The recession could bring back the company car as a key part of employees’ remuneration and benefit packages, according to the boss of Britain’s largest independent fleet management company.
The last decade has seen a surge in businesses providing cash alternatives to company cars for employees.
As a result, the number of company cars on Britain’s roads has dropped to about 1.1 million – 500,000 fewer than when the emissions-based benefit-in-kind tax was introduced in 2002 – according to HM Revenue and Customs’ figures.
Many employees taking a cash option have used the money to fund a car through a personal leasing scheme.
However, as a new study by motoring magazine Auto Express has revealed, falling residual values are leaving many drivers facing negative equity on their vehicles.
Geoffrey Bray, chairman, of Fleet Support Group, which has about 55,000 vehicles under fleet management, said: “Companies are being irresponsible when expecting staff to take up cash alternatives in the current climate.
“Cash-for-car is nothing but financial engineering from the corporate viewpoint. Businesses that value their staff should not be encouraging the take-up of cash alternatives in the current economic climate.
“Employees who are coming to the end of a PCP-style contract are going to be in for a massive shock when they return their car and discover its value is massively below the sum they anticipated.
“As a result they will more than likely hand the car back and walk away and look to return to their employer’s company car scheme. Meanwhile, employers that have shelved their traditional company car schemes in favour of cash alternatives may want to reintroduce them.
“Employees, typically a company’s most valuable asset, will in the main be loath to risk the prospect of negative equity in the future.”
Auto Express calculated that the negative equity shortfall for drivers across the UK could collectively total £272 million.
While not all motorists affected will be ex-company car drivers many are likely to be. Personal contract purchase schemes typically involve drivers making a series of monthly payments for their car over a pre-determined contract period, usually two or three years.
Then a final “balloon” payment is made to secure ownership of the car at the end of the contract period. This payment is based on the predicted end-of-contract value of the car at the time the agreement was taken out.
But the continuing slump in used car prices caused by the economic turmoil means that many of the residual value predictions are thousands of pounds above the actual value of the car. As a result, to secure ownership of the vehicle drivers will have to pay significantly more than the car is worth.
The alternative is to hand the vehicle back at the end of the contract period and walk away leaving a new vehicle to be sourced elsewhere.
“It’s a case of once bitten, twice shy,” Mr Bray said.
“Plummeting residual values caused by the wider economic situation means there is no incentive for employees to fund a car through a personal leasing type arrangement. As a result, the recession could ironically halt the slide in the popularity of the company car, as highlighted by HMRC figures.”