Best Practice Workshop.

1. Best Practice Workshop. 30th November 2010

2. Welcome.

4. Key Speakers. Andrew Hogsden-Baseline costs and disposal Paul Lippitt-AcquisitionNick Jones-In life Guest speaker: Colin Tourick-Fleet Excellence: Is it achievable?

5. Baseline Costs.Andrew Hogsden

6. Baseline costs • One of the biggest costs in employing staff will relate to the provision of a company car or an alternative. • Most companies are unable to locate in 1 place the total cost of providing this benefit. • One of the key areas looked at by Lex Autolease before undertaking a fleet review will be to Baseline the cost of fleet for the customer today.

7. Baseline costs • One of the problems with this is that although most customers can identify some of the main areas: Lease costs and Cash allowance paid, some customers are not fully aware of the value of other key costs such as: • Fuel (if no Fuel card offering) – information tends to be maintained in paper format and retrieving mileage and the costs is often difficult as the accounts system doesn’t tend to drill down to employee level. • Grey fleet (non cash takers) – similar to fuel as limited information maintained in the accounts system and often difficult to obtain at driver level. Another key area that a company should be able to access relates to the vehicles that employees are using when undertaking business mileage and this is often not held.

8. Baseline costs • Cost of hire vehicles – some companies use more than 1 provider and reporting facilities tend to be one of the last areas to be considered when dealing with hire providers. • Outside of lease contract recharges (damage, lease recharges etc). • Vehicle downtime – if customers aren’t pro active in managing the way in which driver’s have their vehicles serviced, they could find there is an additional cost of not having the employee working.

9. Funding costs Funding Lease Depreciation Disposal Operational costs SMR RFL Class 1A NI Grey fleet Fuel Mileage Recharges E.o.C ETs Mgmt fee Premiums Ins. XS Fines Acc. Mgmt Breakdown Hires Downtime Admin Salary Overheads Baseline costs Here is an example of all costs that need to be picked up when base lining your current position.

10. Baseline costs example

11. AcquisitionPaul Lippitt

12. Acquisition • What policy considerations are important? • Why should you focus on whole life cost? • Which funding method should you use?

13. Policy considerations • Meeting the business need • Manufacturer choice • Contract term & mileage

14. Meeting the business need • Commercial vehicles • Fit for purpose? (Size, load, performance considerations) • Cost? (Benefits of downsizing) • Alternative fuel? (Urban centric v long distance journeys) • Essential car users • Tool of the trade • Clear eligibility criteria • Status car users • Part of benefits package • Cash v car • Grey fleet • Cost, perceived benefits and CSR considerations • CSR follows through all areas

15. Manufacturer choice • Commercials & essential user cars • Objective should be to maximize manufacturer support • Does the manufacturer’s model line up cover all the business’s operational needs? • Are CO2 objectives supported? • Should manufacturer volume rebates be paid directly to the customer? • Status users • Consider an open choice • Efficient whole life cost benchmarks to determine allowances • Cash v car should be employer cost neutral • Grey fleet • Assisted employee programmes may improve manufacturer support & help address CSR issues

16. Contract term & mileage • Many company car policies moving to 4 year replacement cycle. • For commercials, 5 years may be cost effective. • But consider benefits of technology advances from a shorter replacement cycle (fuel consumption, greater power from smaller engines, alternatively fuelled vehicles) • Tailor contract mileage based on forecasts. • Reallocate commercials / essential user cars to minimise excess mileage charges

17. Whole Life Cost – what does it mean? • Whole List cost refers to the total cost of ownership over the life of an asset. • Whole-life cost analysis is often used for option evaluation when procuring new assets and for decision-making to minimise whole-life costs throughout the life of an asset.

18. Whole Life Cost

19. Whole life cost examples

20. Whole life cost – How does it affect your policy?

21. Whole life cost vehicle choice

22. Whole life cost vehicle choice

23. Whole Life Cost – CO2 caps • Whole Life Cost can manage fleet expenditure and will promote low CO2 emitting vehicles. However if the goal of the business is to fundamentally reduce the fleets CO2 emissions, a ‘maximum’ cap is recommended; with this cap reviewed yearly as manufacturers improve their engines • Without a CO2 cap, trading down from a higher grade to a powerful small car could result in high CO2 emissions • A combination of Whole life Cost and a CO2 strategy, will meet both the financial restrictions of a modern day fleet, whilst setting a environmental strategy to meet most business CSR.

24. Whole Life Cost CO2 thresholds Note: Expect 160g/km threshold to be revised by HMRC

25. Funding choice • Review of funding options • Current trends • Cash allowances • Lease accounting impacts

26. Review of funding options • Contract hire • Outright purchase • Hire purchase • Contract purchase • Finance lease • Employee car ownership

27. Funding considerations • Cost • Risk • Availability of finance • Cashflow • Tax treatment • Balance sheet treatment • Cars vs commercial vehicles

28. Contract hire Operating lease, usually with full maintenance, where lessee has use but not ownership of asset at any point • Main benefits • Fixed cost motoring, with residual (& maintenance) risk passed to lessor • For cars, 50% VAT recovery on finance; for vans 100% VAT recovery • Lease charges available for corporation tax relief (no lease rental restriction on cars with CO2 emissions < 161g/km) • Treated as asset finance by banks, so not part of funding utilisation (term loans / revolving credit facilities) • Flexibility • Main disadvantages • Early termination cost (although impacts all forms of funding) • Proposed on balance sheet treatment (PLC & foreign owned companies), in common with most funding methods

29. Outright purchase Vehicle purchased outright, either through accumulated reserves or via bank facilities • Main benefits • Capital allowances • No term / mileage restrictions • Bank funding may be cheaper • VAT timing benefit for vans (100% VAT recovery up front) • Main disadvantages • Residual value (& potentially maintenance & interest rate) exposure • Utilisation of working capital / bank facilities • No VAT recovery on company cars • Early terminated vehicles likely to result in a loss on sale • On balance sheet treatment (gearing impact etc)

30. Hire purchase Vehicle is purchased by a series of instalments, with the option to purchase at the end, usually via a nominal sum • Main benefits • Capital allowances • No term / mileage restrictions (assuming loan fully repaid) • Payment by instalments aids cashflow • VAT timing benefit for vans (100% VAT recovery up front) • Main disadvantages • Residual value (& potentially maintenance & interest rate) exposure • No VAT recovery on company cars • Early terminated vehicles likely to result in a loss on sale • On balance sheet treatment (gearing impact etc)

31. Contract purchase Agreement to purchase over a predetermined period by making a final balloon payment, with an option to return the vehicle at the end of contract, based on a guaranteed residual value. • Main benefits • Fixed cost motoring (no residual value risk) • Capital allowances • Option to buy or return vehicle at end of contract • VAT timing benefit for vans (100% VAT recovery up front) • Main disadvantages • No VAT recovery on company cars • Early termination charges apply (subject to Consumer Credit Act rules) • On balance sheet treatment (gearing impact etc)

32. Finance lease Finance lease involves the use but not ownership of an asset, where the full cost may be paid over the contract period & a proportion of rentals rebated based on the disposal value achieved • Main benefits • 50% VAT recovery on cars; 100% on vans • Possible to pay most of the finance rentals up front, accelerating VAT recovery & reducing interest charge (potentially relevant for cash rich companies) • No end of contract damage charges • Funding potentially cheaper than other methods (lessor should reflect benefit of capital allowances received in interest rate) • Main disadvantages • Lessee bears residual value risk • Potential charge if lease early terminated • On balance sheet treatment

33. Employee car ownership Structured cash for car scheme whereby company pays employees additional salary to enable them to purchase their own cars under a credit sale agreement. This may involve a corporate guarantee. • Main benefits • Potential cost savings through tax efficiencies (utilisation of AMAPS & driver contributions) • Driver has option to buy the car at end of loan term or return it to leasing company under a sales option agreement • Manufacturer discounts normally available (like company car schemes) • Off balance sheet treatment • Main disadvantages • Requires high business mileage to achieve cost savings • Administrative effort can be significant (business mileage / payroll link needed) • HMRC require monthly mileage reconciliations • Any payments made on behalf of the driver (e.g. early termination charges) need to be grossed up for tax / NIC which can be expensive

34. Choosing the right funding method • Car vs van • Potential full VAT recovery on vans, full or 50% blockage on cars • Residual value risk appetite • Access to additional finance • Importance of preserving working capital facilities • Cashflow • Administrative burden • Balance sheet treatment • Cost • Best practice would lead to evaluation using NPV analysis of after-tax cash-flows.

35. Choosing the right funding method – cars Some pointers • Where transfer of RV risk is important • Consider contract hire, ECO, contract purchase • Where both transfer of RV risk & low admin burden is key • Consider contract hire or contract purchase (depending upon VAT recovery rate) • Where off balance sheet treatment is required • Consider ECO (contract hire will be required to be accounted for on balance sheet) • Where RV risk is not important • Consider finance lease (assuming on balance sheet treatment is acceptable)

36. Choosing the right funding method – vans Some pointers • Where transfer of RV risk is important • Consider contract hire or contract purchase (note: the latter can provide accelerated VAT recovery) • Where RV risk is not important • Consider finance lease or hire purchase (trade off of low finance cost v access to capital allowances)

37. Current trends – Acquisition method • Comparison with 2009: • Contract hire remains most popular funding method, with a marked increase in take-up over 2009 at £100M-£500M level • ECOS take-up broadly flat • Salary sacrifice take up remains low despite increasing interest Source: Monks Guide 2009

38. Current trends – ECO • HMRC has firmed stance towards ECO administration • PSA concession no longer available for new schemes • AMAPS must be paid to drivers, cannot apply offset against car payment • ECO costs subject to monthly PAYE • Greater emphasis on accurate mileage collection • Overall, greater administrative burden.

39. Current trends – ECO • Popularity appears to have levelled off • Some companies have reverted to traditional company car schemes • As fuel cost increases the benefit of AMAP payments reduces • WLC focus is driving greater efficiencies from traditional company car schemes • ECO schemes rely on high business mileage, and as they are outside company car tax regime encourage higher CO2 vehicles – inconsistent with CSR / environmental focus • ECO less effective with low CO2 vehicles • Likely to remain an alternative to company car schemes, but hard to see a greater future demand.

40. Current trends – Salary sacrifice • Niche product not widely understood • Not a replacement for company cars • Aimed at employees not currently entitled to a company car / cash opt out • Also can apply where employees want a second company car or where organisations already operate a fully flexible benefits scheme for staff with no company cars • Salary give up in return for company car • Tax efficient as car paid out of gross, not net salary • Essentially contract hire with a tax efficient wrapper – useful to provide additional employee benefits at no additional employer cost

41. Current trends – Salary sacrifice • Benefits • Tax savings (employee PAYE / NIC, employer NIC v BIK on salary sacrificed car) • Encourages take up of smaller, low CO2 cars • Supports risk management objectives (promotes new cars rather than second hand) • Potentially cheaper than PCP schemes (VAT treatment & manufacturer support) • Improves benefits package options at no additional employer cost. • Disadvantages • Employer bears early termination cost (implications for organisations with high staff turnover) • Not suitable for some employee groups (implications for statutory maternity & sick pay, mortgage advances, employees nearing retirement)

42. Cash allowances • Advantages • Policy flexibility – freedom of employee choice (manufacturer, new v second hand car choice) • Ease of administration – no company cars to administer, no early termination charges) • Disadvantages • Potential cost leakage through poorly designed schemes • Allowances set too high • Business fuel reimbursement above AFR rates • Environmental impact – generally cash takers select higher CO2 cars • Duty of care concerns – more difficult to control car choice & condition • Driver purchasing power likely to be lower – typical PCP schemes more expensive in areas such as: • Car cost (no access to company manufacturer support terms) • Maintenance • Insurance • Policy design • Policy flexibility can be achieved through well designed company car schemes

43. Cash allowances Of companies surveyed, 72% reported that some employees had expressed a wish to move back into a company car (Monks 2010)

44. Lease accounting changes • All operating leases will be reported on balance sheet • “Right of use” asset & liability • Depreciation & interest charge to P&L will follow underlying asset value • Means P&L charge higher in early part of lease term • Probability test to determine useful life • Discounted at implicit interest rate / cost of funds • Applicable to IFRS reporting entities (UK Plcs & UK companies owned by foreign parent) • Major reporting implications, potential impact to banking covenants, however improves EBITDA performance

45. Conclusions. • Key points • Segment driver population and ensure vehicles chosen are appropriate for each segment (LCV, essential user, status user, grey fleet) • Restrict choice / maximise savings for non-status users • Increase operating life cycle where appropriate (e.g. 3 to 4 years) • Utilise WLC to drive car choice • Funding selection depends on a number of criteria (cost, risk, VAT position, admin burden, balance sheet treatment) • Usual to have different funding outcomes for cars and vans • Salary sacrifice can work well for grey fleet, but not a replacement for company cars • Lease accounting changes will bring reporting complexity but fundamental benefits of contract hire remain otherwise unchanged • P&L impact area • Depreciation & funding savings (right vehicle for the role, downsizing) • Depreciation & funding savings (manufacturer support) • Depreciation & funding savings (reduce depreciation) • Operational cost savings • Depreciation & funding savings (VAT & tax impacts) • Operational cost savings but largely introduced to bring HR benefits)

46. In-life Vehicle Management. Nick Jones

47. In Life. Once the vehicle has gone live… until termination

48. In Life Activities Servicing Duty of Care Grey Fleet Maintenance Fuel Policy Cash Allowances Insurance Accidents Contract Mgt Environment Tyres In life covers… Mileage

49. Mileage variations.

50. Our focus In Life Activities Servicing Duty of Care Grey Fleet Maintenance Fuel Policy Cash Allowances Insurance Accidents Contract Mgt Environment Tyres