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Legal view: Company cars – benefit or burden?

23rd Mar 2005
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Alison Wallace, head of employment practice at Steptoe & Johnson explains how to manage the use of mobile phones while driving, understand corporate manslaughter and phase out company car benefits, legally.

The acquisition of a company car was once the aspiration of many employees. It was a highly prized and valuable benefit if fully expensed including private mileage. Cars which were changed every three years also provided a substantial retention/reward benefit for most businesses.

That all changed with an adjustment in the tax provisions which sought to reduce the tax benefits of company car ownership. Nevertheless, there are still many businesses that provide a company car scheme.

In bigger organisations where there is a pick and mix selection of rewards cars, whatever their size will often be selected as a first choice. Many companies will either provide a vehicle or allow the employee to take a cash allowance or a car plus a partial cash allowance.

Eligibility for this type of arrangement will very much depend on the level at which an employee is working as not all car schemes are open to all grades of workers .

Cash paid in lieu of a car is not treated as pensionable salary. In order to pro rata the annual cash alternative, a percentage of salary is usually calculated to a maximum sum and then is paid on a monthly basis.

The cost and management time for administrating the provision of a car fleet for employees is huge. A leasing company who retains ownership of the car and meets all maintenance costs in return for a monthly fee is a common and practicable way of reducing administration time.

Regardless of who manages the scheme, the business should always have a car policy in place. This should cover as far as practical all eventualities and be part of the employee’s terms and conditions of employment.

Car policy

What needs to be included?

First the business needs to decide on the level of car for the grade of staff and timing and replacement of the vehicle. Are there to be any restrictions on who can drive the car? Whilst the car may be used by other staff, any other driver should be notified to the business.

However, there is usually spouse exception provided they hold a valid licence and are covered by the insurance. What level of insurance is to be provided? The sensible approach would be a comprehensive one.

The business needs to decide what expenses are to be carried by the employee, in particular, expenses relating to maintenance, testing, taxing, insurance, repairs and fuel. There are tax advantages in spreading the running costs between the business and the employee. All vehicle registration documents should be held by the business but a copy of the insurance certificate should be held by the employee.

The employee should also be responsible for obtaining an MOT certificate if required. If the car is being provided as an integral part of the employee’s job, there should be a condition in the policy that the car is maintained in a roadworthy condition and kept clean.

The employee driving the vehicle should be responsible for payment of all fines incurred for traffic offences. These should not be reclaimed as expenses. This should also apply in regard to the congestion charge. If the car is owned by the company and the fine is paid by the company, there should be a mechanism for reimbursement by for example deduction from salary.

As to the use of the car, even if the car may be used privately, it should be made clear to the employee that the vehicle should not be used for hire and reward, racing, other sports or taken abroad without consent.

The business can provide for forfeiture or suspension of the use of the vehicle at their discretion if any serious offence is committed by the employee. Consideration should be given to what should happen to the car on termination, during maternity leave or any period of illness.

It is a well known fact that most senior executives leaving a company would put the transfer of their car, even if it does carry a tax liability close to the top of their wish list. Maintaining the company car when their role has ceased, even if it is an expensive luxury, is a very important factor to some.

Termination costs

What happens on termination of employment? Generally on leaving the business, the car should be surrendered by the employee. It is a criminal offence if an employee fails to do this or withholds it pending payment of monies. If it is provided by the business, the business will have to bear in mind the cost and expense of perhaps an early termination of a hiring or leasing arrangement.

If the car is a contractual benefit, however, an employee can claim for the loss of the car if the employment ends by wrongful or unfair dismissal. If the car is only provided for business then the staff member cannot claim damages or compensation for the loss.

However, if as is usually the case, the employee is allowed to use the car for personal use then they will have a valuable claim for the loss of this benefit.

Most businesses negotiate a sum in lieu over the contractual period of notice or if the working relationship is still good and the employee leaves with a payment in lieu of notice, the car can be kept for the equivalent notice period and returned at the end of that time.

Care must be taken however, to ensure, that the employee remains covered under the business’ car insurance scheme or cover arranged by the member of staff and claimed back as an expense.


As an alternative an annual allowance will allow an employee to run and maintain their own car or purchase a new one. In that event, the business has no responsibility for any aspect of owning or running the car. The employee should insure the car including any insurance for business use.

If the employee is required to use their own car for business purposes then they will be able to claim expenses at the business mileage rate which covers fuel costs and incorporates an element in relation to wear and tear.


In April 2002 there was a change in the tax rules covering payments made to employees for using their own vehicles for business travel. Businesses can now pay motoring expenses incurred by their employees for their own vehicles up to a statutory exempt amount without tax being due.

For cars and vans doing up to 10,000 business miles the sum is 40p per mile. If it is over 10,000 business miles the sum reduces to 25p per mile. For a journey to qualify as business travel it has to be one that the employee is required to undertake in the course of their job. Ordinary commuting however, is not a business journey, trips to the shops or gym for example aren’t included either.

When an employee is paid mileage allowance that exceeds the approved amount, the excess is taxable. In this situation, the employer must report the excess mileage allowance to the Inland Revenue and provide the employee with details of what has been reported.

In addition, employers can use fuel only rates depending on engine size to reimburse employees for business travel in their company cars or require staff to repay the cost of fuel use for their own private travel. The current rates range from 9p per mile for diesel fuel for an engine of 1,400cc or less to 14p per mile for petrol fuel vehicles over 2,000cc.

There are scale benefits for vehicles which are revised at each Budget. Employees provided with a company car available for private use are taxed according to a scale based on CO2 emissions.

The basic car benefits charge will be the car’s list price multiplied by the percentage charge for the carbon dioxide emissions band in which the car falls subject to the addition of any diesel supplemental or a discount for cars using alternative fuels and technologies.

It is this increased tax burden on a individual’s tax position which has driven employees away from company cars to a hassle free mileage allowance or a cash lump sum in lieu of company car.

Loss of licence

What if an employee’s job is dependent on driving and they then lose their licence? It would be premature to simply dismiss an employee who is banned from driving. Many employees who drive for a living, have separate insurance to provide a chauffeur in the event that they are banned.

Provided this works for the business, they should be allowed to continue in their job. Alternatively, they can be assigned to another position during the term of the ban.

An employee losing their licence for health reasons should be treated sensitively too, particularly in order to avoid any disability discrimination claim. Equally, providing a car space for somebody who wished to drive to work rather than use public transport for health reasons would be a reasonable adjustment.

Mobile phone use

Businesses should not forget the Road Vehicles (Construction & Use Amendment No.4) Regulations 2003 which came into force in December 2003. These Regulations make it a criminal offence to drive any motor vehicle while using a hand held mobile phone.

Using hands free equipment does not contravene the Regulations if the driver does not have to hold the telephone. Pressing the buttons on a mobile phone attached to a dashboard is also permitted.

An employer can be held vicariously liable for actions of its employees if carried out in the course of their employment. Regulation 101(2) expressly provides that persons who cause or permit any other person to use a hand held mobile while driving will be liable. This covers employers and potentially makes them liable for the acts of their employees.

The Department of Transport suggests that if it is essential for staff to be contacted while out driving they should use voicemail, a message service or call diversion and stop regularly to check messages and return calls.

An employer will not be liable for supplying a mobile telephone to an employee or for calling an employee who happens to be driving. However, if the employee answers, an offence is committed by the employer.

Employers are advised to protect themselves by issuing a policy to explain to employees what they are expected to do in terms of driving and telephone calls. A prudent step would be a policy containing an absolute ban on using the telephone for calling and texting while driving.

If a call needs to be made or answered, the employee should first pull over and turn off the engine. Personal calls should also be prohibited while an employee is driving.

Liability for accidents

The failure of criminal charges against Railtrack and three of its executives (chief executive) in the wake of the Hatfield rail accident re-ignited the call for legislation to reform corporate killing laws.

In May 2000, the Home Office issued a consultation paper and draft bill in relation to proposed reforms to manslaughter laws generally. The proposals included a new offence of “corporate killing” but a number of aspects of the draft bill were controversial.

The Home Secretary announced details of a new draft bill which is still to be explained. He made it clear that the new laws would be aimed at companies, but would not target individual directors and officers.

Since the case was brought against P&O following the sinking of the Herald of Free Enterprise in March 1987, in which the company directors and other employees were charged with unlawful killing, it has been recognised that a company can, in theory at least, be guilty of manslaughter.

However, the offence of corporate manslaughter requires a mental state of mind to be attributed to a company. That is, a company can only be convicted of the offence if an individual who can be said to be the “mind and will” of the company has committed an act that amounts to manslaughter in respect of the death.

There have been only a handful of cases in which companies have been convicted of manslaughter under English law and all of those convicted were small companies.

The result of this is that it has been generally understood that there is no realistic prospect of a corporate manslaughter conviction against any large company under English law.

Critics of corporate manslaughter reformation point to the offences that already exist under the Health and Safety at Work etc Act 1974 where the activities of companies lead to injuries or deaths.

Those who seek change, however, maintain that the “corporate killing” tag will have a stigma attached to it, that a conviction under the 1974 Act does not. There is also a perception that conviction for breaches of health and safety laws, even if they lead to deaths, typically attract lower penalties than would apply under a manslaughter judgement because health and safety liability is based on the fact of the breach, without any real regard for the actual consequences.

Nonetheless businesses that provide cars should be aware of the risks.

In the 2000 consultation paper and draft bill, all of the tragedies cited to explain the need for reform involved transport-related deaths. Any company involved in activities that might present a risk of serious injury to either its own workers or the public could be prosecuted.

For example, it might be expected that corporate killing prosecutions, once the laws are in place, would be a real likelihood against:

  • Employers who fail to properly train and supervise staff in the use of their vehicle
  • Employers who fail to adequately service, inspect and maintain vehicles used by workers.

While few would question the need to ensure that those who neglect their duties are held responsible for the consequences, care is needed to ensure that the investigation of the causes of an accident do not become little more than a hunt for a convenient scapegoat.

Phasing out schemes

How do you phase out a car policy if there is a commercial need to do so?

This is no different from making any other variation to the employees’ contract of employment save that car benefit even with its penal tax consequences tends to be highly prized by employees.

The simplest way is to provide an annual allowance which is taxable and payable monthly which as far as possible replicates the cost of the car currently held by the employee. Adequate notice should be given to the employee of the withdrawal of the car scheme.

It is recommended that this should not be less than six months’ notice. Where the business provides cars on a hiring or lease purchase arrangement, if these are to be prematurely terminated, that cost should be factored in or better still the scheme terminated at the completion of each hiring/leasing arrangement for each relevant employee.

Most employees will find the tax consequences of moving away from a company car more beneficial to them and therefore resistance to change will be limited. There are also cost efficient alternatives such a daily rental vehicles or occasional use of pool cars as very few employees will need a car full time.

The combination of cost, tax and congestion charges in London has therefore toppled the company car from its position as a top status symbol. Has red lights, red Ken and red tape almost entirely stifled the benefit value of company cars?

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By webbrowan
23rd Mar 2016 07:38

Whether a company car is deemed as a benefit or a burden really depends on the needs of the employee. If the employee does not have any purpose for a car, then possessing one would definitely become a burden sooner or later in the long run as a car requires maintenance fees and other miscellaneous costs. However, if the car is fully utilized by the employee even out of job requirements, then obviously it becomes a benefit or an advantage.

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