Business Economic Notes 23

Driving Instructors

THESE NOTES ARE INTENDED FOR INSPECTORS OF TAXES TO ASSIST THEM IN EXAMINING ACCOUNTS. THEY ARE INTENDED TO PROVIDE A GENERAL BACKGROUND TO THE TRADE, WITH SOME EXPLANATION OF ITS MOST IMPORTANT FEATURES.

BUSINESS ECONOMIC NOTES ARE NOT INTENDED TO PROVIDE AN EXHAUSTIVE OR DEFINITIVE PICTURE OF ANY PARTICULAR TRADE OR PROFESSION.

TABLE OF CONTENTS

1. Introduction.

2. Driving Standards Agency Registration.

3. Driving Tests.

4. Structure Of the Trade.

5. The Driving School.

6. The Driving Lesson.

7. Instruction Vehicles.

8. Structure Of the Business.

9. Professional Associations.

10. Fuel to Takings Ratio.

11. Factors Affecting Turnover and Profitability.

12. Franchising.

13. BSM Franchise Arrangements

14. Examination Of Returns or Accounts.

15. Acknowledgements.

16. Appendices.

Every year thousands of people start out along the road to becoming an Approved Driving Instructor. For some it is their first choice of career, for others a second career, following redundancy perhaps. Some people even pre-empt the unemployment situation by qualifying as a hedge against unemployment even though they may not immediately enter the profession full-time.

The Driving Standards Agency (DSA), an executive agency of The Department of Transport, is responsible for the administration and control of the Register of Approved Driving Instructors which it maintains under the provisions of the Road Traffic Act 1988 and the Motor Cars (Driving Instruction) Regulations 1989.

Under the rules of this Act it is illegal for anyone to charge (either money or monies worth) for instruction in driving a motor car unless:

• their name is on the Register of Approved Driving Instructors; or
  
• they hold a trainee’s "Licence to give instruction" issued by the DSA.

As at the end of April 1995 there were 32,966 Approved Driving Instructors (ADI’s). However it should be noted that a small number of these will not actually be giving paid driving instruction.

Again at the end of April 1995, there were 1,380 trainee licences current; these are only of six month duration.

In past years it might have been said that a registered instructor had a ready market for their services. However there has been a drop in demand for the services of ADI’s which can be gauged from the fact that the number of L tests conducted by the DSA dropped from 2,000,187 in 1989/90 to 1,551,700 in 1994/95: this was largely attributable to the demographic downturn in the number of 17 year olds together with the general effects of the recession.

Over the same period the L pass rate dropped from 52% to 47%.

The Department of Transport statistics for private motoring tests: 1983/1993 are illustrated at Appendix 1.

The trade is dominated by one-man businesses, some of which are operated part-time by people with other employment. There are also a number of large franchise organisations such as BSM.

In order to be registered by the DSA the prospective instructor has to sit a stringent examination about driving and instruction and must take a practical test of his or her abilities.

The qualifying examination is in 3 parts, a written exam, a practical test of driving ability (an advanced test) and, finally, a practical test of instructional ability. In addition the candidate must hold a current UK driving licence, must have held a licence for 4 out of the last 6 years, must not have been banned from driving in the last 4 years and must be a "fit and proper person".

If a candidate has passed the Driving ability test they can apply for a "trainee licence" and, if granted, this allows them to instruct for payment although not registered as an Approved Driving Instructor (ADI). Many people however pass part 3 of the exam without acquiring a trainee licence. A trainee licence is only valid for 6 months and apart from very exceptional circumstances will only be granted on one occasion.

Once qualified, and having paid the requisite fee, the instructor’s name is entered in the Register and they are sent an official Certificate of Registration which has their name, photograph and the official badge.

Whilst giving instruction the instructor must display their certificate in the bottom left hand corner of the front windscreen of the instruction vehicle. The ADI certificate is a green octagon, a trainee licence is a red triangle.

The appropriate fees are as follows:-

Driving tests are carried out by a DOT examiner over a route starting at or near a Driving Test Centre. The test areas are carefully selected to contain similar obstacles and difficulties and, in theory, it should not matter where the test is taken. At most Test Centres there are a number of alternative test routes. Tests are scheduled to last about 45 minutes and to cover 5_ to 6 miles. The location of the Test Centre depends on demand; in cities and large towns there may be more than one centre but in rural areas those taking the test may have to travel some distance to the centre. It is usual for training and driving tests to be taken in the driving instructor's vehicle.

From 1st July 1996 new regulations require a candidate to sit both a practical driving test together with a theory test. The new test will be available at 139 centres in England, Scotland and Wales operated by DriveSafe Services Ltd, and will apply to learner car and motorcycle drivers. Bus and truck driver theory testing will commence on 1 January 1997.

Learner drivers will now have to pass a written paper composed of 35 questions chosen from a 200 page book published by the DSA entitled ‘The Complete Theory Test for Cars and Motorcycles’ which contains 600 questions and answers. 26 questions need to be answered correctly to pass the theory test.

Learner drivers will still be able to take up a provisional licence and begin to drive as before and for the first six months candidates will be able to do the theory and practical rests in either order. Thereafter that they will have to pass the Theory Test before taking the practical.

It is difficult to say at the moment what impact the new test will have on driving instructors. The DSA advise that the government propose that as wide a market as possible be involved in the giving of theory tuition and recent legal advice suggests that theory tuition given outside the car is not subject to the statutory regulation of the Road Traffic Act 1988. It may be therefore that ADI’s will face stiff competition from schools, colleges and other institutions. It is expected that the ADI’s will offer integrated training but it is also possible that large numbers of provisional licence holders will merely read books as a way of preparing themselves for the theory test.

Driving schools have reported a ‘bow wave’ of people trying to beat the July 1 deadline, the increase could be as high as 10%-15%.

It is estimated that there are only around 12,000 to 14,000 driving instructors working full-time in the UK. The industry is however attractive to people seeking to supplement other income.

The Driving Instructors Association (DIA) advise that many of these "moonlighters" will pick up trade in the unsociable hours and are to some extent responsible for driving down the price of lessons.

There are a number of large franchise concerns. The British School of Motoring Ltd, for example, has between 14% and 16% of the market and AA The Driving School around 1.6%.

There may be upward of some 45,000 cars used in the UK for tuition purposes, as many instructors fit dual controls into spare cars that can be used in case of a breakdown. Dual controlled cars are required by most Insurance companies and are expensive and most difficult to obtain on a short-term hire basis. These spare vehicles are often used by say, a wife or other family members.

The majority of driving instructors are self-employed, probably over 95%, and most of these will operate from a home base.

Driving instructors predominantly work on a self-employed basis and tend to be one man operations.

Occasionally a number of individuals operating in the same locality may band together to form a loose co-operative allowing them to share the cost of office premises and other overheads such as receptionists, stationery and so on. They may be able to obtain bulk discounts on the purchase of vehicles and perhaps be able to take advantage of after sales service deals with the supplier on aspects like servicing, repairs, spares, tyres etc.

Alternatively there are schools run by sole proprietors where several cars are available for tuition. The proprietor retains responsibility for purchase and maintenance of vehicles, runs and controls the office premises, and usually commands a proportion of the tuition fee. The actual tuition is undertaken by other ADI’s who may be employed or self employed depending on the terms of the particular engagement.

Occasionally the proprietor provides administration facilities only, the vehicles being provided and maintained by the individual instructors. In these instances a fee will be paid, usually on a weekly basis to the school, by the ‘ADI’s’.

The franchise operations, such as those of BSM, will be dealt with in a separate section of the note.

Driving instructors are having to break away from "traditional lessons for learners". With the declining birth rate, there are less learner drivers taking to the roads than say, a decade ago. Driving instructors are being encouraged to give additional training to new drivers such as the DIA Post Test Training Scheme or the DSA’s Pass Plus. These encourage newly qualified drivers to undertake additional six hours of training that involves motorway, night time and adverse weather driving. The Driving Instructors Association, for example, encourages all drivers to undertake further training culminating in the DIAmond Advanced Motorist Test or other similar test.

Driving instructors therefore are undertaking more work of this nature in the attempt to comply with the Government’s policy of reducing traffic deaths by one third by the year 2000.

Most self employed instructors teach on Category B vehicles although some may also teach in other Categories such as C (Large Goods Vehicles), D (Passenger Carrying Vehicles), and E (Large Trailers).

Many instructors teaching in the latter categories however tend to be employees of, for example, transport or bus companies. There may be around three thousand such instructors, who do not require specific qualifications as they are not regulated by the state.

Large goods vehicle (LGV) training is a specialised form of driving instruction and one which tends to pay better than private car work. A lorry driver is often prepared to pay well to obtain a licence which is a valuable capital asset and firms are encouraged to train employees by sending them to driving schools.

To gain a picture of the regional structure in any area a quick glance at the Yellow Pages or Thomson Directories will earmark the individual instructors and small and multi-car franchises.

No figures are available on the numbers of the various sized schools, as driving schools are not registered by law in the UK.

The average length of lesson is still one hour, although some instructors prefer forty five minutes and others intensive training, say one week

( 9.00 a.m. to 5.00 p.m.).

The pattern of a well planned course of driving lessons is likely to be the same anywhere. A number of hours will be spent learning to control the car and getting used to being in the driving seat. Next comes further tuition driving on quiet roads followed by experience in town driving. Finally some further lessons will be spent on a test route. A slow learner might need extra lessons at the 'town driving' stage and a rapid learner would manage with fewer. Different lesson patterns will be encountered, for example because of local conditions or considerations of economy.

Research by the Transport Research Laboratory has shown that the average number of lessons in a full course is between 32 and 35. It used to be said that a person learning to drive needed roughly about one lesson for every year of their age. With modern traffic densities this will probably be more like 1½ to 2, depending on age, sex and aptitude.

The mileage of a driving lesson may vary between areas but it is unlikely to be greater than 15 miles, on average, and will more often be in the region of 12 miles. The instructor may well have 'dead' mileage in between lessons. Instructors often pick up pupils from their home and return them there after the lesson.

Dead mileage is often minimised by overlapping lessons :-

Pupil A picks up pupil B who drives A home as part of the lesson.

Usually the instructor counts the time spent driving to meet the pupil as part of the lesson so that a one-hour lesson may involve the instructor in only 45 or 50 minutes instruction. Instructors in rural areas have the biggest problem with dead mileage since they often have to pick up pupils in distant villages. A common method of reducing the amount of dead mileage in rural areas is to offer lessons of two-hour duration.

The actual number of lessons required will vary considerably from pupil to pupil. Some people have an aptitude for driving others will require considerable amounts of driving time to build up confidence. Some will have access to vehicles to practice between lessons with say a member of their family, perhaps cutting down the number of professional lessons required, others will be wholly dependent on the schools facilities for practice.

A reasonable guide to the number of lessons required would be as follows:-

Many pupils fail their tests and rates of failure are reflected in the table at Appendix 1 although the figures do not show first and subsequent failures separately. Failure will result in the need for subsequent lessons.

Few lessons are given to pupils in their own vehicles as the demand for this sort of instruction is very limited and driving instructors have to provide a suitable vehicle. It will nearly always be fitted with dual controls (i.e. dual clutch and brake). Fuel consumption is an important factor in choosing a vehicle and most instructors have cars of no more than 1300 cc capacity. Unless they are diesel powered, driving school vehicles, of the professional instructors, are likely to be replaced regularly, perhaps every two to three years, due to the considerable amount of wear and tear on brakes, gearboxes, clutches ,tyres etc.

The greater part of a course of driving lessons involves town driving and towards the latter end exercises like reversing and three point turns. The fuel consumption is accordingly high the mileage per gallon will be only three-quarters or two-thirds of the normal average for the vehicle.

Manufacturers of new cars carry out standard tests to determine their fuel consumption and the results of those tests are recorded in official fuel economy certificates issued by the Department of Transport. The New Car Fuel Consumption Tables are published annually by the Department of Transport and are reproduced for Inspectors in Volume 1 of the Investigation Handbook supplement Section 1 Item 14.

Two mileage figures are given one represents driving at a steady 56 mph and the other simulated town driving. The tests are carried out on a machine and represent the mileage which would be obtained by a very good driver. Although the published "town driving" figures are obtained from bench tests they represent the mileage obtained from driving in heavy traffic, i.e. much idling and first gear work and no use of top gear. A person learning to drive would use more fuel, even driving a route which exactly corresponded with the simulation. The list may be used when considering the mileage’s of the more common driving school vehicles which in view of their presumed fuel economy and ease of manoeuvrability, tend to be the more standard smaller models.

All types of vehicles are considered by driving instructors and some favour unusual models, if only to attract attention and subsequent custom. In general though, the Ford Fiesta, Vauxhall Corsa, Rover 100 and Nissan Micra type of vehicle tends to be most popular.

Some vehicles are purchased by driving instructors that are particularly poor on clutches, the DIA advise for example that members experienced problems with the 1994 model Nissan Micra. Some of these vehicles were achieving four to six thousand miles on a clutch. It is more usual to get around twenty five thousand miles on a clutch and often even greater mileages. A list of the published fuel consumption figures for the more common driving school vehicles is given at Appendix 2.( 1994 figures). This list is not exhaustive.

The driving instructor should replace their car when it is economically viable to do so. Unfortunately, with the expensive additional fitment and removal of the dual control equipment which can cost up to £200, driving instructors tend to hold on to their vehicles for around two to two and a half years. The most popular practice is to buy the training vehicle through hire purchase finance or bank loan.

Vehicle overheads can be high, including insurance and fuel, but, not only do training vehicles have to be well maintained, they have to look good too. Consequently additional costs for car washes etc may be incurred.

8.1 Cost of Lessons.

The DIA kindly provided the following information:-

The professional instructor’s charge-out rate should be around £18 per hour, but it is stated that few can in fact charge this figure. Services and standards often have to be trimmed and the standards of living of the instructors may also accordingly be lower.

The DIA advise that the problem for professional instructors is exacerbated by rogue and moonlighting instructors who pocket cash payments and accordingly artificially lower the charge-out rate. Some driving instructors offer "catch-penny" advertising such as free or discounted lessons, but most of these instructors find more lucrative employment rather than staying in business as a driving instructor. The turnover of numbers of driving instructors can be around 3000 annually.

Using the comparison of the DSA ( Driving Standards Agency), for the administration of booking the driving test and supply of the examiner, the DSA charge £28.50 for fifty minutes service. However the DSA do not have to supply a car with the subsequent variable costs that are incurred by driving instructors. Very few driving instructors would charge £28.50 for one hour, let alone fifty minutes.u

The prices charged by instructors have gone up in recent years, but by very little due primarily to the recession.

• The comparison with DSA charges may not be wholly appropriate as it should be borne in mind that the DSA has to maintain a national network of driving test centres and examiners at a standard fee, often in places where, if it were not a national service, it would be uneconomic to do so or at least at the standard fee.
• BSM advise that in the current economic circumstances they feel that it is largely improbable that instructors will be able to maintain a chargeout fee at a level of £18 per hour. BSM instructors operate at the premium end of the market and their full lesson rate varies from between £16.50 in most provincial towns to £19.25 in central London (1996 rates). However most BSM instructors will discount the standard lesson by up to £3 per hour if a course is booked in advance

Charges therefore can vary and there may be a considerable difference between the highest and lowest hourly charges in any area. Reference to local newspapers may give guidance to the range of local charges prevailing at any time.

In view of the intense competition for decreasing numbers of pupils many schools offer discounts and other incentives to attract clients.

Discounts and incentives will come in a variety of forms but are usually along the lines of:-

• Reduced fees charged for lessons to students or for a short course of introductory lessons,
  
• First lesson half price or one lesson in every 10 free if booked in advance,
  
• Discounts for block bookings or to large organisations,
  

and so on.

Instructors generally receive their payment in cash at the end of a lesson, although clients often prefer to pay by cheque and some by credit card.

Lessons can also be paid for in advance.

8.2 Hours worked.

Driving instructors tend to tailor their hours to meet customer demand. Lessons may be given early in the morning, at lunchtimes, in the evenings and at weekends.

An instructor may commence their fist lesson at 7.30 and not finish the last until after 22.00 however work will not be continuous over the course of the day. They will usually have considerable ‘down time’ during which the instructor may take advantage of a break, perhaps returning home.

There will be some daytime customers. These used to be predominantly made up of women but changes in working practices mean that this is no longer the case. Many instructors will offer discounts to try to attract people to book in the "slack periods".

Bad times, when cancellations happen most frequently, are bank holiday periods, especially Christmas, when spending goes in other directions. It is only in very bad weather that lessons become impossible but some lesson time is likely to be lost for this reason; the instructor may find he or she is able to give fewer lessons in the winter months because of the combination of adverse weather and lack of natural light in the evenings.

8.3 Organisation & Records.

• The Appointment Book.
  
  This will form the mainstay of any driving school’s booking system and may be manual or computerised depending on the size of the business.
  
  It is through the appointment book that the instructor can ensure that they pick up the right pupil at the right time and that they also organise their appointments, where possible, to obtain the most efficient and economical use of both time and fuel.
  
  A main appointment record may be retained in the office or at home, if the instructor works from there, often a duplicate record in the form of a diary is also retained in the car for ease of reference.
  
  The appointment book may be completed straightaway, on the receipt of a booking either by telephone or at the end of a lesson, or there may be an intermediate notebook or record of telephone call from which information is transferred to the main appointments records.
  
  Co-ordinating all these records is essential to ensure that there is no double booking. Systems should be made as simple as possible to avoid confusion.
  
• Appointment Cards.
  
  The use of appointment cards is not uncommon. These are given to the clients to act as an aide-memoire. Occasionally they will carry additional information such as charges on cancellation which may be in operation.
  
  
• Client’s Progress Records.
  
  Bearing in mind the numbers of pupils a single instructor may have to deal with at any one time and the varying stages each may be at, it is often beneficial to keep individual progress records detailing precisely what stage the pupil is at.
  
  These records may detail the number and type of lessons received to date, manoeuvres covered and progress made, areas in which the pupil is experiencing difficulties and may require further tuition, routes covered and so on.
  
• Payments Record.
  
  A separate record may also be maintained detailing the clients payment record to date i.e. numbers of lessons booked and paid for if in advance, any monies outstanding etc.
  
• Proprietors Records.
  
  Where a number of drivers work for one firm, albeit on a self-employed basis, a record of the hours worked by each driver and fees received will be maintained by the proprietor.
  

• Driving Test Applications.
  
  Where the school handles the administration connected with driving test applications, a record of tests undertaken by pupils may be maintained.
  

• Other Records.
  
  Vehicle maintenance records are likely to be maintained along with relevant purchase information on spares, fuel tyres etc.
  
  It is not uncommon for a driving instructor or driving school to have a monthly account with a filling station. Discounts on fuel may be obtained.

8.4 Costing of Charge out Rates.

8.1 above looked in general terms at the charges for lessons. The method of arriving at a charge is generally very arbitrary and may be based on levels prevalent for similar businesses in the area.

As a result of the above it may be that a very low rate per hour is charged, which in turn can affect the living standard of the instructor.

The DIA state that in general living standards of driving instructors are below that of the "average person". To make up any shortfall the instructor may be required to work excessive hours.

The self-employed instructor however does have to make a living and it would be expected that they would charge hourly rates sufficient to allow themselves to be paid a fair and average wage for a reasonable working week.

Appendix 3 is an illustration of costing a charge-out rate based on the running costs of a Rover 100, assuming it is replaced each year. Costings allow for servicing, including the replacement of other parts such as the clutch, which may not be covered by some manufactures warranties.

See Appendix 4

Profits in this profession are capable of being measured in terms of fuel to takings ratios, that is to say there is a link between the expenditure on fuel and the profitability of the business. The link is not however straightforward and many factors may have a bearing on the achievable fuel to takings ratio of any individual business.

The elements required to be taken into consideration when looking at any financial year are:-

• Average vehicle fuel consumption;
• Average cost of fuel in the period;
• Average cost of a lesson in the period;
• Average mileage per lesson and average number of dead miles;
• Private mileage.

The following sample models illustrate the considerations required.

Example A (A straightforward model):-

• Car say a Rover 100 ( M5) (CAT) Urban mileage 40.3.
• Consumption rate at 75% of Urban figure approximately 30 mpg.
• Cost of fuel, average for unleaded say £2.54 per gallon.

If the cost of business fuel during the year totalled £2000, then this would equate to :-

£2000/£2.54 = 787 gallons aprox. @ 30 mpg = 23610 miles.

Say that the average lesson = 15 miles

The average dead mileage per lesson = 3 miles

Total mileage per lesson = 18 miles

Number of lessons given 23610/18 = 1311 lessons.

At £18 per lesson                      x £18

Expected Total Turnover         £23598

This equates to a fuel to takings ratio of 1:11.80.

Example B (As A but introducing private mileage).

Taking the same figures as example A but introducing 2000 private miles.

Total mileage 23610

Private mileage 2000

Business mileage 21610

21610/18 = 1200 lessons

@ £18 per lesson

Expected Turnover £21600

This equates to a fuel to takings ratio of 1: 10.8, assuming the fuel deduction of £2000 does not include the cost of the private mileage. If private mileage is included in the fuel costs the cost of business fuel would be reduced to approximately £1845 making the fuel to takings ratio approximately the same as the first example i.e. 1:11.7

As previously stated many factors affect the fuel to takings ratio and these will also include such things as discounts given, mileage variations, fuel consumption variations, the effect of cancelled lessons and so on.

The DIA have provided the following comment on the subject of fuel to takings ratios:-

"Dead mileage has always been a problem with driving instructors especially in recessionary times. Due to the downturn in work, instructors often have to accept unprofitable clients, that is they would drop a pupil off on one side of town and have to drive across to the other side to pick up the next pupil. Often there could be a long gap in between of a few hours. With more clients a more cost-effective booking arrangement can be made which in turn alters the fuel to takings ratio.

With less demand and now the common practice of picking up clients, cancellations can be extremely costly. This is especially so when instructors have to travel great distances only to be told upon arrival that their client has forgotten the appointment and gone out. Most instructors absorb the loss because of the cut throat competition."

Many driving instructors find the alternative of becoming a franchisee an increasingly attractive proposition. They avoid the risks involved in setting up their own business with the franchisor providing an established administrative structure and back-up services.

Different franchise concerns operate different types of agreements. When considering the affairs of any individual franchise instructor it will be necessary, to determine the precise nature of the current agreement in force with the particular franchise operation involved.

BSM and AA The Driving School are two of the principal players in the franchise sector but there are numerous regional companies who operate along similar lines.

Although the franchise organisation and agreements differ from one franchisor to another there are a number of common features which may occur:-

• The franchisor will normally organise groups of self-employed driving instructors, who give tuition to the public.
  
• The franchisee is essentially a self-employed person carrying on their own business, keeping and maintaining all the necessary books or accounts.
  
• The franchisor usually operates a number of branch offices to which the instructors ( the franchisee’s) are attached. In the case of smaller companies these may be in a specific region ( West Midlands or South East) or straddle a number of counties. BSM, for example, have around 148 outlets in the UK and this number is extending at the rate of approximately six per annum.
  
• When an instructor joins a franchise organisation they will normally enter into some form of written agreement, The Franchise Agreement.
  
• These agreements normally have a number of principal points in common such as:-
  
• The instructor is permitted to carry on business as a driving instructor under the trade name of the franchisor, e.g. BSM.
  
• If the franchisor has a system of instruction laid down in an operating manual then the instructor will be obliged to carry out instruction in accordance with the specified system. Certainly there will normally be an obligation to maintain and provide services to a standard set down by the franchisor.
  
• The instructor will be licensed to use the franchisor’s trademark, symbols, insignia, distinctive designs, logos and any other promotional material.
  
• The franchisor will normally provide the tuition vehicle which they will licence, equip, insure, maintain and repair save that the instructor would be required to pay for any repairs resulting from their neglect or wilful default.
  
• The instructor would normally have to cover the cost of fuel and other running costs (including parking fines) as well as any excess on insurance claims. Some franchise agreements may put the onus of responsibility for repairs and servicing on to the instructor.
  
• Many franchisors will undertake training to the required DSA standards and administer the process, for the "trainee instructor" to undertake the three part DSA course, enabling them to become a registered ADI. The trainee will however bear the cost of this instruction.
  
  Training can also take place during the subsistence of a franchise agreement if the franchisor considers that the instructor requires the same to maintain the standards set down by them.
  
  Where the franchisor has a specified tuition system the instructor will require to be trained in it and often will not be allowed to commence to trade until they have completed a prescribed course.
  
  The instructor may be required to pay a training fee or merely to cover the cost of travel and subsistence expenses incurred during training.
  
• The booking of lessons is normally handled by the franchisor from offices staffed by their personnel. This service is sometimes referred to in terms of the franchisor providing a "booking agency" service and is usually combined with other support services in respect of the tuition provided by the instructor for the pupils. The pupils incidentally are usually defined in franchise agreements as the franchisee’s (the instructor’s) pupils.
  
• The fees charged to the pupils for the tuition received are normally determined by the franchisor with the franchisee being precluded, by the agreement, from varying the fees or offering any form of discount.
  
• Often the agreement will specify the duration of the lesson, for example BSM’s instructors are obligated to provide lessons which should not be for less than 1 hour.
  
• As far as receipt of payments is concerned some agreements may preclude the instructor from accepting any fees other than for immediate tuition. If, however, pupils pay in advance for lessons or special courses the instructor may receive the payment but they must ensure that it is made by cheque, payable to a subsidiary company normally set up by the franchisor to deal with acceptance of monies. The company will usually be called something like "XYZ (Acceptances) Ltd.
  
• The instructor may be required by terms of the agreement to appoint the franchisor’s "Acceptances" to collect all monies earned by the him /her in carrying out the business of providing tuition. This normally occurs where the franchisee has entered into an agreement whereby the level of franchise fee is determined by reference to the number of hours worked rather than in accordance with levels of weekly fees set by the franchisor. That is to say fees based on hours worked as opposed to a fixed weekly payment.
  
• In turn the acceptance company may, on a weekly basis, pay a net fee to the instructor which will effectively be the monies earned by the instructor less any refunds, licence fees or other deductions or retention’s due.
  
• Alternatively the instructor may keep all receipts except cheques issued by pupils in respect of tuition, driving licence and test fees which would be made payable to the franchisor’s "Acceptances" as detailed above. Where a fixed fee arrangement is in place any cheque receipts paid to the acceptances company for tuition will probably be off set against the franchise fees due.
  
• Some franchisors charge their fees in terms of a vehicle hire and management service charge for a specified number of hours per week. Once those hours have been exceeded any tuition undertaken is free of such charges and the income derived becomes profit in the hands of the instructor.
  
  For example a fee is charged in respect of vehicle hire and management services in the sum of £280 per week (+VAT). This represents an hourly charge for management services and vehicle usage of £8 per hour for 35 hours.
  
  For the first 35 hours tuition per week the instructor is entitled to a fixed sum per hour; thereafter, subject to any payments due, say in respect of a retention fund or other monies due to the franchisor, the tuition fees belong to the instructor.
  

The British School of Motoring have supplied the Business Information Unit with specific information relating to their franchise agreements. This information is commercial in nature and strictly confidential but has been made available to Inland Revenue Inspectors. The information is not in the public domain and does not form part of this Business Economic Note.

14.1 General

Low net profits and drawings can be common features in the returns or accounts of Driving Instructors. It may not be uncommon to find a significant number of those engaged in this profession returning figures of drawings suggesting living standards which are generally below those of the "average person".

Instructors would still expect, as stated by the DIA, to make a living and would aim to charge hourly rates sufficient to allow themselves to be paid a fair and average wage for a reasonable working week.

Where the level of personal drawings appears to be inadequate it may not be unreasonable for an Inspector to consider a particular set of accounts for further enquiry.

Cases may also be considered where it is thought that the fuel to takings ratio may be lower than expected. The Inspector will be aware of local variations in accordance with prevailing levels of charges and patterns of lesson and will normally be able to establish a pattern of the normal range of ratios for the locality.

In such circumstance the examination of the underlying business records may be required, including, for example, the appointment books (if there are two, one in the car and one in the office, both may be required) and the pupil progress records.

A review of the economics of the business, as demonstrated by the models above, may be undertaken and is likely to turn on factual questions like the mileage obtained per gallon, the length of the lessons, private usage etc. Inspectors will undoubtedly wish to check the results obtained from a fuel/takings ratio calculation or simple check of hours worked x charges.

The effect on fuel to takings ratios caused by free or discounted lessons, petrol consumption, cancellations etc should be built into the model after explanations have been tested. It would not be unreasonable for Inspectors to expect explanations received to be upheld by the contemporary records maintained throughout the accounts year.

The new rules introduced in the 1994 Finance Act of course mean that driving instructors will be required to keep all appropriate records.

Guidance on record keeping practices for the self-employed under Self Assessment are available to the public in the Inland Revenues leaflet SA/BK.3 available from Tax Offices and Tax Enquiry Centres.

Each individual instructor’s circumstances will vary. Exploration of the aforementioned aspects will allow Inspectors to evaluate whether the figures shown and results demonstrated by the accounts received are viable.

Where the Inspector is able to demonstrate that the results do not accord with the information given by the instructor about inputs and charges, after considering aspects such as bad debts, reduced rate lessons and dead time etc, they may be justified in considering that there have been apparent omissions from the accounts. The Inspector should adequately cover all aspects leading to variations before attempting to quantify such omissions. They may also wish to discuss private and personal expenditure where inadequate drawings from the business is a consideration.

14.2 Franchise Fees and other Pre-trading Expenses.

The first accounts of driving instructors often contain a number of expenses of a one-off nature. Examples are franchise fees (where the instructor is operating under a franchise agreement), training fees, the cost of acquisition of the licence from the DSA and DSA test fees.

The tax treatment of such expenses should be considered, by Inspectors examining accounts, in line with normal principles. Inspectors obtain guidance from the Inspectors Manual which is available to the public as part of the Inland Revenue’s response to the Government’s Code of Practice on Access to Government Information. Guidance is to be found:

• on ‘wholly and exclusively’ questions at IM601-601h
  
• on ‘capital/revenue’ questions generally at IM602-602b and IM803a
  
• on franchises at IM2400-2403b

The loose-leaf manuals may be inspected free of charge in any Inland Revenue Tax Enquiry Centre.

The Inland Revenue’s views on the tax treatment of initial sums paid for franchises have been published in Tax Bulletin 17 (June 1995) and on training costs incurred by the proprietor of a business in Tax Bulletin 1 (November 1991).

As discussed in section 2 above, in order to be registered by the DSA the prospective instructor has to sit a stringent test of his or her abilities.

Some franchise companies, for example BSM, provide training programmes which cover the three required parts of the DSA exam, for which they charge a training fee. Exam fees will also have to be paid.

Such training fees and exam fees paid by the individual are likely to be capital expenditure under the principles set out in the article in Tax Bulletin 1. The expenditure is incurred on the acquisition of a DSA licence which is an asset or advantage of enduring benefit to the instructor and, indeed, an asset without which in practice the instructor cannot trade. As with other licences the fact that the DSA licence has to be renewed at intervals does not prevent it being of enduring benefit to the instructor.

It is sometimes argued that S401 ICTA 1988 (pre-trading expenditure) operates to permit a deduction despite the fact that the expenditure might be capital on normal principles. We do not accept this view. The sole function of S401 is to mitigate the ‘source’ principle of UK taxation under which expenses can only be deducted if there is a source of income in existence at the time the expenditure is incurred. The test for deductibility under S401 is that expenditure would have been allowable if it had been incurred after the trade had commenced; this means among other things that the expenditure must (in the context of a continuing trade) be revenue and not capital on normal principles.

Thanks are due in particular to The Driving Standards Agency, The Driving Instructors Association, The Approved Driving Instructors National Joint Council and The British School of Motoring Ltd. for their assistance in the preparation of this note.

The department acknowledges the use of material provided by the Driving Instructors Association (DIA) over which they retain copyright.

A list of professional associations can be found at Appendix 4.

The following information is appended;

Appendix 1 Private motoring: driving tests: 1983 - 1993

Appendix 2 The more popular driving school models of car and new car fuel consumption figures.

Appendix 3 An illustration of costing charge out rates is reproduced with the kind permi width="34">

48

Private motoring: driving tests: 1984 - 1993

1. These gross figures take no account of applications which do not mature into a test due to cancellations etc.

The more popular driving school models of car and new car fuel consumption figures.

A starting point might be 80% of the mileage shown though consumption might well be even greater. It should not normally be so poor that the miles per gallon dropped below 75% of the published town driving figure.

The following illustration of costing charge out rates is reproduced with the kind permission of the DIA.

Factors affecting the model.

• Average Wage.
  
  The average number of hours worked to produce this wage is 35 over a 48 week period 35 hours has been used as a basic week but, with car preparation and the time spent in reaching pick-up points and other activities, it is believed this would equate to the average of 42.7. 48 weeks allows for 3 weeks holiday and one week sickness, both figures are below the national average.
  
• Car Expenses.
  
  

• Sickness and Accident Insurance.
  
  An estimate of a benefit of £7,500 per annum to provide costs and extra benefits not available to the self-employed.
  
• Others
  
  Based on estimates and costs according to information available to the Accountancy service department of the DIA.

The Model

Professional Associations.