By Mark Carter, Partner, PricewaterhouseCoopers' HR Services Group. First appeared in the June 2004 edition of Business Ireland magazine.
The imposition of PAYE & PRSI on employee benefits from 1 January 2004 has acted as a catalyst for many employers to review their total benefit packages. One of the traditional benefits which is receiving more scrutiny than most is the company car. The new employee benefit tax regime can add employer PRSI costs amounting to 3.2% of the original car value to the annual costs of supplying car benefits. Employers are also grappling with additional administrative headaches as the responsibility for collection and payment of the tax due on taxable employee benefits has, for the most part, moved from the employee to the employer.
The additional benefit provision costs added to the hidden costs of administering the new withholding tax, particularly where the payroll service is not outsourced, and the potential Revenue penalties for compliance errors, are combining to trigger a re-evaluation of company car policies by many employers.
On top of the PAYE/PRSI changes, other factors which are causing employers to re-evaluate car fleet arrangements include increased employee demands for benefit flexibility, and pressure on HR departments to control costs and/or achieve total remuneration savings.
So what are the current trends in relation to employee car benefits in Ireland?
Current Trends
A recent report on organisations providing company car benefits in Ireland in 2004(1) indicates that respondents with ‘car only’ policies are still in the majority. A minority of respondents provide a ‘car allowance only’. But more than half of the participants indicated that they are either reviewing their car benefit policies or are planning changes in the current year.
The report indicates that a car benefit is still a standard benefit for many employees, ranging from 97% for CEOs to 38% of middle management being eligible for car benefits. This suggests that the car benefit is one of the most important and appreciated benefits offered to employees.
Of the different types of car benefit offered to employees, the prevalence of "car only" is overwhelmingly common. A high proportion offer a choice between a car or a car allowance, with more senior management likely to have a greater choice in this regard. This is an indication of a differentiated car policy design for senior executives from other staff who are eligible for car benefits. It is closely linked to the finding that company cars are allocated to senior executives as a "perk" rather than a business need while employees at mid or junior level, especially in the sales function, are offered a “business need” car.
Frequency of journey is the most commonly cited criteria for a business need car, followed by business mileage. (Figure 1) The indications are that average minimum business mileage undertaken by ‘business need” car users in Ireland is just over 11,000 kilometres per annum.
The median market list price of cars offered across all sectors for directors below CEO level is €46,000, compared to a median market list price of €34,000 for sales managers’ company cars. If offered a car allowance, the median annual cash alternative or car allowance offered in lieu of a company car ranges from €15,745 for a CEO to €9,120 for senior sales executives.
Another company car policy feature is the degree of flexibility that is offered to those eligible for a car benefit to select a car of their own choice. In line with other findings mentioned above, the typical approach within organisations is closely linked to seniority. From Senior Manager up to Chief Executive level, the jobs holders are typically offered a choice of car within a budget. Middle Managers downwards tend to be offered a choice from a list of specified car models.
Time For A Re-Think?
Traditionally many organisations provided car benefits as part of their reward packages without considering the full economic impact of such benefits. Now, many employers are re-evaluating the impact of the provision of car benefits on their overall competitiveness. The indications from this report are that over 50% of Irish employers who provide car benefits are either reviewing their car benefit policies or are planning changes in 2004. Contemplated changes include:
- the provision of cash allowances in place of cars;
- modifications to the annual car allowance amounts;
- switching from purchase to lease.
In reviewing the provision of car benefits, prudent employers will give consideration to the impact of modifications to existing schemes in areas as diverse as tax, pensions, industrial relations and employment law. As mentioned already, car benefits are one of the most appreciated employee benefits, and the impact of any benefit changes on employee retention and motivation should be carefully considered. In introducing changes, employers should also be mindful of not inconveniencing any employees who require a car to undertake their job on a daily basis. If changes are to be implemented following a benefit review, they should be well planned and communicated in order to lessen the possibility of negative employee reaction and potentially disruptive IR consequences.
Issues which may need to be considered when contemplating car benefit changes include:
- car benefit buy-out compensation payments;
- determination of remuneration values to replace car benefits;
- purchase values of cars on transition to new scheme;
- appropriate levels of mileage allowances.
Employers who decide not to modify their existing scheme may wish to consider whether the scheme is delivering the maximum benefits to employees, and whether they are controlling the scheme costs to the greatest extent e.g. consider whether:
- employees have been made aware of the value of all their benefits, including cars?
- employees are aware of their tax reduction entitlements for any reimbursements to their employer, for business mileage, and for periods when their car is deemed not available for use?
- pool cars supplied by the employer qualify for Benefit-In-Kind (BIK) tax elimination?
- the maximum corporation tax deductions are being claimed by the company for the provision of cars?
- all company provided vehicles are in fact liable to BIK tax?
For example, following representations on foot of the controversy which arose in 2003 regarding the potential impact of employee benefits withholding tax on company provided vans, Finance Act 2004 introduced a BIK tax exemption to cover the private use of company vans. This exemption applies where the van (as defined) is provided essentially for the purposes of the employee’s work, where the employee is required to bring the van home, where other private use is prohibited and the employee spends at least 80% of his or her working time away from the employer’s workplace.
A review of car benefit schemes should also identify the potential for:
- administrative and other costs savings;
- tax treatment simplification;
- risk reduction.
A significant risk issue for employers following the introduction of employee benefits withholding tax is the imposition of tax penalties for failure to collect adequate PAYE/PRSI on company car benefits in accordance with the new rules. Since 1 January employers are responsible for estimating the quantum of most taxable benefits provided to employees and include this amount as “notional pay” within the PAYE/PRSI system. In reviewing their company car schemes, prudent employers will review their mechanisms for capturing the appropriate information to ensure that adequate PAYE/PRSI on all car benefits is collected.
One Way Traffic?
As a result of the various forces now impacting on the provision of employee provided vehicles, some commentators are predicting shrinkage for the company car market in Ireland. In many of the EU countries which traditionally saw a higher proportion of company cars than in Ireland, the trend is for change, with some employers reducing their car fleets and moving towards cash alternatives etc. Many of these changes are being driven by other forces including increased car taxes designed to stabilize or reduce CO2 emissions. It remains to be seen whether 2004 is a watershed year in relation to company car benefit packages in Ireland.
Figure 1: Criteria for Allocating Business Need Cars
(as a % of respondents)
Source: PwC Snapshot Survey Company Cars 2004
Note: Some organisations indicate that their policy is influenced by more than one factor.
Mark Carter of PricewaterhouseCoopers’ HR Services group advises organisations on employee remuneration.
