The Thorny Issue of Liability

Britain was once a nation of shopkeepers. Now, if our credit card habits are anything to go by, we are a country of shoppers. The UK's commitment to flexing its plastic and buying on credit is widely recorded. If every man, woman and child in the country owned one credit card each, it would only come to half the total number in circulation.

The plastic habit isn't just confined to personal use. Of the 120 million or so cards held in the UK, approximately two million are issued by businesses for their employees to use for their Travel and Entertainment (T&E) expenses. These are readily adopted, occasionally regarded as status symbols, and take their place in the standard spending armoury.

INDIVIDUAL OR CORPORATE LIABILITY?

For most people the use of a commercial card, whether it has individual or corporate liability, doesn't present any particular problem. However, trouble can occur when the use, or abuse, of one type of card affects the individual's ability to use or even acquire another.

It would be decidedly embarrassing if an application for a corporate card were turned down because the executive concerned had a bad personal credit rating. And red faces are only part of it. There's the additional administration involved, the special arrangements to be made, and the delays incurred. Nor is the reputation of the individual likely to last long once their financial shortcomings enter the daily gossip round. This is one of the reasons why companies choose to go for a card with corporate rather than individual liability.

The reverse situation is just as bad. If a company takes its time over reimbursing out of pocket staff and pay off individual liability cards, then those card-holders may find themselves with an unnecessary, and extremely inconvenient, poor credit rating. No one wants to work for a company that, directly or indirectly, causes them to have a mortgage application refused.

From an individual's point of view, therefore, there are obvious advantages to having a card with corporate liability. However, from their employer's perspective, the drivers for corporate liability are more complex, and more diverse. The embarrassment factor and the inconvenience are still considerations, but more importantly organisations, particularly multi-nationals, increasingly recognise that corporate liability cards enable them to see exactly what they are paying for while staff are on business trips or at sales meetings.

ADDING THE EXTRAS

With individual liability cards there's always the temptation to add a few little extras to the bill in the knowledge that it is relatively straightforward to slip them in under the accounts team's radar. Most employees resist that temptation. But those who don't are committing fraud. However, with corporate cards, it's much harder to hide the Bond Street shopping trip, the unauthorised first class flight, or the upgraded hotel suite. And that makes it much easier for companies to comply with anti-fraud regulations such as section 302 of the Sarbanes Oxley Act.

Perhaps not surprisingly the growth in regulations covering corporate governance has increased interest in corporate liability cards. As the daily bulletins emerging from the ongoing Enron trial remind us, failure to adopt transparency in financial dealings can have fatal consequences.

Even if criminal prosecutions are avoided, neither regulators nor shareholders are likely to look kindly on companies that achieve anything less than full disclosure. And since travel and entertainment expenses are the second largest controllable cost centre after salaries, the advantages of ensuring there are effective controls in place are clear. Furthermore, corporate cards also offer insurance cover against rogue spending, so even if fraud has been committed, the company is not out of pocket.

RECLAIMING VAT

Another issue that is moving towards centre stage is that of reclamation of VAT or the equivalent goods and services tax. This is already a major concern for most companies, and multi-national operations or a widely-travelled workforce only add to the challenge. However, it's an area that is of particular interest to local tax authorities and the EU Commission, both of whom are focusing attention on the VAT incurred by businesses on their T&E expenses.

It is a complicated area, with varying rules and regulations across different countries to be taken into account. For example, VAT can be reclaimed on client entertainment in Germany but not in the UK. Similarly car hire is reclaimable at 10% in Italy, 50% in Spain, but not at all in France.

The VAT challenge illustrates exactly why uncontrolled expenditure by individuals can be such a problem. It relies on employee-driven evidence: each individual has to ensure they get a proper VAT receipt in order for the tax to be claimed back, leaving employers totally reliant on the information that the individual chooses to give them.

The extra complication with VAT is that individual spending blurs the distinction between expenses incurred for personal reasons – which are not eligible for VAT reclamation – and those that are legitimate business expenditure – which are.

The European Court of Justice has already ruled that where goods and services are supplied to an employee rather than the employer VAT cannot be recovered, unless there is evidence that the expense was incurred by the company and not the individual. The underlying principal – that individual expenses should be distinct from corporate outlay – can be easily supported by a card offering corporate liability. With such a card programme the boundaries between the two are clearly delineated. Cards can also be labelled for corporate expenditure only, which can further clarify the situation.

COMMERCIAL CARD PROGRAMMES

Most companies introduce some form of commercial card programme to achieve three broad aims: better management information on company spending patterns; compliance with company policy; and preferential rates with regular vendors, such as airlines. Companies stand a much better chance of achieving all these aims if the card programme has corporate liability. Control and visibility of business expenses is much harder to achieve with individual liability cards. Added to which, advantageous card and data fees, payment terms and cash-back deals of corporate programmes are even more attractive when aggregated across the whole user group, which can only happen with corporate liability cards.

So why do many companies still have individual cards? The simple truth is that, for any company operating in different countries, a universal approach is likely to raise more problems than it solves. The UK has a plastic-happy population that is receptive to the idea of corporates taking on responsibility for business cards. But it's not a universal trend across Europe. The continent's diverse cultures, customs and regulations need to be taken into account if card programmes are to be a success.

EUROPEAN CONTRASTS

One of the most notable contrasts is that between Germany and the UK. One might expect the two countries to have a similar approach, but in fact the reverse is true. Unlike the UK, it is accepted practice to take on individual liability for corporate cards in Germany, and when corporate cards are introduced there, they tend to have far lower usage rates.

Germany is much more credit averse than the UK, and the use of cards among the population as a whole is much lower. As a result the perceived need for revolving credit is much lower.

In addition, German businesses are obliged to have representatives from their Works Councils, a close equivalent to British trades unions, on the board. One of the major concerns that the Works Councils have is the possible invasion of individual privacy. Corporate cards that are submitted to the central accounts department for payment, but which also show personal spend, are considered an infringement of privacy.

Sweden is also rather reluctant to adopt credit cards. This is largely because bankruptcy stays with defaulters for life. As a result payment periods are usually very short. Meanwhile in Spain, the very visible, formal and humiliating process of debt collection, which traditionally involved highly visible men in 19th Century black costumes approaching debtors in public, also affects attitudes to credit.

If we were to apply national stereotyping, we might consider that the preference for immediate payment over credit in Germany is a symptom of the famous Teutonic efficiency. But making judgements based on such clichés simply will not work. The same logic would suggest that the Italians, for example, would be strong supporters of corporate liability. But here, too, individual liability is the preferred option.

In fact Italy also has a below average use of credit among the general population, even though extended payment periods are standard. There is an emotional attachment to cards where they are used: they are seen as a perk, or an indication of achievement or status. Companies attempting to introduce a commercial card ignore this at their peril.

So imposing a one-size-fits-all card programme across multiple geographies is unlikely to achieve the desired results. To gain maximum benefits from them, the company has to ensure that the cards are as widely used as possible. Choosing the right programme will help, ideally one with a high global acceptance rate. But introducing plastic that employees do not want to use is a self-defeating move.

A recent survey showed that 84% of treasurers believe that they do not, as yet, have sufficient control over their T&E expenses. Many recognise that a commercial card programme is the most effective way to change this. However, a balance is required so that control can be maintained, while card adoption, usage and, therefore, rebate are maximised.

A draconian approach, where reimbursements will only be given on expenses incurred through the use of the corporate card and where no personal expenditure is allowed, runs the risk of alienating staff and reducing flexibility. The far more open policy of adopting personal liability, runs the risk of personal spend and potential fraud. Nor does it offer any reason for an individual to stop using their own card and gaining their own rewards.

For most companies the ideal position is somewhere between these two extremes. But it will also vary from country to country. Corporate liability provides the benefits that drive the adoption of corporate cards in the first place and, logically, is the best option. But simply imposing it without consideration for local practice, and indeed local sentiment, is unlikely to produce the looked-for results. For any organisation that wants to introduce global purchasing and global card policies, time spent talking to local operations and establishing what really happens on the ground is going to be time well spent.