Fleet Manager GuidesUseful guides to Fleet Management

The role of a Fleet Manager is complex and ever-changing. That’s why we’ve worked in partnership with industry experts to create a set of 12 comprehensive Fleet Manager Guides, offering useful industry information and advice to successfully managing your fleet.

Simply choose a section below to get started, or download the full guide to read later.


Fleet funding and taxation are two areas that should be considered in unison simply because different tax treatments apply to different funding methods. The cost of funding can only therefore be accurately predicted if the relevant tax treatment is considered for each form of funding.

Purchase or lease is usually the first question a fleet manager should consider. There are fleets that elect to buy their cars and vans outright, but the business buyer should generally have plenty of other uses for its capital. Therefore, over many years the UK fleet market has developed a range of general purpose and specialist funding options to help businesses manage their vehicle acquisitions.

More than one funding method may be adopted by a fleet. Overall funding strategy would usually be a matter for the Finance Director, but it is important for the fleet manager to understand the potentially serious implications of getting it right, and getting it wrong.

This Fleet Manager’s Guide presents an introduction to the issues involved, but relevant senior management within the business, and external professional advisers, should be consulted about any proposed changes. Furthermore, there should also be an in depth evaluation of any sales proposal made by a potential supplier to ensure that the implications relating to each particular fleet are fully understood and suitable for your business needs.

Funding options

All that said, there are in fact only three basic approaches:

  • Purchase;
  • Lease; and
  • Driver funded.


  • Outright purchase: Some businesses simply pay for cars as they need them, and buy outright. A car is treated as an ordinary business asset, and when sold, all proceeds go into the company’s general funding pool.
  • Hire purchase: For those who want to own their vehicles, but choose not to pay outright, a hire purchase arrangement is often used. The fleet operator pays a deposit followed by regular fixed payments over an agreed period. The regular payments can be reduced by incorporating a larger final or balloon payment, which would be typically set to equal the projected residual value of the car at the end of the agreement.

If all conditions are met, full title and ownership passes to the client usually once the final instalment is paid. This way each car or van is paid for over its working life, and as with outright purchase, when sold all proceeds go into to the company’s general funding pool.


Vehicle leasing is very popular in the UK as many businesses are attracted by the advantageous VAT treatment and the ability to offset residual value risk.

  • Contract hire: As the predominant form of leasing in the UK, this allows specialist leasing companies to offer competitive rentals by:
    • negotiating manufacturer discounts;
    • utilising specialist funding arrangements; and
    • assuming residual value risk.

Together with a maintenance package, Vehicle Excise Duty (VED) and administration, the total projected costs are recovered in the form of fixed, regular rentals from the fleet operator.

  • Finance lease: Although rarely used nowadays, finance leasing is very similar to a basic hire purchase agreement, with two common options being:
  • Full pay-out: At the end of the agreed term, the fleet operator must sell the car, normally via a sales agency agreement, to a third party in return for an agreed proportion of the sales proceeds. Alternatively, the fleet operator may extend the term of the lease, paying only a peppercorn rental.
  • Balloon lease: Payment of a proportion of the car’s cost is deferred until the end of the lease, giving lower rentals across the period. At the end of the lease the car is sold to a third party, with the fleet operator retaining any proceeds in excess of the balloon. If there is any shortfall however, the fleet operator is responsible and must pay the lessor by way of a balancing rental.

Although the appearance is similar to hire purchase there is one important difference: under a finance lease the customer never actually owns the vehicle, they simply pay the owner for its use. This means that it should not strictly be regarded as capital expenditure, although in most cases the finance lease should be reflected on the balance sheet, and as a supply of services the regular rentals attract VAT.

Driver funded

For the majority of the 4 million employee owned car users in the nation’s grey fleet, the funding arrangements are simply not of specific interest to the employer. But some employers have transformed their company car fleets in to a structured employee purchase scheme.

  • Personal Contract Purchase (PCP): Under such a scheme the employee enters in to a finance agreement and makes regular payments over an agreed term. Ownership would be transferred at the end of the contract provided a final, or balloon, payment is made, but as the employee usually has the option to return the car without making the final payment the residual value risk to the employee is minimised.
  • Employee Car Ownership Scheme (ECOS): Unlike a PCP scheme, under an ECOS ownership of the car is transferred to the employee when the contract, which must be a credit sale (loan) agreement, is signed. This ensures that the car is not taxed as a company car whilst having all the benefits of a company car.

Because the funding and tax implications of ECOS can be complex they should not be undertaken lightly or without expert advice and the approval of HMRC.

Common issues

There are two fundamental issues that need to be considered before any firm decision on funding is made.

  • Projected residual value: The matter of a projected residual value and who bears the risk of depreciation needs to be understood very clearly. It may be attractive to have low rental payments with a high residual value built into the calculations, but if this figure is not realised when the vehicle is finally sold consideration should be made on how that will affect the operators bottom line.
  • Effective interest rate: The effective interest rate charged in a deferred purchase or lease agreement is the difference between the estimated depreciation (original cost less residual value) and the total instalments or rentals. Of course the total cost is what really matters, but the calculation of the effective interest rate will give some measure of the actual competitiveness of the whole deal, and should therefore be useful when comparing suppliers.

Which option should you choose?

Each option has a place in the fleet market, but as all come with a range of features, advantages and disadvantages the following issues should be carefully considered before choosing a funding option for your business:

  • Overall cost of the option, using a full whole life cost computation;
  • Cash flow implications;
  • Balance sheet effects;
  • Taxation of the employer;
  • Business tax;
  • VAT;
  • National Insurance Contributions (NIC);
  • Taxation of the employee, that is the income tax on the company car benefit charge;
  • Flexibility, implications for the business;
  • HR/Personnel implications;
  • Risk profile; and
  • Internal administration and resource costs and implications.

These represent the broad issues, and highlight the fact that fleet policy must meet the needs of the business. Given the financial implications the Finance Director or similar should be involved in any decision making, but it is important that the fleet manager has an understanding of these issues, to enable them to provide the optimum evaluation of the business issues.

Evaluation of the funding issues

The key aspects of each of the issues can be summarised as follows:

  • Overall cost: A whole life cost figure for each option should allow the fleet manager to find the lowest cost funding option, even if business considerations, such as cash flow restrictions, mean the final decision may not be the optimum method shown.
  • Cash flow implications: In many organisations cash flow is considered to be more important than actual cost. Therefore the overall cash flow within the fleet may be crucial, and a comparison should be made between purchasing and selling cars, and paying regular rentals/instalments.
  • Balance sheet implications: Some businesses will pay particular regard to certain performance measures such as Return On Capital Employed, which can be affected if company vehicles are included as assets on the balance sheet. This is a complex area and the fleet manager should always seek professional guidance.
  • Taxation of the employer:
  • Business tax: Business taxes may differ depending on whether the business is a company that t is liable for corporation tax, a partnership that is liable for income tax, or is a public sector organisation or charity. The tax relief available for cars is though the same for all, as set out in Example 1 on page 5.
  • VAT on purchased cars: If there is no private use, such as with pool cars, then in most cases VAT registered fleet operators can recover the VAT on the purchase of a new car, but they must also include VAT within the disposal price, when it is sold.
  • VAT on leased cars: All forms of leasing attract VAT on the rentals. If there is no private use then all of the VAT is recoverable on the rental, but where a car is available for private use then only 50% of the VAT may be recoverable by the fleet operator. If a fleet operator is not VAT registered they will be unable to take advantage of this saving.
  • NIC: Often overlooked, NIC is a significant component of whole life cost as it is due on every company car that is made available for private use and on which the driver is liable to income tax on the car benefit charge.
  • Taxation of the employee: Where an employee has the benefit of the private use of a company car ‘by virtue of employment’, that benefit is taxable. Please see Example 2 on page 6 for more information.
  • Flexibility, implications for the business: Regardless of the way in which a business funds its fleet there are likely to be inherent restraints associated with the funding method chosen. Accordingly, the degree of flexibility available and how the business may be affected should be investigated thoroughly before a decision is reached. For instance, where a company has a high turnover of drivers, if the remuneration package offers every new driver a new car and the business is forced to return vehicles before the end of the contract when employees leave the early termination penalties for the company may be significant.
  • HR/Personnel implications: The remuneration package offered should reflect the type of employee the business wishes to attract and retain. The fleet policy should reflect the needs of the business, so the fleet should contain appropriate makes and models. The reasonable and realistic expectations of drivers and an understanding of the competitive environment, is necessary to get the right balance between cost and driver satisfaction.
  • Financial risk management: Both new car prices and residual values may vary significantly over a short period of time; that risk must be assessed as should any risk associated with interest rates. These are in addition to the basic risks of running a fleet such as insurance, road traffic accidents and maintenance for higher mileage vehicles.
  • Internal administration factors: Running a fleet is a serious undertaking. If a business elects to do everything in-house it should not underestimate the time and management resource that may be required. Adopting a funding arrangement such as contract hire should provide the majority of the fleet administration required, leaving the fleet manager to concentrate on higher-level management issues.
Funding and taxation are an important part of running a successful fleet and should be considered alongside the business’ requirements of its fleet. The fleet manager should be a key member of the management team making the decisions and recommendations about funding options; how feasible they are and how beneficial.

Example 1 – Business tax relief

Although detailed information regarding taxation falls outside the scope of this guide, it could have a significant impact on the choice a company makes. The whole life costs of a car should take taxation and tax relief into account which may show significant differences in the cost of a typical mainstream fleet car depending on the CO2 value and whether it is purchased or leased.

  • Purchase: Capital allowances are a business tax relief available for purchased cars. Capital allowances enable business taxpayers to claim tax relief for the reduction in the value of cars purchased and owned by the business and used in its trade. By writing off the capital cost against the taxable income of the business, capital allowances effectively take the place of depreciation charged in the accounts, which is not normally deductible for tax purposes.
How much relief available and when, depends entirely on the CO2 emissions of the car; the lower the CO2 emissions the quicker the relief is available. On the subsequent sale of the car any excess relief must be paid back over a number of years.
    Leasing: Tax relief may be claimed on the effective rental, that is the rental plus irrecoverable VAT, if the car’s CO2 emissions are 130g/km or below. Cars with emissions above that level will be restricted to relief on only 85% of the effective rental.

As set out in the fourth Fleet Manager’s Guide in this series, employers should consider their allocation policies carefully to ensure they are fully aware of all the costs they must consider before deciding on their fleet choice.

Example 2 – Income tax on the car benefit charge

To calculate the car benefit charge, that is the benefit in kind (BIK) on which the driver will pay income tax, the official list price of the car must be multiplied by the ‘appropriate percentage’ which depends of the CO2 emissions of the car, as fixed in the car’s V5 registration document.

In 2015/16 the appropriate percentage ranges from 0% for electric cars to a maximum of 35%. If a car runs solely by diesel, there is a 3% surcharge applied to the scale, although the maximum is still capped at 35%.

These figures will change over the next four tax years in accordance with announcements made in recent Budget statements made by the Chancellor of the Exchequer. When calculating the car benefit charge the current table should be reviewed to ensure the correct percentage is being used, especially as:

  • in April 2015 the concession available for electric cars will be withdrawn and the maximum percentage will rise to 37%; and
  • the 3% diesel supplement will be abolished in April 2016.

  • Although the table will change, the government has promised to publish rates for three years in advance to aid the motor industry in the UK. This helps the fleet industry to make an appropriate selection with a degree of certainty about the tax liability for most of the car’s life.

    Fuel for private use

    The government has made it clear that it wants to discourage the provision of fuel for private use. Where an employee is provided with this benefit, a separate tax charge is due. This is calculated by multiplying the fuel benefit charge, which in 2015/16 is £22,100 for all cars, by the car’s ‘appropriate percentage’, as shown in the following example for an employee who has private use of a Volkswagen Golf BlueMotion 1.6-litre TDI 110PS 5 door:

    Income tax on the car benefit charge for private use:

    List price £22,090.00 (includes VAT, delivery and number plates
    CO2 89g/km
    Appropriate percentage 16% (13% for CO2 of 89g/km +3% diesel supplement)
    Car benefit charge £3,525.60 ('Cash equivalent' of benefit)
    Income Driver tax @ 20% £706.88
    Income Driver tax @ 40% £1,413.60

    Income tax on fuel for private use

    Fuel scale charge £22,100.00
    Appropriate percentage 16% (13% for CO2 of 89g/km + 3% diesel supplement
    Fuel benefit charge £3536.00 ('Cash equivalent' of benefit)
    Income Driver tax @ 20% £717.20
    Income Driver tax @ 40% £1,414.40


    Where private use is restricted to commuting to and from work sites and otherwise is only incidental to the overall business use no taxable benefit applies.

    Where the van can be, and is in fact used extensively for private use this is considered as non-incidental. If this is the case, in 2015/16 a flat-rate tax charge of £3,150.00 is applied. If fuel for private use is also provided, a further tax charge of £594.00 is applied.

    To ensure that income tax is not paid unnecessarily the fleet operator should establish a policy-level commitment to restrict private use. Journey-logging and mileage records, clear policy statements acknowledged by the drivers’ signatures, or even withdrawing insurance cover for everything except business and commuting can all be used to ensure that no income tax liability arises.

    Class 1A NIC

    The driver’s employer must pay Class 1A NIC on the driver’s car benefit charge that is taxable benefit-in-kind. In 2015/16 the rate of Class 1A NIC is 13.8%.

    Company car and van drivers do not pay employee NIC on their company vehicle, as employee benefits in kind are only liable to income tax.

    Click here to view our full set of comprehensive Fleet Manager’s Guides.

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