with some timely thoughts to help in the decision-making.
Making the choice between a company car or a car allowance program is not an easy task. Many factors are at play; control of vehicle decisions, administrative costs, company image and others are involved. Company A may decide to go the company car route, Company B a car allowance, Company C a combination of both.
“The decision to lease is often based on a company requirement to exercise control over the type of vehicle, image and fuel efficiency of the vehicles representing their business,” said Paul Wingate, National Director, Sales Force Effectiveness, TLS Fleet Management. “Perhaps the biggest misconception that some companies make is assuming that an allowance program requires little or no administration and that it removes all liability from the employer. They may also underestimate to what degree it may distract their employees from focusing on their jobs.”
Companies that elected a car allowance program might have to invest in additional insurance to cover off various liabilities if drivers are involved in accidents. In addition, driver safety of the driver cannot be as closely controlled when vehicle maintenance is uniquely a driver responsibility.
“With a car allowance program what type of vehicle, the age of the vehicle and what state or repair the vehicle is in is at the sole discretion of the driver. Even if a company has restrictions on these items it can be difficult to police and enforce. This can result in safety issues due to improper vehicle maintenance, increased driver downtime and, in a worst case scenario an automobile accident,” said Janice Jucke, Sales Manager, Wheels Inc. “A company car program ensures that your drivers are in a safe and reliable vehicle which is representative of your company’s image at all times.”
Company car programs provide more control over all costs incurred on the selected vehicle. Costs such as lease charges, fuel, maintenance, licensing, insurance, accident repairs, depreciation among others must be closely monitored for car allowance programs and the total cost of ownership assessed and analyzed.
“In most cases, fleet departments are not involved in approving or tracking driver reimbursement and allowance program transactions, yet they often find such expenses are listed as miscellaneous line items under the fleet expense report,” said Jacqui Gough, Manager of Strategic Services and Sales Support, ARI. “While circumstances do vary from company to company, unless the allowance or reimbursement rate is unusually low, in the majority of cases the financial analysis supports a centrally managed fleet program.”
One important matter for both employers and employees is the taxable benefit component which allows the company to claim input tax credits and the driver to pay lower taxes.
“The taxable benefit calculation benefits the company car option over a car allowance. The company can deduct the same (perhaps even lower vehicle expense) and the employee pays fewer taxes making it a win-win,” said Mike Rusch, Executive Vice-President and CFO, Jim Pattison Lease. “The company also gets to claim input tax credits on lease payments, whereas car allowance is gross payment including tax and there are no input tax credits for either driver or company.”
Another significant element of a company car program is the choice of vehicle selected. With a selector policy in place, drivers are held to select vehicles right for the job. Thus, the company controls the image displayed to customers. Since company cars are normally in use for relatively short periods of time (three to four years), employee visits to customers are with current vehicles.
“A company car program allows companies to choose their vehicles, those that are best suited to particular roles (e.g. sales, delivery) and those that best represent their company image, for a consistent presence to their customers. The company can also benefit by adopting ‘green’ vehicles into their fleet to demonstrate how they are reducing their environmental impact,” said Janet Jansson, Strategic Consulting Manager, GE Capital. “In a company car programme, the employee is also, generally speaking, receiving a new vehicle every three years or so which is a major plus for most people since the average length of time that cars are owned in Canada is around eight years.”
At first glance, a car allowance program may appear to be beneficial to both company and driver, paradoxically by reducing some costs and liabilities for the company while providing drivers more choice, it can end up costing more for both.
“Car allowance actually entails a shift of responsibility from the company to individuals who are likely to be less equipped to handle it. While a reimbursement program may simplify budgeting fleet expenses, you have no control over what vehicles employees choose or how employees spend their reimbursement allocation,” said Greg Grant, Regional Director, Client Relations, PHH. “Fleet costs are usually higher for employes, and the company under a reimbursement program.”