Time to update your TCO: New Cost Elements

The shift has happened: fleet management is no longer about cars; it’s about maintaining a mobility ecosystem to keep employees mobile. The old TCO components stay with the shift, and new components are added.

The P&L TCO

As a general rule, the following elements are part of the traditional TCO:

• Depreciation or capital
• Interest
• Taxes (registration, road tax…)
• Insurance (TPL, casco, driver/passenger insurance, legal assistance…) 
• Services (maintenance & repair, tires, relief vehicle…)
• Energy (fuel, electricity)
• Recalculations, end-of-contract settlements, open-book settlements

Although considering these elements’ P&L (Profit and Loss) level has not changed much over time, there have been significant changes in VAT and deductibility rules.

The Cost-to-Company (C2C) TCO

As a rule, VAT is recoverable for all expenditures supporting the business. As such, the VAT on a copy machine can be recovered at 100%. Company cars, especially in Europe, are used only partially for business; this has given the tax authorities a window to adjust VAT recovery. The general trend across the EU is towards lower and rule-based (e.g., the more polluting the vehicle, the less VAT can be recovered) recovery.

Deductibility is another tool in the tax authorities’ toolbox. A company pays taxes over profit; to reduce those taxes, it will spend money on items it needs to run its business (salaries, offices…). These items can be deducted from the profit, which is how the company reduces its corporate tax.

(Note: only profitable companies benefit from deductibility. There’s nothing to deduct costs from if there is no profit.)

Since company cars are used privately, tax authorities rarely consider a company car as an item that can be deducted for 100%. Over time, deductibility has become an “incentive” to align buying behaviour to more strategic targets: if an EV is 100% deductible, but a 3-litre V6 only for 10%, companies will most likely buy EVs. Here again, deductibility will reduce gradually as the tax authorities require more income.

TCI or Total Cost of Mobilising an Individual

The shortcoming of the P&L or C2C TCO models is their isolation of the company car expenditure versus the actual total cost to run a fleet. A shortlist of additional items to include to shift towards a TCI model:

Operational cost. The cost of the fleet manager, fleet operations, HR operations, procurement etc., is typically not considered. Nonetheless, as fleet operations are moved to Centres of Excellence (CoE), fleet management software is being deployed, and fleet management companies have taken over (part of) fleet-related activities, this cost must be included. Examples are:

• Pro rata cost of CoEs
• Software cost per car
• Pro rata cost of Fleet Management providers

Mobility. The company car is the default solution but is increasingly complemented or even replaced by mobility budgets. From a tax perspective, business-related transactions (the shared car ride from the office to the client) are often 100% deductible and easy to identify and isolate.

Technology: many companies have implemented technology solutions to support fleet management, from telematics to apps.

Service outsourcing: as most companies are trying to reduce the number of dedicated fleet headcounts, services are being outsourced to leasing, fleet handling, or facility management companies on a per-transaction or per-car basis. Service outsourcing also includes account payable providers and other supporting functions.

Sustainability: a necessary but high expenditure is the transition from ICE to EV. It includes at least the following items:

• Vehicle: especially on the P&L TCO level, EVs are more expensive than traditional cars. In addition, rebates are no longer what they used to be, resulting in significant increases in lease rates.
• Home chargers: to facilitate the transition to EV, many companies offer home chargers to employees, sometimes as CAPEX, sometimes as OPEX, almost always fully depreciated. 
• Office chargers or commonly called depot chargers: to avoid more expensive on-the-road charging, companies must install EV chargers on their parking lots. This sometimes involves complex engineering efforts linked to the installation (power supply adjustment, load balancing, civil engineering).
• Mandatory sustainability reporting. Not on today’s agenda in all countries, but unavoidable: companies must report on emissions generated by business travel and commuting, not only for company cars but for the entire employee population. “Guesstimates” will no longer be sufficiently accurate. Hence an additional cost for software will be part of the TCI.

Provisions: the fleet is a cost centre, but its financial management is usually limited to creating a PO. In the ideal world, the fleet management department acts as an internal provider and looks deeper than P&L. This includes provisioning for inflation, cost increases…

In conclusion, the professionalisation of fleet management is a fact; it’s no longer about the company car but about managing a complex ecosystem of providers and solutions to bring the employee comfortably, without business disruption, to a new era.

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Authored by Yves Helven

Image: Shutterstock