Over the years I have been asked by many businesses, “Should I give my staff company cars or a car allowance?” This question remains a mystery to many people.
Let us examine the effects of each on the company and the benefits for the staff.
The company car offers the company ways to reduce taxation and increase the asset base. The method of financing these vehicles will play a role.
The options are:
1. Cash or financial lease - on balance sheet financing
2. Rental - Off-balance sheet financing.
What are the effects of each?
Cash - This is money taken out of the company’s cash flow. A once off payment, there are no monthly instalment and no interest payments.
The vehicle shown as an asset on the balance sheet and can be depreciated for tax purposes, the depreciation and running costs are shown as an expense on the Income statement.
(Over 5 years for passenger and 4 years for Light Commercial vehicles etc.)
On-Balance sheet funding - The finance instruments that can be used are Instalment sale (where ownership is intended) or Financial lease (where usage only is intended). These essentially work the same, but at the end of the term there are tax implications on the lease.
Both of these finance options allow for the vehicle to be shown as an asset and the loan shown as a liability on the Balance Sheet.
The depreciation, interest paid and running costs are shown as expenses on the Income Statement.
This has the effect of reducing taxation and affects the cash flow with the instalment/rental on a monthly basis.
Off-Balance Sheet Funding (Rental) – This is a true rental agreement where the term and kilometres are limited. This agreement is a usage only finance tool.
The vehicle and debt are not shown on the balance sheet. The monthly rental is shown as an expense on the Income statement and the VAT on the rental can be claimed by the VAT vendor. There no depreciation claimable.
The company car option allows the company directors to decide on the method of financing most suitable for the company. When deciding on what vehicle to provide, the following should be taken into consideration:
Cost of ownership (Depreciation, Maintenance and fuel efficiency)
Type of usage
The Car Allowance allows employers to give their employees the option to own their own vehicles. The allowances can cover a number of different aspects of the cost of the vehicle. These costs are repayments, licence, insurance fuel and maintenance. Some companies bear the fuel and maintenance costs and the rest are covered by the employee from the allowance.
The company can still achieve a tax reduction as the allowance paid to the employee is recorded as a cost to the company under the salaries on the income statement. The difficulty that may arise is that in the current economical climate, many employees will not qualify for finance due to high interest rates or previous defaults ion finance agreements. This will leave the vehicles being used to represent the company in a poor state and the company must step in.
In both the company car and the car allowance, companies have the right to place restrictions on the types of vehicle purchased. Eg. Sedan, maximum 2.0l engine, maximum price, minimum price etc.
So the debate continues, what will be the best option for your company? The only way to decide is to look at all aspects of the business and the advantages and disadvantages of each. A further consideration is the staff attitude to the two options. Unhappy drivers tend to neglect the vehicle and the costs rise.
For further information or assistance please contact Gary Lees at Gary Lees & Associates. Cell: 082 566 5007 e-mail: firstname.lastname@example.org