Company cars – should you be electric too?

The COP26 commitment to secure global net zero by mid-century and keep 1.5c degrees within reach rests on a number of factors including ‘speeding up the switch to electric vehicles’.  As part of achieving this commitment countries were asked to present ambitious emissions reductions targets (Nationally Determined Contributions or ‘NDCs’) with the UK government announcing the end of the sale of new petrol and diesel cars by 2030, putting the UK on course to be the fastest G7 country to decarbonise cars and vans

KPMG’s 22^nd Annual Global Automotive Executive Survey, (which this year sought the views of 1118 executives across automotive and adjacent industries), supports this ambition but shows there may be some way to go. Over half (59%) of UK automotive executives saying that by 2030 most vehicle sales will take place online, and (56% say) that electric vehicles (EVs) will make up between 70-100% of all new vehicle sales in western Europe.

To phase out petrol and diesel cars, from 2030 all new cars sold in the UK must be capable of driving a significant distance without any tailpipe CO₂ emissions (e.g., plug-in or fully-hybrid electric vehicles) and from 2035, all new cars sold in the UK must have zero tailpipe emissions.

This isn’t far away, and businesses need to start thinking now about what this means for their car fleet provision, supporting the business’s ESG agenda but also  how they provide cars as part of their total employee reward proposition.

-Customers, investors, employees and other stakeholders rightly expect to see coherent and thoughtful strategies from businesses on how to balance sustainable environmental commitments with profitable growth.

Employees, as always, are a key constituency – not least because cars are often seen as a key part of total reward, meaning that change needs to be carefully handled. For many employers, business travel will be a major contributor to their carbon footprint. And, being seen to be serious about the environment as part of the employee value proposition can be a competitive advantage when recruiting and retaining key talent.

The UK government recognises this and provides significant tax incentives for environmentally friendly company cars. 

We all know that private use of a company car, which includes normal commuting, gives rise to a taxable benefit for employees and a National Insurance Contribution (NIC) charge for the employer.

Currently, the tax rules mean that the taxable value of an electric company car can be as low as 2% of the list price as opposed to 37% for a petrol car emitting  CO₂ at 160 g/km. 

If we assume the average price of a company car is £35,000 that’s over a £5,000 difference in the tax and NIC bill for a 40% tax payer, not to mention the close to £2,000 employer’s NIC difference. 

The percentage of the list price is expected to remain frozen until April 2025 so you can see that this could be an attractive proposition for some employees.

The recent KPMG survey of automotive car industry executives also brought out that the charging infrastructure is key to electric vehicles’ success.  In addition to the tax and employer’s NIC incentives to provide electric cars to employees, income tax and NIC relief can also be available where you provide employees with charging facilities or meet the cost of charging electric cars.

There are different ways of providing the cars to employees depending on your business needs, current fleet structure and whether you wish to offer cars to employees on a salary sacrifice basis.  However, its worth considering the full picture before pressing ahead to make sure you are realising the benefits – both financial and employee engagement.

With new petrol and diesel cars being phased out, and strong tax incentives available for hybrid and fully electric company cars, is ‘greening’ your car fleet as soon as possible the obvious course of action?

Not necessarily.

For commercial reasons, different businesses may need to move at different speeds. Additionally, redesigning your car fleet and employee value proposition requires an assessment of several factors – a holistic approach and balancing potential trade-offs are needed.

So don’t set off without a roadmap – points to consider include:

• How could a sustainable car fleet help you achieve your business plan?
  Where are you now and where do you want to be? How do you get there and how long will it take?
  
  
• What are your key drivers?
  The route you take will be determined by the key objective of the exercise. Is it cost saving, employee engagement, or environmental sustainability?
  
  
• Are your current company car and expenses policies fit for purpose?
  Should these be revisited on your journey? Are they up to date and relevant in light of any new hybrid working models?
  
  
• Cars or cash?
  What do your employee value proposition and total reward need to look like – and are company cars still right for your business? Several factors, from the administrative burden to employee engagement feed into this.
  
  
• Can change fund itself – or potentially be cash generative?
  Could salary sacrifice for electric cars deliver cost neutral change or, potentially, deliver real cash savings for both your employees and the business?
  
  
• Don’t forget your employee communications!
  An otherwise well-planned change strategy can under deliver if there isn’t enough focus on how it’s communicated. Company cars can be a surprisingly emotive benefit, so how change is received by employees should be carefully managed. How will you communicate the personal and environmental benefits to ensure the largest return on investment – in terms of employee engagement as well as financially? 

ESG strategic fit, financial analysis, tax considerations, employee engagement and communications and legal implementation are key to any company car changes.

Make sure your strategy delivers for your business and is supported by your existing policies which deliver value to employees and also optimise the financial position for you and your employees. 

If you have any queries, or would like to talk through how we can help you to navigate the changing terrain of company car provision, please get in touch with Will McGahan, David Raistrick, or your normal KPMG contact