Step 1: Calculate The Cost

When an employee goes into a an electric car salary sacrifice scheme they become a company car driver, and just as with any other company car you will have car running costs.

But calculating the cost to both the employee and your business is not the same as for company cars and not a step to be undertaken lightly.

You'll need to calculate the monthly costs of:

• running the car, including finance and depreciation, servicing and maintenance, insurance and breakdown cover at business rates, not personal rates;
• the personal tax and national insurance changes to particiapting employees from taking an electric company car under salary sacrifice instead of cash pay;
• the gross salary sacrifice required to leave a net salary that will meet national minimum wage requirements, yet still cover the car's running costs (other than fuel); and
• adjustments to the salary sacrifice to compensate for any extra company taxes/NIC, or amounts to deduct for tax/NIC savings (if that's how your policy will work).

Let's look at each of these in detail.

Car running costs

The monthly costs of cars provided under an employee electric car salary sacrifice scheme may not be the same as the costs you currently pay for any company cars you provide.

What you are calculating is the net cost to charge to the employee, and you probably don't currently charge your company car drivers for their company cars.

In addition, the costs to an employee of participating in an electric car salary sacrifice scheme may not be anything like those that employees would pay individually to get a car of their own.

For example, individual private car insurance costs may well be significantly less than your business pays for fleet car insurance - employees may have a high no-claims discount but your business will still be rated for car insurance on your overall claims history.

Similarly, employee monthly payments to finance a car may operate at different finance rates and purchase discounts.

What this means in practical terms is that you need to assess the car running costs to the business cost

As a first step, look at the staff turnover amongst those employees that you would want to make eligible for the electric car salary sacrifice scheme.

You will be committing to operating cars for possibly the entire eligible group of employees and this may change the dynamics of the company balance sheet and profit and loss account.

Look too at how you currently fund company cars - if you purchase outright or use hire purchase or contract purchase then these funding approaches typically aren't suited to a salary sacrifice scheme because of both the financial committment and the medium-term nature of the funding involved.

Ideally you will need a funding approach which allows you to de-fleet the car in the event that the employee leaves employment and to do so without a penalty.

That essentially means using contract hire with a reversion clause so that, in the event that the employee does leave employment, the responsibility for the monthly payments transfers to the employee (though keep in mind the implications for termination of employment both with or without cause).

So now you will need to get contract hire quotes from a suitable supplier and do this across the range of cars you will allow into the scheme.

Why? Well, remember that this is effectively a company car scheme, so the same types of controls you have on your existing company cars should still be applied.

This means you may still have to apply pre-requisites such as no convertibles/coupes, no 2/3 door cars, or a limited badge range, etc.

But narrowing down the focus of the cars will allow you to obtain the required monthly costs for rentals.

And to rentals you need to add:

• fleet motor insurance
• comprehensive maintenance and servicing
• tyres (including punctures)
• breakdown recovery
• replacement car (for extended servicing/breakdowns/accidental damage)

So now you understand the need to know the cost of what you're planning to do before you get started - it could make or break the proposition to employees.

Which leads to ....

Step 2: Profit or Loss?

There are typically two key reasons for implementing an electric car salary sacrifice scheme;

• cost savings compared to providing cash;
• improved offerings for recruiting/retaining staff.

However, no matter which point is the prime motive for your business offering an electric car salary sacrifice scheme, probably the most important impact is likely to be from the cost.

In other words, will an electric car salary sacrifice scheme save your business money on your overall payroll costs will it cost more and, if so, could any cost increase be offset by sufficient enhancements to employeer recruitment, retention and motivation to make it worthwhile?

It's beyond the scope of this article to answer the last point - it's so subjective that HR practitioners, consultants and employees will all happily engage in hours of debate on the pros and cons, so we're going to concentrate on the quantifiable impact of a switch to an employee electric car salary sacrifice scheme.

How To Quantify Costs

Assuming you've already followed Step 1 and calculated the monthly car operating costs across a suitable range of vehicles then you'll need to:

• Calculate the national insurance implications of salary sacrifice.
• Decide whether or not the salary sacrificed will qualify for benefits such as pensions, etc, and the associated costs to add to the employee's sacrifice.
• Identify the net business cost impact of a swap to salary sacrifice after changes to business tax relief and recoverable VAT on company car runnign costs compared to cash.

You'll need to do this for every level of employee where you aim to provide an employee electric car salary sacrifice scheme.

For example, multiply the individual salary sacrificed after tax/VAT/NIC at each grade by the number of employees eligible.

The resulting number is your potential cost impact +/- and your highest cost-risk point, i.e. if everyone eligible for an electric car salary sacrifice scheme decides to take up a company car instead of cash.

Also factor into the calculations the cash-flow impact of switching from cash pay to company cars and those profit and loss and balance sheet implications too.

Once again our employee electric car salary sacrifice calculator will take you through this.

Step 3: Create An Offer

If your employees haven't purchased new electric cars previously, you will need to consider whether you will:

• introduce your employees to your existing company car provider; or
• engage a specialist company in the field of providing employees with cars through salary sacrifice.

For employees likely to use salary sacrifice to acquire a car for business use you may need restrictions or conditions on:

• The types of vehicles chosen (e.g. do you need 4 doors for access, a lockable boot for equipment/samples/goods, will you prohibit petrol/diesel/hybrid cars, etc).
• The age of vehicles chosen (will they need to be acquired from new or can employees buy nearly new or used?), and when should they be replaced (age/mileage).
• Maintenance - is a full service/repair history required for used cars?

You'll now need to put together an offer to your employees. How you do this will depend on:

• the current employment contract position of your existing employees; and
• whether your electric car salary sacrifice scheme proposals will leave employees neutral in comparison to cash or better/worse off.

Here are some typical ways of providing a cash alternative:

• A fixed monthly cash allowance to cover depreciation, maintenance and insurance, with a mileage allowance just for fuel costs (or a fuel card or reimbursement of fuel costs on production of receipts).
• Just a mileage allowance, covering all running costs and typically in line with HMRC authorised rates.

We recommend that, unless your business has HR specialists with the right technical knowledge, you speak to your company employment lawyers about the changes you propose.

This is to ensure the cash allowance offer you make complies with employment legislation, particularly if employees have a contractual right to company cars and/or other related benefits (such as free private fuel) and you are planning to replace this with a cash allowance arrangement.

In addition, you need to ensure that the offer also complies with the complex rules on employee taxation where company cars and cash become interchangeable - your tax advisers will guide you on this.

Ensure that your offer is documented appropriately and communicated to eligible staff; also consider bringing employee representatives into the process of formulating the cash allowance offer.

Irrespective of the scope of the cash allowance offering you will need to decide and communicate how the offer will be structured, e.g. will employees have:

• A one time offer to swap to cash, with no way back to company cars for those who do accept and no future offer of cash for company car drivers those who don't take the offer.
• A recurring offer which will be available each time an employee's car is due for replacement or periodically for those who take cash (beware of the tax implications of this).
• A compulsory switch to cash as each employee's company car comes up for replacement (beware of the legal implications of this).

Step 4: Transition The Change

When you're ready to start implementing a cash allowance you'll need to manage the transition out of company cars. Consider carefully the pace at which employees who have opted for cash can:

• decide on a car - the employee's decision may take much longer if car policy restrictions are removed, or simply because the employee is choosing a car which (s)he will actually own or lease;
• apply for finance and set up a maintenance contract (or some other means of evidencing regular servicing and repairs); and
• get personal motor insurance (the cost of which will fluctuate with the employee's choice of car).

All of this may take much longer for employees than it would take for your business, especially as the employee is now at risk for the car itself.

Look carefully at the documentation you will want to see evidencing:

• employee ownership of the car or other entitlement to use it for business purposes (e.g. leasing company permission);
• motor insurance cover for busines use (particularly if you require employees to transport samples or goods);
• proper on-going care and servicing of the vehicle, plus breakdown cover, current MOTs when applicable and, of course, driving licences.

Make sure you have procedures in place to manage and monitor all of this and, possibly, sanctions for non-compliance by employees.

Step 5: Monitor And Review

Swapping to a cash allowance doesn't absolve you of your responsibility for ensuring the safety of your employees when driving on company business.

This means you will still have a duty of care to your employees on business travel and must prove that you have exercised due diligence in monitoring the condition of vehicles used on business motoring.

So, you'll still need a means fo verifying on a regular basis that cars used on business motoring comply with the law, including being:

• taxed;
• insured;
• maintained in a roadworthy condition, including having a valid MOT certificate where appropriate.

Put in place a feedback process for employees who take cash to provide information on issues related to running their own car. You should at least consider monitoring:

• ease of employee access to finance, maintenance and insurance and any problems encountered with these;
• car usage behaviour - e.g. does the swap to cash promote employees using their cars less and taking public transport or using other means of communicating with customers/suppliers;
• actual employee costs of motoring vs projected costs and cash allowance - you'll need to ensure employees are not disadvantaged by the change for morale/motivation/employment law purposes.

And finally ...

And Finally ....

Swapping to a cash allowance is only the beginning.

As with any part of your business environment you'll need to refine and enhance the package in response to:

• changing business conditions;
• employment and tax law revisions; and
• employee behaviour in response to living with the cash allowance.

Not least you'll want to check that the cash allowance delivered what you set out to do at the beginning.

Remember too that this article is focussed on the key steps in switching company car drivers to cash allowances.

There's a lot more detail to be covered when you embark on the process, so check all available sources of detailed information and analysis at every stage.

Don't be afraid to ask for help!