A travel allowance seems less risky or costly to a business than a company car, but dig a little deeper and you’ll find it’s often not the case.
Over the past few years, companies have made the decision to switch from company cars to travel allowances instead. Businesses perceive a travel allowance to be more cost-effective. On paper, and in the short term, this is sometimes the case. But in the long run company cars are still the healthier choice for your business.
When looking at the two options, there are various factors to consider, and many of these aren’t clear upfront, which is why companies find themselves making a decision that looks good initially but ends up costing the business more down the road.
But, which is better - a company car or travel allowance? It’s a question that regularly plagues both employers and employees.
“In light of new SARS requirements for travel reimbursements, it needs to be carefully revisited,” says Jerry Botha, Master Reward Specialist and Executive Committee member of the South African Reward Association (SARA).
Important changes
Botha is referring to the removal of the 12,000 km limit that was previously applied to reimbursements. If travel exceeded, this distance was reimbursed at a per-kilometre rate higher than that prescribed by SARS, or another travel allowance was paid, the total amount needed to be reflected under code 3702. However, reimbursement paid at or below the prescribed rate was declared under code 3703. Either way, PAYE was not deducted from the employee’s income.
From 1st March 2018, if an employer reimburses staff at a per kilometre rate higher than that prescribed by SARS, they have to split any reimbursement into two components. The portion that falls within SARS’ rate must be declared using code 3702 while the portion above that rate must be reflected under a new code, 3722. If the employer also pays a fixed travel allowance, this is declared separately with code 3701 as usual.
Under this new system, the excess reimbursed portion is subject to PAYE just like a fixed travel allowance or fuel, garage and maintenance cards. Reimbursement at or below the prescribed rate is reported using code 3702 as before.
“More important than the new code and method of calculation is the removal of the 12,000 km limit and the introduction of PAYE on the excess portion,” says Botha. “These changes affect the reward dynamics significantly.”
Employers should therefore review the new rule to ensure their workers are enjoying the best tax and cost benefits, especially those who reimburse certain segments of personnel well over the prescribed rate.
It may be that a lower reimbursement rate puts more money into an employee’s pocket, as there is no PAYE thereon and the reimbursement does also not have to be substantiated by a logbook on the filing of the employee personal income tax return.
Either way, the compliance around the new rules makes it important for all employers to enforce compulsory employee logbooks, even where the employee does not claim on a tax return. We know employer PAYE audits is a SARS focus area and employee logbooks are critical for the employer to evidence tax compliance.
Fleet managers should look at the following aspects when trying to decide on a company car vs a travel allowance:
Fleet managers should carefully consider the following points:
Lower cost to the company
A well-run, company-provided fleet will generally reap the benefits of lower overall costs due to the economies of scale than larger volume drives. These include:
- Lower acquisition costs.
- Lower holding costs (lease or depreciation expense).
- Lower maintenance expenses (e.g. specially negotiated programs on tires, oil changes, etc.).
- Lower fuel expenses, and lower insurance costs.
Individual buyers don’t have access to the above benefits, which means travel allowances need to be higher to compensate.
Reduced Admin
The hours of administration it takes to process all individual travel allowance and fuel expense claims should be considered when deciding which option to go for because it’s a big additional cost. A company-provided fleet is easier to manage with one payment to a leasing company rather than processing numerous expense reports.
Insurance and Liability
Travel allowances often don’t take into account insurance costs. But even if a company includes this in the cost, there is no way to control whether employees have sufficient insurance to cover all scenarios. Companies can also negotiate much better rates than individual employees, which further reduces costs if you opt to go with company cars instead.
Checks & Balances
With company cars, the business is in charge of all aspects of the vehicle. Travel allowances open the door for the padding of business mileages in order to increase the allowance. Typically, drivers keep poor records of where they drove and for what reason, so companies often reimburse without actually knowing whether it was for business mileage. Although logbooks have gone a long way to solving this problem, this is an area that requires constant monitoring. The administration that comes with this detailed monitoring adds to the overall cost of travel allowances.
Excellent Recruitment Tool
If you want the best staff, your company needs a competitive edge when it comes to attracting the right talent – and company cars are one of the most effective ways to do so.
Improved employee productivity
Companies are trying to save money, which means that travel allowances often aren’t sufficient to cover actual expenses. Employees can’t afford to maintain their vehicles properly, which leads to breakdowns and therefore downtime. It’s then up to the employees to get their vehicles repaired, which further reduces productivity. A company car is maintained under the fleet management system, which eliminates the need for the employee to coordinate his own services and repairs.
Improves morale and loyalty
As a rule, travel allowances are allocated according to a specific job description, which means all employees don’t receive the same amount. With company cars, however, there is a perception that the company values their staff more (and equally), which leads to increased morale and productivity. In many cases, fuel compensation along with travel allowances works out to be costlier in the long run than providing an efficient company vehicle.
Always consider your company image
A company providing vehicles to its employees can control the suitability and appearance of vehicles used for the business, and thereby maintain the required corporate image. A company paying a travel allowance has no control over the type of vehicle being used by the employee, and also can’t ensure it stays in good condition.
Improved driver safety
By controlling the type of vehicle, as well as ensuring they’re properly maintained, companies have a much lower risk of driver injuries whilst on the job, which further increases productivity.
The employee gets a 'pay cut'
The cost of petrol, insurance, tax, registration fees, and maintenance of vehicles varies substantially. It is rare that a company reimburses mileage at a rate that fully covers a driver for the actual cost of operating a vehicle, simply because it can’t be predicted. The driver ends up with a reduction in pay because they must make up the difference between the reimbursement amount and the actual cost of operating the vehicle. This drastically reduces morale and raises the risk of employees skimping on insurance or maintenance.
What are car allowances actually used for?
An ongoing question relating to travel allowances remains: Will the allowance provided by a company be used for a vehicle or to pay school fees, a mortgage, medical aid or home insurance?
Let’s say, for argument’s sake, a company provides R15 000 per month for a travel allowance. If employees can find a car and insurance that only comes to R10 000, they will do so and rather keep the ‘extra’ R5000 for living expenses. Companies have no control over this, and in the end, they don’t get the full value of the travel allowance. It then ends up costing the company more when productivity is reduced due to unreliable vehicles.
Transferring vehicles
With a company-provided fleet, you can transfer vehicles to other employees, which is lost in an allowance program. This way you keep the asset that you’re paying for. With a travel allowance, the employee keeps the vehicle.
Branding opportunities
Company cars offer an excellent opportunity for vehicle branding – one of the most effective ways to get your company noticed, and a very valuable form of advertising. This opportunity is lost under a travel allowance scheme.
From a pure cost standpoint, the answer is clear that it is almost always more cost-effective to provide a company car than a travel allowance. There are exceptions to this rule, and a professional fleet partner will be able to help you look at it from all angles and make the right decision for your specific business needs.
Is it time to offer a company car?
In seeking travel compensation that is fair and rewarding to a worker, it is a good opportunity to decide if they would benefit from a company car. “As a rule of thumb,” advises Botha, “if more than 60% to 65% of an employee’s travel is for business purposes, they are losing out by using their personal vehicle.”
Typically, fuel only makes up 50% of the total cost of running a car. Additional expenses, like maintenance and insurance, or depreciation on the vehicle are not covered by travel allowances, reimbursements or fuel cards. A highly mobile employee may also have to bear the early replacement costs of their private car.
The vehicle buying habits of South African employers and employees remain routed in emotion and decisions are not made based on running the numbers. This causes the employer to be burdened with too high fleet costs, whilst the employee is mostly significantly out of pocket, often only realising the mistake when they want to trade in their vehicle.
According to Botha, there remains a sweet spot for travel reimbursement, reimbursement with a travel allowance and company vehicles. The employers who care about the cost and staff allows all three, as part of their Total Package approach. Especially for employees on high business travel, the employee is severely disadvantaged were not on a company vehicle. “If an employer does the calculation correctly,” says Botha, “they will see that a company vehicle is the best reward strategy in this case.”
Botha advises organisations to engage their reward specialist to ensure their employees receive the appropriate package for their needs.
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