The Motability Scheme Contents

2Government support and absence of competition for Motability Operations

19.In his evidence to the Committees, Mike Betts, Chief Executive of Motability Operations, said that Motability Operations does not face competition for customers in the same way as other companies competing in a competitive market:

This is where the scheme is unique. No, we do not compete for customers in the open market. It is solely the responsibility of Government to decide who is eligible for the scheme.

[…] In terms of competition, we regard ourselves as competing for people’s disposable income. If they want a new car, it would be very difficult for someone to compete against us with our scale and with that assignment. However, thousands of people do buy used cars in private sales or thousands of outlets across the UK.28

20.Motability Operations estimates that leasing a vehicle using its scheme is “45 per cent cheaper” than sourcing a vehicle on the open market.29 It is able to achieve this in part because of its scale, and in part because of two tax exemptions that Motability scheme users are able to access.

21.Under the Value Added Tax Act 1994, a motor vehicle leased to a disabled person who is in receipt of a mobility allowance can be zero rated, and therefore have no VAT levied. Furthermore, the first sale of an ex-lease vehicle as part of the scheme once it is no longer being used by a member can also be zero rated and therefore not subject to VAT.30 In addition, under the Finance Act 1994, an insurance contract supplied to the person leasing the vehicle is exempt from Insurance Premium Tax (IPT).31 The VAT exemption provides a 20 per cent discount on the value of the vehicle, and the IPT exemption provides a 12 per cent discount on the insurance element of leasing the vehicle.

22.HMRC wrote to the Committees explaining that these two tax reliefs are not limited to the Motability scheme, and that “any supplier who meets all the specified conditions can supply the lease to a qualifying person at the zero rate for Value Added Tax (VAT), or provide recipients insurance which is exempt from IPT.”32 However, in order for the reliefs to be applied, the individual hiring the vehicle needs to have their mobility allowance “transferred directly to the supplier by the DWP. Under current legislation, the DWP only has the power to transfer mobility allowance to Motability for these purposes.”33 Therefore in practice these reliefs can only apply to Motability Operations.

23.Section 44 of The Social Security (Claims and Payments) Regulations 1987 specifically identifies Motability Operations as the only company or charity with whom the Secretary of State for Work and Pensions “may arrange that any mobility allowance payable to the beneficiary shall be paid in whole or in part on behalf of the beneficiary”.34 Motability Operations is therefore the only company with these advantages. Kerstin Parker, Deputy Director for Disability Benefits, DWP, told the Committees that the VAT exemption for Motability costs the Government between £600 million and £700 million per year, and the IPT exemption £55 million per year.35

24.Motability Operations therefore has monopoly access to tax reliefs that insulate it from external competition on the grounds of price, for the provision of vehicles to recipients of mobility payments. As noted in paragraph 16, it has also faced no competition when re-tendering to operate the Motability scheme on behalf of Motability the charity. The Committees wrote to Motability asking it to set out its “assessment of whether the awarding of this contract was on an arm’s length basis.”36 In its response, Motability stated that it did not believe competition was appropriate when tendering its contract. It therefore chose not to hold a competitive tender:

Competition is undoubtedly a means of driving value, and competitive pressure can help to ensure that services are priced competitively. However, this is only true where there is genuine potential for competition in the given market, and where competition ensures that all the customers in that market can be served. The particular features of Motability Operations’ market mean that these conditions do not apply.37

In justifying this decision Motability stated that:

Motability Operations’ not for profit status enables it to reinvest profits in the scheme for the benefit of customers (principally through improved customer service, a wider and more comprehensive range of services, and value for money) [and] is able to provide the unique level of service required by disabled people and their families, and can also subsidise certain customers, for example customers requiring wheelchair accessible vehicles (WAVs) or adaptations, in a way that profit-distributing companies would find difficult, if not impossible.38

Motability further noted that “neither in 1996 nor in 2007 did the NAO recommend that the arrangements with Motability Operations be opened up to a tendering process”.39 This is not the case, however. The NAO’s 1996 report stated that in 1994, Motability itself was of the view that “competitive pressure should be introduced in to Motability’s relationship with all those supplying services to the scheme”.40 In the NAO’s view, “open competition for the provision of administration and finance to the scheme would provide further assurance to Motability that the total cost of these services are reasonable.”41 In its 2007 follow up report, the NAO stated that its conclusion that “Motability should review the scope for increasing the level of competition for the financing and administration services provided by Motability Operations” had only been “partially met” in the intervening years.42

25.Tax exemptions on vehicles make them affordable to many more disabled people than would otherwise be the case. To the extent that the tax breaks enable the provision of low cost mobility aids, they are an appropriate use of public money.

26.Potential rivals cannot compete with Motability Operations. This is because it receives substantial tax breaks from the Government to which no other company is entitled. Nor does it face any competitive pressure when tendering for the contract to run the scheme on behalf of Motability. Without any competitors on an equal footing, it is impossible to know whether disabled drivers would be able to access better loans elsewhere.

27.Through secondary legislation, the Department for Work and Pensions provides Value Added Tax and Insurance Premium Tax relief that is uniquely available to Motability Operations. It comes at a cost of around £700 million per year. Motability Operations does not have to competitively tender for this unique assistance from Government. For the Government to provide tax reliefs to one company alone, especially without requiring the company to competitively tender for such reliefs, makes it, in effect, a monopoly supplier sustained by public money. The Department for Work and Pensions must explain why providing such state assistance in the absence of competition is an appropriate use of public money.

28 Q22

29 Q23

30 Letter from Jon Thompson, Chief Executive, HMRC, 20 March 2018

31 Ibid

32 Ibid

33 Ibid

34 The Social Security (Claims and Payments) Regulations 1987, Section 44

35 Q128

36 Letter to Motability from joint Chairs, 7 March 2018

37 Correspondence from Motability Director, to the Chairs of the Treasury and Work and Pensions Select Committees regarding Motability submission, 16 March 2018, paragraph B 1.1

38 Ibid, paragraph B 1.2

39 Ibid, paragraph B 1.8

40 National Audit Office, Motability, 16 July 1996, Paragraph 3.60

41 National Audit Office, Motability, 16 July 1996, Paragraph 3.63

42 Correspondence from Motability Operations Chief Executive, to the Chairs of the Treasury and Work and Pensions Select Committees regarding Motability submission, 16 March 2018, page 53

Published: 21 May 2018