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Car salary sacrifice schemes: new tax arrangements ‘not the end of the world’

Car salary sacrifice schemes: new tax arrangements ‘not the end of the world’

The ICFM has held it inaugural Masterclass focused on the key industry issue of car salary sacrifice schemes and car or cash allowance programmes. Below are the highlights from the event.

Car salary sacrifice schemes and car or cash allowance programmes continue to have a key role to play within wide-ranging employee benefit packages despite the introduction of new rules from April 6, 2017, the ICFM’s inaugural Masterclass heard.  

Numerous myths have been circulating and there has been much scaremongering surrounding the future viability of both car salary sacrifice and car or cash allowance programmes since the government outlined changes late last year, and confirmed them in the 2017 Finance Bill published last week. But experts told Masterclass delegates “it was not the end of the world”.  

Expert speakers Alison Argall, business development director sales at Tusker, and Claire Evans, head of fleet consultancy, Zenith - two of the UK’s major car salary sacrifice providers - agreed that “all the key benefits remain in place”.
 

Delegates to the Masterclass hosted by the RAC at its West Midlands operations control centre, were also warned by Dan Rees, associate director, Deloitte Car and Mobility Consulting: “Policy compliance is going to be a real challenge.”  

With the final legislation published less than three weeks prior to launch of the new rules, Mr Rees said: “There is likely to be widespread non-compliance, especially in the first year.”  

With the burden of responsibility for correctly reporting benefits for tax purposes falling to employers, and ultimately individual taxpayers, he urged employers to get processes in place to track employees with the relevant parameters to facilitate correct benefit reporting. Indeed those employers who currently payroll car benefit, as opposed to reporting via P11D, have an immediate requirement to get their processes in place for new joiners.


Furthermore, with the changes affecting now, what are known as Optional Remuneration Arrangements (OpRA), being introduced so rapidly, impacted employees were warned that they could face a delayed tax hit through an increased tax code in 2018/19. That’s because there is no official mechanism to report a higher salary sacrifice/cash allowance in 2017/18 until P11D submission in July 2018. Mr Rees strongly suggested that employers advise their employees to contact HM Revenue and Customs immediately if they believed they were impacted by the rule changes, so that they could pay the right amount of tax during 2017/18.  

Essentially the new rules mean employees opting for a salary sacrifice arrangement or taking a company car in lieu of a cash alternative will pay tax on the higher of the existing company car benefit value and the salary sacrificed or cash allowance given up. However, car arrangements in place before April 6, 2017 will be protected until April 2021 and ultra-low emission vehicles (ULEVs) - currently those with CO2 emissions of 75g/km or less - are exempt from the regulation.  

Even then not all cars will be impacted and employers and employees can still enjoy financial and other benefits associated with salary sacrifice arrangements. The key benefits include: fixed all-inclusive monthly costs, National Insurance savings, ‘hassle-free’ acquisition, no credit check requirement, no deposit needed and fleet discounts and for some a beneficial VAT position reflected in monthly costs.

However, the Masterclass heard that analysis of the cars most affected by the salary sacrifice rule changes were low emission, low value cars above 75g/km. Ironically, it is low emission cars that the government is looking to increase take-up for as it pursues an environmental agenda aimed at improving air quality.  

The Masterclass heard that petrol-engined models costing less than £20,000 (according to Tusker the average P11D value of a salary sacrifice car in 2017 is £21,000) with emissions of 79-90g/km would be hit the most under the new rules followed by petrol-engined models in the same price sector with emissions of 91-105g/km.  

That’s because the benefit-in-kind tax is invariably low delivering significant financial savings to employees versus the tax charge on the gross pay sacrificed. By comparison employees choosing a car with a high CO2 figure and a high value will almost certainly be largely unaffected by the new rules as will those choosing a low value car with a high CO2 figure or a high value car with a low CO2 figure where the benefit-in-kind tax paid on the vehicle is already higher than the tax due on the amount of salary sacrificed. 

Nevertheless, analysis by Zenith suggested that only one in three of cars ordered or delivered to customers in the past 12 months would have been impacted by the new rules, which was due to increases in company car benefit-in-kind tax rates.  

But, said Ms Evans: “Salary sacrifice has not been sold on the taxable benefits for a long time because of the way that benefit-in-kind tax rates have increased, and continue to increase, each year.  

“Employees look at the net cost of a new car through a salary sacrifice scheme versus the cost of obtaining the same car through a retail proposition. The figures show that benefit remains.”  

Further research revealed that post April 6 there remained a huge choice of cars by net cost band available to basic rate taxpayers - a core market for salary sacrifice schemes particularly in the public sector.  

In the sub £250 per month bracket there were 248 cars (pre April 6: 308 cars); in the £251-£300 segment 531 cars (537); in the £301-£400 segment the choice of cars had actually increased from 1,747 to 1,788; and similarly in the over £400 segment to choice had expanded from 3,534 to 3,559 models.  

Ms Evans said: “The changes do have an impact, particularly at the bottom end, but employees still have a large choice of cars that are unaffected. Our research shows that the impact of the rule changes are perhaps not as great as feared.”  

Analysis also suggested that a 20% taxpayer choosing a BMW 116d (89g/km) via a salary scheme would see a £1 net monthly cost increase post April 6, but a typical saving of £132 a month when compared with acquiring the identical car via a retail proposition. Similarly significant savings versus the retail cost were highlighted for other models including the Nissan Juke, a popular salary sacrifice model, and for 40% taxpayers on the Audi A3 and Mitsubishi Outlander.

With car salary sacrifice and car or cash allowance rules entered into before April 6, 2017 protected until April 2021, Ms Argall suggested that a “hotspot” would be when renewals were due.  

She said: “Both employers and employees need to be aware of the new rules and their impact. It may be that the choice of car made previously is not the right option under OpRA.”  

Mr Rees added: “Employee focus has for many years been on low emission cars for tax reasons. If that is a ULEV then no problem, but above that 75g/km breakpoint other options may be more viable than the car currently driven. Nevertheless, salary sacrifice still has advantages.”  

Industry figures suggest that the number of cars on the road funded via salary sacrifice schemes is around 70,000 and Ms Argall believes that figure will rise as both employers and employees get to grips with the new rules.

She said: “88% of Tusker’s salary sacrifice cars are supplied to basic rate taxpayers. These people are choosing salary sacrifice arrangements to make their money go further. While the savings available have reduced due to increases in company car benefit-in-kind tax, there are still financial savings to be made and the many other reasons for funding a new car through a salary sacrifice arrangement remain in place.”  

However, she added: “A re-education process is required, but interest in salary sacrifice schemes remains strong. Our order book has never been better and many organisations have recognised that employees are comfortable with the new rules. Employer communication with employees is crucial, but the only way staff can truly decide what is best for them is when they study the numbers.”  

Furthermore as more employers turn to offering car salary sacrifice schemes as part of their menu of employee benefits, there is a widespread belief that rival employers will need to do likewise to compete in terms of staff recruitment.  

Ms Argall said: “Businesses will be left behind if they do not offer benefits such as car salary sacrifice schemes.”

Cash allowance rules could drive employees away from low emission cars above 75gkm  

The popularity of low emission cars above 75g/km chosen by employees opting for a company car in lieu of a cash allowance could be reduced following introduction of the new rules, it is claimed.  

Employees choosing a company car instead of a cash allowance have historically been attracted by the low benefit-in-kind tax for those cars versus the cost of having to fund a car privately out of the post-tax cash allowance.  

However, where the option of car or cash exists, employees will pay tax on the greater of the taxable value of the benefit or the cash allowance option. Additionally, if opting for a car, employees will save National Insurance, but employers will pay Class 1A National Insurance on the benefit. If taking the cash option, employees will pay National Insurance as well as tax on the amount.  

Mr Rees said: “In many cases I have seen the cash allowance available to employees is either low or commensurate with the taxable value of the vehicle chosen so the new rules do not have a significant affect. However, I have also seen examples of high cash allowance policies, where the new rules would mean that the incentive to choose low emission cars above 75g/km is either gone or is significantly reduced.

“Drivers might either choose a ULEV, which is exempt from OpRA, or select the car they would most like to drive based on how the benefit-in-kind tax compares to the cash option.”  

He suggested that could give rise to employees potentially “changing their behaviour” and opting for higher emission cars, which would also deliver an increased Class 1A National Insurance charge for employers and therefore higher whole life costs, particularly when considering reduced fuel efficiency.  

For example, Mr Rees suggested before April 6, 2017 a higher rate taxpaying employee able to choose between a cash allowance of £6,500 or a Ford Mondeo 1.5 TDCi ECOnetic Zetec (94g/km) would save tax by choosing the car. However, under the new rules the employee may decide to opt for a Mondeo 2.0 TDCi Titanium AWD (127g/km) with a taxable value slightly above the tax charge on the cash allowance.  

But, as benefit-in-kind tax rates increase in 2018/19 and 2019/20 the taxable value of the 94g/km Mondeo would increase thus narrowing the gap in the tax differential versus that on the cash allowance from £600 to £100.

Mr Rees concluded: “OpRA will have the greatest impact in 2017/18 because benefit-in-kind tax on cars is lower than it will be in 2018/19 and 2019/20. As benefit-in-kind tax rates increase the financial impact from the new rules diminishes. In addition, as only a proportion of employees will be entering new arrangements in 2017/18, the true impact of OpRA is not a great as it could otherwise be.”  

Looking to the future, Mr Rees suggested that many employers were now considering their policies, for example whether to offer car, cash, or continue to offer both and for which populations. It would actually be possible, albeit an intensive exercise, to remove the choice of cash on an individual employee basis if that person agreed that they would never choose it.  

Ms Evans said: “The impact of OpRA where car or cash allowance choice is available to employees will vary depending on current policy and is likely to self-regulate according to driver behaviour. However, it may be that employers will decide to change policy parameters, which could include removing the cash option where few employees take cash today, so the new rules do not apply.”

  The ICFM view: a balanced approach to vehicle funding is critical  

Best practice dictates that employers take a balanced approach to vehicle funding and provision and salary sacrifice should be one of the options on the table along with outright purchase, contract hire, finance leasing, flexi-lease and a myriad of other options, which may also include cash allowances.  

The inaugural ICFM Masterclass heralded the launch of a new initiative from the organisation dedicated to advancing the profession of car and light commercial fleet management.

ICFM director Peter Eldridge said: “There is a clear dichotomy between protecting the environment and driving low emission cars above the 75g/km threshold. However, as more sub-75g/km cars become available that conflict will reduce.  

“If organisations have not already undertaken a detailed analysis of fleet funding and the option to include, exclude or abandon a car salary sacrifice then they should do so immediately.”  

With regards to the cash or car option, he said: “It used to be so simple, but is now much more complex. Cash alternative schemes are very diverse in their structure so delivering a ‘one size fits all’ approach for all businesses is impossible”  

He concluded: “Every employer must look at the merits of car salary sacrifice and offering a car or cash option within the context of their own business and the marketplace in which they operate. It is clear that careful consideration is required, but make the right choices and both businesses and employees can benefit.” ·         The Masterclass presentation is available upon request to Peter Eldridge at [email protected].