Salary sacrifice is one of three areas under review by HMRC
The Government has announced that it has fulfilled a promise made at this year’s Budget to initiate consultations into salary sacrifice schemes, including those that cover cars.
This is one of three areas affecting company cars that the Government currently has under scrutiny. The other two areas under review are changes in lease accounting and the balance sheet treatment of assets including company cars, and the tax treatment of ultra-low emission vehicles (ULEVs).
Why is the Government doing this?
At this year’s Budget Statement in March, the Government said that it would look at the range of Benefits-in-Kind (BIK) that attract income tax and National Insurance Contributions (NIC) advantages when provided as part of salary sacrifice arrangements.
The Exchequer has been concerned that it has missed out on a substantial amount of tax revenue as a result of such salary sacrifice schemes, where employees surrender a portion of their salaries in return for a benefit such as a company car. And it has a noted a 33% increase in such schemes between 2009/10 and 2014/15.
As a result, Her Majesty’s Revenue & Customs (HMRC) has announced a 10-week consultation period that will be open until 19 October to which all interested parties are invited to make written representations.
The purpose of the consultation is to explore potential impacts on employers and employees should the Government decide to change the way the benefits code applies when a Benefit-in-Kind is provided in conjunction with a salary sacrifice or flexible benefit scheme.
The Government is keen to seek views from a wide range of stakeholders, including employers who operate salary sacrifice and flexible benefit arrangements, their representatives, trade organisations and any other interested parties.
What is the consultation looking at?
The consultation is looking at proposed changes to tax legislation so that, when a benefit-in-kind is provided through salary sacrifice, it will be chargeable to income tax and Class 1A employer NICs.
Normally, such as benefit would be exempt from income tax and NICs, although BIK taxation would be payable on the notional value of the benefit.
The consultation suggests that the income tax and NIC should be charged at the greater of:
• The amount of salary sacrificed or
• The cash equivalent set out in statute (if any).
This would mean that where the normal taxable value of the benefit is higher than the amount of salary sacrificed, it would be subject to income tax and Class 1A NICs in the normal way.
Any changes to tax legislation required would be introduced from April next year.
What has the response been to the proposals?
Salary sacrifice providers, including Maxxia, have expressed concerns over the “unfair impact” on basic rate tax payers.
And they have highlighted that charging National Insurance on the Benefit-In-Kind on a company car has a much bigger impact on employees paying the basic tax rate than it does on those paying the higher rate of income tax.
Meanwhile, research by the trade body of the leasing and rental industries, the BVRLA, has shown that 80% of salary sacrifice drivers are basic rate tax payers, many of them public sector workers who have had to struggle with long-term pay freezes over the last few years and use salary sacrifice schemes to make their pay go further.
In a statement, the BVRLA said “the vast majority of staff receiving this valuable perk are in the basic income tax bracket and salary sacrifice schemes provide them with a unique opportunity to drive a newer, cleaner and safer car than they would otherwise.”
Numerous benefits of salary sacrifice cars
Providers have also highlighted the numerous benefits that cars provided under salary sacrifice car schemes deliver, especially when compared to employees’ own cars.
Research has shown that the very nature of the schemes encourages the uptake of cleaner, lower carbon dioxide emitting cars as they attract lower tax bills, thus helping the Government hit its clean air targets.
Some providers have also pointed out that the proposed changes may not even address concerns over missing out on tax revenues, as cars are usually tax positive under a salary sacrifice scheme and benefit the economy in numerous other ways.
Research carried out by leading accountants, PwC, has highlighted that many salary sacrifice cars are net tax contributors, due to the additional revenue from VAT on additional services, lease agreements and disposal costs.
At the same time, British-built models have proved popular in many salary sacrifice schemes, thus helping the UK economy. And all cars are sourced through UK franchised dealers, further supporting British jobs and contributing significant revenue to the economy.
The consensus from providers is that new car sales generated by salary sacrifice schemes give a valuable boost to the UK economy and provide a more sustainable alternative to the older, more polluting grey fleet vehicles that staff might otherwise use for business travel.
Duty of care concerns overcome
Many providers are of the firm opinion that a salary sacrifice car scheme helps to mitigate the risk associated with employees who are given a cash allowance in lieu of a company car.
Numerous studies have shown that cash allowance drivers often opt to choose older vehicles as they see their acquisition as being made with their own money and therefore do not opt for brand new cars.
Such so-called ‘grey fleet’ vehicles are often not serviced and maintained as regularly as company-provided vehicles, nor are they as well looked after.
As a result, they may pose a potential threat from a duty of care perspective, as the company can be held liable if any serious accidents should occur in such vehicles if they are being used on company business.
Conversely, a salary sacrifice car scheme provides cash allowance drivers with the opportunity to select a new, modern car incorporating the latest safety technology with low emissions, high fuel efficiency and regular servicing.
As a result, this helps to not only improve driver safety but allows employers to meet their duty of care responsibilities.
What happens next?
Interested parties have until the middle of October to make submissions in writing to HMRC, detailing what they believe the impact of the proposed changes would be.
Maxxia will be playing a full part in the consultation process and believes that salary sacrifice car schemes have a number of clear benefits for employees and employers alike, and will be responding accordingly.
If you need more information or to discuss options for an employee car scheme, please get in touch.