Through the annals of time, probably ever since Fred Flintstone took to the wheel, company cars have held onto their status as one of the foremost employment perks that, if being candid, many people would admit to getting a little giddy over, at least inside.

Going by HMRC’s Benefit-in-Kind (BIK) figures, UK company car numbers reached a 5-year peak1 of 960,000 in the 2015/16 tax year but since then actually fell2 by 20,000 according to provisional figures for the following year, released earlier this summer. Positively for the government and negatively for most other people, contributions to the Treasury went in the opposite direction, rising nicely from £1.49bn to £1.85bn, despite company car drivers continuing to considerately or begrudgingly plump for cars with lower CO2 values3.

BIK is a tax attracted by employees who enjoy certain ‘non-cash’ perks or benefits4 in addition to their salary, such as accommodation, medical insurance5 and vehicles. It’s calculated by multiplying a car’s P11d value by the tax percentage band it sits in, which is determined mainly by how much CO2 it emits.

Relentless taxation causes a shift in thinking

The unabated swell in the contribution company cars make to the Treasury is largely because of a number of 2% annual BIK rises on the trot, with the 2019/20 tax year just over the horizon set to bring a 3% increase. Meanwhile, the diesel surcharge increased to 4% this April as part of widespread chivvying by varied voices to ditch fuel from the black nozzle.

These tax increases combined with uncertainty over how the new and improved WLTP fuel consumption and CO2 emissions test for new models (from September 2017) and all new cars in general (from September 2018) will affect businesses’ financial positions and decisions are fuelling a trend that Vehicle Consulting is certainly observing across its client base and further afield – a move towards encouraging employees to take personal contract hire (PCH) deals through car allowances.

Frustratingly, the European Commission has long reassured, through the European Automobile Manufacturers Association (ACEA6), that “the move to the new WLTP test should not negatively impact vehicle taxation by increasing costs for the consumers”, but Mr Hammond’s (the Chancellor, not our editorial manager) department hasn’t made any indications that BIK values will be adjusted downward to reflect the fact that vehicles’ CO2 figures will rise by as much as around 20% on average after WLTP testing.

There is some light at the end of the tunnel, though. Since September 2017, car manufacturers have been able to voluntarily put their vehicles through an additional test called Real Driving Emissions (RDE), which involves real roads and driving conditions, with measurement apparatus fitted to the back of vehicles being assessed. RDE will become mandatory from September 2019 and, just like when comparing NEDC and WLTP figures for CO2 and MPG, discrepancies will exist between nitrogen oxide (NOx) figures in the laboratory and out there in the wild.

To compensate for this, cars will be allowed to emit up to 2.1 times the amount of NOx from this date until stricter RDE2 rules come into effect from January 2021, when the allowed difference will be capped at 1.5 times NOx. Ironically, the EQUA Aq Index from Emissions Analytics identifies that certain non-RDE diesels such as specific variants of the Volkswagen Passat 1.6 currently available for leasing and purchasing already emit less CO2 than will be permissible under RDE2, which is still three years away.

Euro 6, introduced in 2014, is technically still the cleanest engine standard that all new cars are manufactured to, but the EU subsequently implemented updates called Euro 6c, 6d-TEMP and 6d to reflect the arrival of WLTP and RDE, with Euro 6c essentially indicating compliance under WLTP, and Euro 6d-TEMP signalling a step further i.e. RDE standards.

Vehicle Consulting believes, just like many manufacturers, that diesel still has a future for certain drivers and vehicles, so it’s great to see many other models such as the new Audi A7 50 TDI, BMW 2 Series Active and Gran Tourer, new Mercedes A-Class and Volvo XC40, to name but a few, already meeting Euro 6d-TEMP standards with their latest diesel iterations.

The good news for fleets and anyone else leasing or buying a car is that HMRC exempts officially RDE2-compliant cars from paying the 4% diesel supplement surcharge, so, just as the Chartered Institute of Payroll Professionals reported in February, there are mechanisms available for reporting such cars during the 2018/19 tax year and beyond. Essentially, organisations with payroll software that supports the calculation of car and fuel benefit, the reporting or 2018/19 in-year P46 vehicle information and the reporting of year-end information for 2018/19 on form P11d are directed to use ‘Fuel Type A – All other cars’ for RDE2-compliant models. This status will be indicated in the vehicle’s certificate of conformity and can be advised by the contract hire broker. Fuel Type A will be used to calculate the cash equivalent, involving boxes 177 and 182.

It’s beginning to feel a lot like Brexit

Fleet managers compiling company vehicle choice lists have clearly had and continue to face many extraordinary challenges to grapple with, the absence7 of BIK and National Insurance Contributions (NIC) bands and other vehicular tax rates for 2021/22 and beyond making it particularly difficult for fleets with replacement cycles of three years or longer, fresh data from Arval8 finding that the average UK fleet cycle is currently 3.9 years. Many fleets are trying to adopt as many plug-in hybrid and electric cars and vans as they feasibly can, despite the discouraging immediate future whereby tax for zero-emissions vehicles will rise from 13% for 2018/19 to 16% for 2019/20 before falling to 2% for the 2020/21 financial year9.

It’s no surprise, then, that the last few months have seen a flurry of headlines emerge such as ‘Cash takers fuel PCH growth’10 and ‘Tax uncertainty is killing company cars.’11 Vehicle Consulting’s account managers have seen this trend build momentum and we foresee personal contract hire continuing to grow amongst employee ranks, with a consequential fall in salary sacrifice and employee car ownership schemes, attractive PCH deals in many cases working out cheaper in terms of fixed monthly rental payments than if a staff member had taken a traditional company car and paid BIK tax. A key advantage for employees is that, unlike in a salary sacrifice arrangement, personal lease cars are considered as private and not classed as a benefit12.

The car leasing industry reacts

For the growing ranks of employees opting out of organisations’ company car schemes, taking cash allowance alternatives and leasing cars via PCH, stalwarts and leaders across the contract hire industry are introducing additional new service models, a prime example being Arval with its Re-Lease product that enables such staff to lease nearly-new vehicles at cheaper prices. Mark Evans, fleet consultant at ALD Automotive, another of the funders that  Vehicle Consulting works with, perceives PCH’s rise amongst cash-takers as a trend mainly appealing to younger drivers at the moment, partly because it puts them behind the wheel of a new, technologically-advanced and visually exciting car every few years or so.

More choice through PCH – but within reason

Broadly speaking, organisations have sought to reduce the size of their company car choice lists in order to simplify things from all perspectives, obtain the best possible terms, and for other reasons. Cash allowance-takers, on the other hand, are generally freer to pursue a wider spectrum of cars. If such vehicles are to be used for any purposes falling under the remit of ‘at-work’ legislation including driving, they will technically be deemed part of an organisation’s ‘grey fleet’ (non-company cars, essentially), meaning that fleet managers may impose certain restrictions. A 2-seater convertible, for example, would hardly be considered as appropriate if the staff member is regularly required to transport bulky sales items or other equipment or colleagues around, and nor would a high-performance sports car in certain industries and settings.

Meanwhile, some employees will always prefer to be provided with a company car by their employer than obtain their own mobility through a personal lease, put off by having to deal with the initial administration, insurance, maintenance and other aspects themselves13.

Useful tools for comparing the pros and cons

TomTom Telematics has published a clear and informative guide looking at whether a company car scheme or cash allowance would be best for an organisation, in which they make the good point that an organisation’s image can be affected if employees choose various different models in different colours, spelling an end to any uniformity in the car park. We would also add that car allowances can lead to some employees driving more expensive or generally desirable cars than their managers or even directors in some cases, which can potentially lead to disgruntlement.

Vehicle Consulting also has a calculator tool available on request, which can prove invaluable to finance directors addressing implications from AMAP mileage expense payments, balance sheets and acquisition and funding methods, to early terminations, affinity schemes, insurance premiums and other considerations.

Grey fleet’s silver lining

Paul Hollick, MD of The Miles Consultancy (TMC) of Cheshire and Chair of the Institute of Car Fleet Management (ICFM), believes that it’s not overly burdensome for smart fleet decision-makers to apply the same occupational road risk management, duty of care and other fleet policies to opt-out drivers who’ve chosen PCH. In a recent Fleet News blog, Paul says that “the big differences will be the sourcing of the correct type of motor insurance and ensuring business use policies are in place. He clearly perceives PCH as a wise move for many, adding: “Employees are discovering they can fund a new vehicle out of a cash allowance appropriate to their company car grade and potentially make a saving over their tax bill.”

What other alternatives exist?

Employee car ownership schemes (ECOs)14 are another mobility option that organisations can use, whereby vehicles are sold to employees at discounted rates and control is placed on how the allowance can be spent, on how many miles can be driven annually, on how many months and years the contract term will span after which options similar to PCP will kick in, and what maintenance services are provided and stipulations applied.

ECOs are traditionally considered to be tax-efficient, with NIC not payable on the scheme, employees not taxed as if they had a company car, and AMAP also being free of NIC and tax, while ECOs can be structured flexibly to suit each organisation15. Employee car ownership schemes also reduce organisations’ exposure to tax and comeback in comparison to them promoting or supporting PCH cash-taking16. Certain contract hire and leasing brokers can provide organisations with access to such schemes, so fleet managers may find it worthwhile at least asking the question when comparing their options.

Beware new HMRC rules

If an organisation has entered into a new or amended cash allowance or salary sacrifice agreement since April 2017, they will need to report such BIK on form P11d due to sal-sac and cash-for-car mechanisms coming under HMRC’s new Optional Remuneration Arrangements (OpRAs) rules. With the exception of cars emitting 75g/km CO2 or less, tax is applied to the BIK value of or the cash sacrificed in lieu of a car, and to cash-for-car agreements, whichever is greater.

As tax director Nigel Morris explained to Business Motoring17, “this is a potentially a very significant change. The new rules will negate the income tax and NIC advantages that can exist where some BIKs are subject to tax and NIC on an amount that is less than the salary sacrificed or foregone.”

HMRC has also recently clarified that a car, its servicing and maintenance and its insurance can be classed as separate and distinct benefits.

Organisations are essentially encouraged to compare whether the salary sacrifice relating to the car itself or its normal BIK calculation will work out higher, which will determine the taxable benefit value and subsequent Class 1A NIC. They may have to update existing P11D records and financial systems to be able to make this analysis accurately.

Vehicle Consulting encourages all fleet decision-makers from SMEs to larger organisations to contact our account managers for a no obligation chat to discuss the pros and cons of traditional company cars, cash allowances and other alternative schemes.



3, 14.
10, 12.
11, 14.