Car Allowance vs. Company Car: Pros and Cons of the Vehicle Provision Flat Rate

The company car is an integral part of German fleets and indispensable for many employees. In August 2022, the Federal Motor Transport Authority recorded an increase of 2.8 percent in the number of newly registered commercially used passenger cars, with approximately 125,000 units, compared to the previous year. In contrast, the concept of Car Allowance is less widespread in Germany. In this blog post, we’ll explain what lies behind this term and the advantages and disadvantages it holds for fleet management. Read moreopen_in_new .

What is a Car Allowance?

A Car Allowance is a financial compensation provided to employees who commit to using their private vehicle for business purposes. In this scenario, the employee does not have access to a company car or pool vehicle; instead, they use their own vehicle for work-related trips. Unlike a company car, the vehicle remains the employee’s private property.

The allowance can be used to finance the car and cover various expenses, such as repairs. The amount can vary depending on the type and size of the vehicle, as well as the employee’s position. The concept of a Car Allowance has been practiced in the United States and the United Kingdom for some time, and it has also become a viable alternative to a personally assigned company car for German fleets

Company Car vs. Car Allowance: The Differences

There are several differences between the traditional company car and a car allowance:

Car Allowance

The employee is responsible for the purchase, maintenance, and insurance of the vehicle.
The vehicle remains in the employee’s private ownership.
Driver’s license checks and driver training according to UVV (accident prevention regulations) are not required.

Company Car

Primarily used for business purposes, and if permitted, private usage must be documented.
Acquisition, maintenance, and repairs are handled by the fleet management.
Fleet management must adhere to ownership liability obligations.
Must be returned upon termination of employment.

Advantages of a Car Allowance for Companies

A company car allowance not only offers advantages to employees but can also benefit companies financially.

Firstly, it reduces costs in the fleet, as fewer vehicles need to be purchased or leased, and expenses for acquisition and insurance are eliminated. Since employees are responsible for maintenance and repairs, which typically account for a significant portion of fleet costs, expenses for the fleet are reduced in this aspect as well. Even though the allowance covers wear and tear on the vehicle and repair costs, the monthly rate is usually lower than that for a leased vehicle.

Simultaneously, it reduces administrative overhead for fleet management since fewer vehicles need to be procured, organized, and maintained. Tasks related to owner liability such as driver’s license checks and driver training in accordance with UVV are eliminated since a private vehicle is not considered a company asset.

Some employees prefer to use their own familiar vehicles. Allowing them to use their vehicle for business trips can have a positive impact on satisfaction.

Disadvantages of a Vehicle Provision Flat Rate for Companies

However, there are also disadvantages associated with a Car Allowance for companies. When it comes to the choice of the employee’s private vehicle, the employer has little say. If it’s an older or unrepresentative vehicle, it can have a negative impact on the company’s imageopen_in_new . Additionally, it can be challenging to establish an appropriate Car Allowance that is economically viable for the company while also meeting the employee’s requirements.

Implementing a Car Allowance: How to Proceed

In order to successfully implement a Car Allowance in your fleet, we have summarized the key steps for you:

Set the amount: Determine a reasonable lump-sum amount that aligns with your financial situation and meets the needs of your employees.
Create a Car Allowance contract: To prevent future misunderstandings or uncertainties, all Car Allowance regulations should be documented in a contractopen_in_new . This should include details regarding the amount, payment method, and the procedure for Car Allowance reimbursement.
Document required evidence: To ensure that the private vehicle is indeed used for business purposes, employees should provide the necessary documentation. This helps avoid potential issues with tax authorities. Companies should also keep records of all payments, which can be useful in case of a tax audit or legal dispute.
Review and make adjustments: Regularly assess whether the Car Allowance still aligns with the needs of your employees and the financial interests of the company. If not, consider making adjustments to the regulations and the amount.
Internal communication: Ensure transparent communication with your employees, clarifying how the Car Allowance will be administered and what conditions need to be met.

These steps can help ensure a smooth and effective implementation of a Car Allowance program in your fleet.

What is the difference between a Car Allowance and a Mobility Budget?

The concepts of Car Allowance and Mobility Budget should not be confused with each other. In both cases, it is generally a flat rate that is often paid out monthly and is intended to ensure employee mobility. However, in the case of a Car Allowance, employees must provide evidence that their private vehicle is used for business purposes in order to be eligible for the compensation. On the other hand, a Mobility Budget can be flexibly used for various modes of transportation. Whether it is public transport, bike leasing, or car sharing, employees can use the budget as they see fit and combine different mobility solutions according to their needs. For many fleets, the Mobility Budget complements the company car already present in the fleet.

The Key Points on Car Allowance at a Glance

A car allowance is a financial compensation provided to employees who use their private vehicle for business purposes.

The advantages of a car allowance for companies include cost savings in fleet management, reduced administrative workload, and potentially more satisfied employees.

The car allowance should not be confused with a mobility budget, which can be flexibly used for various modes of transportation such as public transport or bike leasing.