Italy: The changing landscape in favor of Long-Term Rental

Fleet managers mainly fund their fleets through long-term rental. The largest difference in funding methods is between the personnel-only and combined fleets. While some companies only use fleet management companies to fund their vehicle acquisitions, others also use a variety of fleet management services.

In Italy the outsourcing model for car fleets has clearly demonstrated its value with the success of the Long-Term Rental. The main funding options used in Italy are now two: lease (with little differences) and purchase, while the driver-funded option (as car allowance) has mostly been eliminated because of excessive taxation. In parallel with a retreat from the driver funded option towards long-term rental, is the integrated management of a mixed car fleet with vehicles being owned, leased and rented.

The main funding method in Italy is Long-Term Rental (83%). The other methods are outright purchase (13%), finance lease (2%), finance lease with services (2%) (Source: Centro Studi Auto Aziendali).

Fleet funding and taxation are two areas that should be considered together simply because different tax treatments apply to different funding methods. The cost of funding can only therefore be accurately predicted if the relevant tax treatment is considered for each form of funding. Purchase or lease is usually the first question a fleet manager should consider. There are fleets that elect to buy their cars and vans outright, but the business buyer generally has many other uses for his company’s capital.

Over many years, the Italian fleet market has therefore developed a narrow range of general purpose and specialist funding options to help businesses manage their vehicle acquisitions.

More than one funding method may be adopted by a fleet. Overall funding strategy would usually be a matter for the Finance Director, but it is important for the fleet manager to understand the potentially serious implications of getting it right, and getting it wrong.

It is useful to remember what is meant by fleet management in Italy. The term refers to all operational and administrative assistance activities relating to the management of the fleet, with the exception of the financing/rental of the vehicle. As part of fleet management, a more specialized fleet administration service takes care of all the administrative elements that were traditionally carried out by an office within the client company: car policies, orders, interface with the supplier, control of invoices and costs and preparation of accounting data.

The customers of fleet management companies are generally made up not only of
companies of various sizes (larger companies, even with the option of someone working within them), but also of rental companies, car manufacturers, distributors and major dealers. There is also a strong element of flexibility within the system, facilitating companies in complex situations or responding to opportunities expressed by the market.

Beyond these briefly described advantages, the fleet management solution is not
yet sufficiently known in the Italian business context  Specialists in fleet management and fleet administration continue to be few. Turnover data from the last three years shows solid and constant growth, with an increase of 18.2% on 2013 (+ 40% from 2012), thanks in particular to innovative business models and different service offerings, planned according to customer needs (Source: ANIASA).

Each funding option has a place in the fleet market, but as all of them come with a range of features, advantages and disadvantages, the following issues should be carefully considered before choosing a funding option for a business:

• Overall cost of the option, using a full whole life cost computation;
• Cash flow implications;
• Balance sheet effects;
• Taxation of the employer (Business tax, VAT, National Insurance Contributions)
• Taxation of the employee, that is the  company car benefit charge;
• Flexibility, implications for the business;
• HR/Personnel implications;
• Risk profile
• Internal administration and resource costs and implications.

These represent the broad issues, and highlight the fact that fleet policy must meet the needs of the business.

Given the financial implications, the Finance Director or similar should be involved in any decision-making, but it is important that the fleet manager has an understanding of these issues, to enable him to arrive at an optimum evaluation of the business issues. The saturation of the market has forced many captives, not previously involved in banking, to diversify their financing methods in order to gain a competitive advantage.

Blended funding has been seen as a way to achieve significant savings through tailored funding instead of traditional one-size-fits-all methods. A complete separation between funding-only contracts and full-service fleet management isn’t common in Italy, where Long-Term Rental is the ‘choice’.

The new scope of fleet funding now affects the private market: why should an individual choose Long-Term Rental? Time savings, purchasing power, certainty of cost, convenience, financial aspects, vehicle always in good order.

Many individuals think that the advantage of rental lies in decreasing taxation and therefore it is not beneficial to those who do not decrease anything.

This is not a correct analysis. A tax regime should not be compared with that of a third party, but with a person’s own options. It is not correct to say that a private rental is not convenient because you do not decrease tax costs as a company. It is more correct to say that the car, as well as the direct purchase or lease, do not bring any benefit to private tax. In Italy, it is not easy to compile a table of the financial players. Today all banks are very oriented to also sell car fleet financing products. The largest rental companies are part of banking groups and therefore customers using Long-Terms Rental are not very interested in the method of financing, but they are oriented to negotiating the monthly fee.

It's also interesting to understand that in Italy, the rental company asks customers for financial documents every year, which are used by banks to test the soundness of the customer to open the credit line: as of today we have no examples of Finance Directors of the customer who have requested info regarding interest rates/ money cost to the rental companies, leaving the fleet manager and fleet buyers alone.

However, the commercial part of the rental company does not have much more information, but only ‘dark and immovable‘ constraints dictated by their internal financial department (often they are part of a bank group).

Authored by Giovanni Tortorici