Fleet News crunches the numbers for salary sacrifice change
Fleet News have reported on the increased tax bill for drivers who have taken up salary sacrifice for a company car since 6th April 2017, when the new optional remuneration arrangement rules came into force. This centres on whether HMRC intended to take into account additional costs when computing the new ‘relevant amount’ that is compared to the standard P11D calculation. The industry side claims that Government originally declared that ‘insurance, maintenance, tyres and breakdown cover would not be taxed when the Optional Remuneration Arrangements (OpRA) regime was introduced’ (1). But within the year, HMRC now claims it ‘always intended to tax the ‘package’ of benefits they receive with their car’ – admitting that not including this in the original legislation was an ‘oversight’ (1).
Surprisingly, in the notes supporting the amended legislation, HMRC appear to blame stakeholders for not spotting this during the OpRA consultation period – and as such, what has been simply described as a ‘mistake’, will be remedied with changes due to apply from 6th April 2019 (1).
Fleet News highlights that ‘Industry estimates suggest it could cost affected drivers an extra £100-£240 in tax per year, with employers also paying more Class 1A National Insurance’ (1).
It calls into question whether an employee is actually better or worse off for paying for the vehicle via salary sacrifice when the additional costs are taken into account (1).
In a bid to protect employees who entered into arrangements on or following April 2017, ‘the leasing industry is lobbying Government to introduce a transitional arrangement or to introduce grandfathering’ (1).
Transitional arrangements would mean that planned changes only apply to new arrangements entered into after the amended legislation was announced (July 6th 2018) (1). Grandfathering would exempt those currently in arrangements, entered into on, or after 6th April 2017, from the change in the law (1).
At the moment, HMRC maintain that ‘grandfathering would be inappropriate’: “the changes intended simply ensure the rules work as intended” (1).
What will be the impact for affected drivers?
Well it’s a complex picture.
For 2017/18 and 2018/19 employers will compare the amount sacrificed (and that can be either a car allowance not received, or salary given up) excluding any additional costs such as maintenance and insurance. That means scrutinising the lease document to work out the cost for the car alone or going back to the formula for the compensatory car allowance, and only considering the part of the foregone car allowance for the car itself not the extra costs. This is the ‘salary foregone’ figure and is compared to the gross P11d calculation ie list price x emissions’ percentage. If the salary foregone is higher, then that forms the starting point for the remainder of the P11D calculation. If the P11D figure is higher, then the salary foregone is ignored and a normal P11D calculation is undertaken.
For 2019/20 and beyond (assuming no grandfathering) the initial comparison will be the whole of the amount sacrificed either by a reduced salary or giving up a car allowance and that could well be higher than the normal P11D figure.
Fleet News emphasise that ‘the change won’t affect P11Ds or tax bills until July 2020 and it doesn’t affect cars first supplied prior to April 6 2017’ (1).
Basing their analysis on a ‘worst-case scenario with no grandfathering’, SG Fleet predict that ‘43% of the 14,000 vehicles currently on its system will be affected’ (1). More than ‘a third of those (36%) will see their monthly company car tax bill go up by less than £10 or under £120 a year’ (1).
Whilst another provider believes that this will affect less than 50%: “the average impact, where there is one, being around a £10 per month increase” (1).
But as Managing Director of Hitachi Capital Vehicle Solutions, Jon Lawes, points out “treating the car and its side benefits in the same way should also make it easier calculate the taxes that are owed” (1).
Fleet company directors are also actively engaging with the new consultation process and are proactively discussing proposed changes with customers to assist with any necessary changes (1).
In addition, Grandfathering can still be a possibility – HMRC did introduce it before the introduction of OpRA so there is hope (1). It all depends on to what extent they dig their heels in.
The least HMRC could do is offer a degree of leniency towards any incorrect tax calculations in the short-term when changes are brought into play (1). My view is that there will be plenty of incorrect P11Ds that were submitted this July, as many employers have not understood that taking a car in preference to a car allowance is also classed as an optional remuneration arrangement, not just traditional salary sacrifice schemes.
Is this the death of salary sacrifice vehicles?
Well hopefully not. As Adrian Hulme from accountants BHP suggests, ‘the opportunity to run a brand new vehicle on a just add fuel basis, where all the other costs are taken care of, is still a great benefit to offer and one employers should not dismiss’ at a first glance (1).
Lawes also notes that: “A salary sacrifice vehicle is cheaper at the start of its life because companies can often buy them at a discount and pass that discount on to their employees. It is more convenient throughout its life, as extras such as road tax and breakdown cover are bundled in. And, by virtue of being a newer vehicle, its resale value is protected at the end of its life” (1).
My advice for employers and payroll agents
- Watch out for any grandfathering – in my view it’s unlikely to happen as HMRC have already lost two years of an increased tax and Class 1A NI take from the original ‘mistake’ in the legislation as they refer to it
- Work out the difference in tax for employees who took cars out under sacrifice arrangements since 6th April 2017 as compared to this year’s P11D (assuming you reported the right amount this year!) and cascade that
- Inform finance of the increase in the total Class 1A for 2019/20 and beyond
- Ensure employees who have taken out cars between 6th April 2018 – 5th April 2019 understand that their first P11D for 2018/19 will have a lower tax amount that will increase for 2019/20 when the new rules come into effect.
- More information on the changes here