This guide briefly explains the meaning behind some commonly used jargon and phrases within the fleet industry and is by no means exhaustive. The explanations relate to their most commonly understood meanings.
This is only a guide: many suppliers use the terms in different ways.
Accessories – Equipment added to a car also known as ‘extras’ or ‘factory fitted options’, for example, a sunroof. Certain types of equipment are excluded from the definition, including mobile phones and security enhancements.
Accident management – The proactive management of all aspects of vehicle accidents, from minimising the time a vehicle takes to be repaired and returned to service, to ensuring the driver has continued mobility. It also involves managing repair and insurance costs, and any medical/injury aspects, as well as legal services such as recovery of uninsured losses. Third party specialist suppliers can be appointed to manage this area, normally for a fixed monthly fee.
Acquisition – The actual process of acquiring the vehicle in the first instance. This may involve physically identifying and purchasing the appropriate vehicle, or utilising a third party to acquire/supply the vehicle, for example, leasing or contract hire.
Administration – All organisational tasks involved in running a fleet of cars and vans. This includes the inventories of vehicle and driver listings, acquisition and disposal details etc. Some organisations can offer services that relieve the fleet operator of most of this administration.
Advisory Fuel Rates (AFRs) – HMRC guidelines on fuel only mileage rates for company cars, to be used where employers reimburse employees for business travel or where employees are required to repay the cost of fuel used for private travel to avoid the fuel benefit charge.
Approved Mileage Allowance Payment (AMAPs) – The maximum Mileage Allowance Payment that is exempt from income tax.
Annual contribution – The amount an employee may be required to pay by his employer as a condition of a car being available for private use. The contribution will be deducted from the taxable benefit for the tax year in which the payment is made, and is often referred to as a contribution for private use.
These contributions are not capital contributions which are treated differently for income tax purposes.
Allocation policy – Defines the company hierarchy, and outlines the vehicle type and specification that may be chosen by employees at certain grades/sectors. Using the whole life cost of vehicles as opposed to rentals or capital value more exactly defines the overall cost of the car to the business.
Balloon payment – This is the final payment due under some finance agreements, to satisfy the whole debt. Usually set to match the expected residual value, so rentals reflect actual depreciation. If a balloon payment is set too high it may result in a low rental, but will usually leave a financial shortfall, if the car doesn’t realise sufficient proceeds on disposal.
Benefit in Kind (BIK) tax – The term used in the fleet industry to describe the income tax paid by an employee on a company car, company van or free private fuel provided by their employer by virtue of their employment.
Blocked car – A car regarded as being available for private use and on which input VAT recovery is blocked, in whole or part.
Budgeting – The forward planning of operational costs over a future period, usually the financial year.
Capital allowances – When a business purchases vehicles and other plant and machinery, business tax relief is calculated by a system known as capital allowances. The amount of the allowance and the timing of its receipt depend on the type of asset.
Capital contribution – A capital sum an employee contributes towards the cost of a car or any qualifying accessory. When calculating the income tax due on the BIK , a contribution, up to a maximum of £5,000, can be deducted from the list price for the year in which the capital sum is contributed and each subsequent year that the employee is assessed on the BIK for that car.
Car benefit charge – The amount on which an employee will be chargeable to income tax for the private use of a company car.
In the fleet industry this income tax is more commonly referred to as Benefit in Kind (BIK) tax.
Cash flow – The movement of money into or out of a business. Large capital expenditure can have an adverse effect on cash flow therefore finance arrangements can ease pressure on cash allowing more resources to be invested in core activities.
CO2 – Carbon dioxide – The level of CO2 emitted is used in the calculation of the car and fuel benefit charges.
Contract – A legally binding document relating to a third party. In fleet these normally relate to the supply of vehicles and services. Read them carefully before signing, and always check the small print. Consider situations such as early termination, excess mileage and dilapidation penalties when considering any financial contracts.
Contract hire – One of the most common types of lease, via which the lessor accepts responsibility for virtually all ‘normal’ costs associated with providing the cars, including depreciation, maintenance, funding, VED, administration, at their own risk in return for a fixed rental paid by the fleet operator. Contract hire is a service and therefore fleet operators do not own the vehicles, which are leased for a fixed period for a fixed rental, to which the lessor must apply VAT.
Depreciation – Loss of value of an asset or vehicle as it is used and ages. Different professions have different definitions. For example, accounting definitions of depreciation may be different as they use accounting conventions, and therefore their figures may not reflect the vehicle’s actual loss in value. The true depreciation of a vehicle is its purchase price less its current market value or sale price.
Disposal – The final sale or de-fleeting of a vehicle at the end of its life on the fleet. This will be undertaken by the supplier under a contract hire or leasing agreement, but is the user’s responsibility for other funding methods.
Dilapidations – Often an area of dispute in leasing scenarios, dilapidation can be defined as the repairs and refurbishment needed to bring the car back to a ‘reasonable’ condition for age and mileage at end of lease.
It is unrealistic for lessors to expect a fleet car to be returned in showroom condition, and hence the industry term of ‘fair wear and tear’. The British Vehicle Rental and Leasing Association (BVRLA) publish clear guidelines outlining what should be regarded as fair.
Duty of care – A term which is often used in respect of occupational health and safety.
Employers owe a duty of care to their employees and to other road users for all situations where the employer requires employees to ‘use the roads’, including driving, walking and cycling. The duty of care extends to all aspects of the working environment and includes issues like the time employees have to spend driving in addition to other duties, providing vehicles which are suitable for the (business) purpose, specialist training if indicated and many more areas.
Early termination – If a fleet operator terminates a finance agreement before its agreed contract term, then the lessor will usually impose an early termination charge. This may be a penal charge, but many leasing and finance companies base the charge on the actual losses they incur due to the premature ending of the lease, using an open-book calculation.
Effective rental – The rental payable for a car provided under an operating lease plus any blocked VAT.
Excepted car – A car which is not subject to the input VAT blockage because it:-
- will be used exclusively for the purposes of the business and is not available for any private use;
- is a stock-in-trade car held for sale within 1 year by a motor manufacturer or dealer; or
- is intended to be used primarily as a taxi, driving instruction car or self-drive (that is daily rental) car.
Excess mileage – Most fixed-cost leasing contracts assume a ‘contract mileage’. Any mileage undertaken in excess of this will incur additional depreciation and maintenance, which the lessor will seek to recover via an excess mileage charge. The use of pooling arrangements, which aggregate and average the actual mileage of all vehicles returned in a period, is a common means of mitigating the cost of excess mileage.
First year allowance – Accelerated capital allowances available to businesses that purchase certain qualifying assets such as low emission cars.
Finance lease – A lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee.
In its simplest form, a finance lease involves writing off the whole value of the vehicle over the primary period of the contract, normally 2 to 5 years. As a finance lease represents the provision of a service, rentals attract VAT, and disposal proceeds are paid to the lessor, who is legally the owner but a proportion will usually be paid to the lessee as a ‘rebate of rentals’.
Although the lessee will never own the vehicle, as it carries the actual risks and rewards of ownership for accounting purposes a finance leased vehicle will be capitalised as an asset on the balance sheet.
Fleet management services – A range of technical support functions available from a specialist supplier, including purchasing, disposal, maintenance, funding, fuel monitoring and reporting etc.
A fleet management company will charge an agreed fee, usually per vehicle per month, to cover their administration and profit. Fleet management software – There are many suppliers of specialist software packages that, once primed with a fleet’s vehicle data, can be used proactively to monitor and manage the fleet and its costs.
Many smaller fleets may merely use a standard spreadsheet application, which in many instances is perfectly adequate.
Specialist software systems are especially beneficial when dealing with a high level of small transactions from different drivers/cars, such as fuel and maintenance costs.
Before acquiring any software it is important to determine the features of the package and the benefits it should deliver as these will help determine the input data that will need to be collated.
Fuel benefit charge – The taxable benefit chargeable on a company car or company van driver who is provided with free or subsidised fuel for private use.
Fuel cards – Fundamentally a corporate credit card that is used specifically for buying fuel. Its main advantages are the provision of a simplified central billing system, and management reports which can provide comprehensive information on fuel purchase and use such as a vehicle’s fuel economy or fuel pricing.
Fuel cards can be restricted to cover only certain forecourt purchases, for instance diesel OR petrol, oil, screen wash, and exclude any other purchases.
Fuel scale charge – The rates used for taxing the private use of road fuel for businesses that recover input VAT on the cost of fuel used for private motoring.
Funding – Anything to do with providing the money to acquire fleet cars, this can include bank overdraft, hire purchase, conditional sale, block discounts, lease or contract hire.
The choice of method or even mixture of methods depends on the needs of the user, including overall cost, cash flow, taxation, balance sheet and risk elements are all factors to be considered.
Hire purchase – Effectively a form of credit used to support the purchase of a vehicle, via which the lender provides a fixed cost, fixed period loan to the fleet operator, who is effectively the owner but will usually not have legal title to the vehicle until the loan is paid off. If a residual value is built into the contract, the arrangement is usually called Contract or Lease Purchase.
As the supply for VAT purposes is regarded as a supply of goods which occurs when the contract is agreed, the supplier should issue a VAT invoice at the start of the contract to account for output tax on the cost of the vehicle and should not charge VAT on the finance element of the repayments.
Hybrid - A car capable of being propelled by two or more power sources, usually comprising an engine and a battery powered electric motor.
Lease – A contract providing the use of a vehicle for an agreed, usually monthly, rental.
Lease rental restriction – For cars with CO2 emissions exceeding 130g/km, 15% of the finance rental cannot be treated as a tax deductible business expense of the lessee.
Lessor – The owner of the goods in a lease agreement that is the person who grants a lease.
Lessee – The customer in a lease agreement that is the person to whom a lease is granted.
List price – The inclusive price published by the manufacturer, importer or distributor of a car if sold singly in a retail sale in the open market in the UK on the day before the date of the car’s first registration.
It includes standard accessories, relevant taxes, customs and excise duties and delivery charges, but excludes the new car registration fee.
Mileage Allowance Payment (MAP) – An employee who undertakes business mileage in their own car may be paid a MAP by their employer.
The payment is designed to cover all the costs of owning and running the car, including depreciation and any interest paid on a loan to buy the car.
Mileage Allowance Relief – The income tax relief available to an employee who uses their own vehicle for business purposes but is paid less than the AMAP rate.
Mileage pooling – Used to avoid potentially punitive excess mileage costs, mileage pooling allows the mileage from a pool of vehicles to be aggregated instead of being considered on an individual basis.
Operating lease – Strictly defined as any lease other than a finance lease, under an operating lease most of the risks and rewards of ownership are retained by the lessor.
Although there are proposals to change the accounting treatment, under current generally accepted accounting practice assets hired under an operating lease should not be shown on the lessee’s balance sheet. For accounting purposes fixed-cost contract hire, with or without maintenance, is an operating lease and assets should not be capitalised on the lessee’s balance sheet. As an operating lease represents the provision of a service, rentals, which are usually paid monthly, attract VAT.
Outright purchase – The simplest form of vehicle acquisition where the fleet operator buys them from cash reserves or via a business overdraft facility.
P11D – The statutory form used each year by employers to report the provision of taxable benefits to directors and higher paid employees; that is employees earning at the rate of £8,500 per annum or more.
Form P11D must be submitted to HMRC and provided to employees, by 6 July following the end of the tax year to which it relates. Passenger payments – Payments paid to employees travelling on a business journey because they carry other employees for whom the journey is also business travel.
Pool car – For income tax purposes, a car used by a business and in respect of which all the following conditions are satisfied:
- it is available to, and actually used by, more than one employee;
- it is made available, in the case of each of those employees, by reason of their employment;
- it is not ordinarily used by one of them to the exclusion of the others;
- any private use by an employee is merely incidental to its business use; and
- it is not normally kept overnight on or near the residence of any of the employees unless it is kept on premises occupied by the provider of the car.
Qualifying car – A car acquired exclusively for business purposes and which has not therefore been subject to the input tax blockage; that is, the business has recovered, in full, the input VAT on purchase.
Relevant Motoring Expenses (RMEs) – Payments that may be paid by an employer to an employee who uses their own car for business purposes, and which may include one or more of the following:
- Mileage Allowance Payments;
- regular lump sum payments;
- one-off lump sum payments;
- an employee’s use of a company credit or fuel card; or
- an employer meeting an employee’s pecuniary liability.
RMEs that do not exceed 45p per mile may be paid NIC free.
Rentals – Periodic payments, usually monthly, made by a lessee to a lessor to cover all costs included within the lease agreement. Usually they are fixed for the contract period and always attract VAT.
Relief cars – Most contract hire agreements, which include maintenance, also provide use of a relief or temporary replacement car if the car is off the road beyond a specified period, for example 24 or 48 hours. Many such provisions are made through rental companies appointed by the lessor.
Replacement cycles – The period of time a vehicle will remain on a fleet before being replaced with a new or newer vehicle. Decisions should be based on valid criteria whether under ownership or leasing, and usually defined as a combination of annual time and mileage such as 3 years and/or 60,000 miles. The length of the replacement cycle is usually based on vehicle type, reliability, costs and employee status.
Residual value – The final value of the vehicle when it reaches the end of its life on the fleet, reflecting the second-hand worth of the vehicle.
Risk management – Minimising the business’ exposure to risk, typically from an accident/health and safety viewpoint should always begin with a comprehensive risk assessment of the actual ‘at work driving activities’ found in the business. Management options may include driver training programmes or reviewing company procedures regarding the length of a working day and hours spent behind the wheel. Again, within the fleet market there are specialist suppliers of these services.
Sale and leaseback – Sale and leaseback is available from most fleet leasing companies and involves them buying an existing car fleet at an agreed value, with each vehicle being allocated a ‘remaining life’ to end of ‘normal’ replacement cycle, with rentals calculated accordingly. When vehicles are finally de-fleeted new leased vehicles are introduced. This system provides rapid, easily managed transition into leasing/contract hire and usually provides a cash injection into the business
Service, Maintenance and Repair (SMR) – Blanket term for all the mechanical and technical attention needed by any fleet car. Includes routine servicing, unexpected repairs and replacement tyres etc.
Showroom tax – The colloquial term used to describe the Vehicle Excise Duty due when a new car is first registered, which can be higher than the standard VED.
Van benefit charge – The amount on which an employee will be charged income tax in a tax year for the private use of a company van.
Vehicle Excise Duty (VED) – More commonly known as road tax, VED is an excise duty paid to enable motor vehicles to be legally used on UK roads.
Since 2001 the VED due for a car has been based on its official C O2 emissions.
Wear and tear – This is an important part of the agreement within fixed-cost leases and guaranteed buybacks. The standard expected condition of a vehicle on return to a lessor must be agreed between the parties at the outset. To avoid disputes industry bodies such as the British Vehicle Rental and Leasing Association (BVRLA) and the AA provide fair wear and tear guidelines.
Whole Life Cost (WLC) – These take into consideration the actual costs associated with operating the vehicle, including depreciation, interest, SMR, insurance, fuel, taxes, and insurance. Whole Life Costs can be shown as a cost per annum, month, or pence per mile and provide an accurate way of benchmarking vehicles for purposes such as allocation lists.
Writing down allowance (WDA) – The annual rate at which capital allowances can be claimed. This rate is reduced or extended if the chargeable period is shorter or longer than one year.
The writing down allowance is the rate which applies in the absence of any initial or first year allowance. For plant and machinery, such as cars and vans a reducing balance basis is used to calculate the capital allowances available each year.
Total writing down allowances may not exceed the balance of expenditure after deducting any initial or first year allowance.