Alastair Kendrick explains Optional Remuneration Arrangements (OPRA) and provides four tips on how to prepare for the new tax rules.
Whilst these new tax rules came into force at April 2017, they do not impact for the vast majority of taxpayers until April 2018.
What is clear is that despite a significant amount of publicity about these new rules there is still a lot of ignorance and misunderstanding about their impact.
1. What are the Optional Remuneration Arrangements?
These rules apply to any employee who in their employment contract is offered either cash or the alternative of a benefit in kind.
So in regard to a company car arrangement the optional remuneration arrangement applies to an employee who is given the offer of a company car or a cash allowance it would also apply to those who have an arrangement in place to sacrifice salary to receive a fuel/ mileage allowance free of income tax.
The rules currently exclude those who enter in to a salary sacrifice for an ultra-low emission vehicle (currently below 75g of CO2/km).
So in regard to employees, the optional remuneration arrangements apply to those who have the offer in their contract of employment to a specific cash allowance or alternatively a company car and those who to receive a company car sacrifice an agreed amount of salary.
In these cases under the new rules the taxable benefit is determined to be the greater of the cash sum sacrificed or the level of benefit in kind arising say on the company car.
Therefore, these new rules can mean that the taxable sum on the benefit is significantly increased than had historically been the case
So for instance, if an employee in their contract is offered a cash alternative to a company car of say £6,000 per year, or a particular company car on which the benefit in kind is say £2,000 for the tax year, they will under the optional remuneration arrangement be taxed on the greater of £6,000 (the cash allowance) or £2,000 (the benefit in kind on the company car they are provided with).
That particular employee will face an unwelcome hike in the tax they will pay if they have exercised the option to take the car rather than the cash.
2. When do these new rules bite?
Whilst the rules came into force at April 2017, they did not impact on the vast majority of employees until April 2018.
Those impacted prior to April 2018 are those who either entered into a new agreement post April 2017 so those who became eligible for a cash or car arrangement in their contract after this date or whose contract was revised post April 2017.
It would say impact on an employee who changed their car post April 2017 when a cash or car arrangement was in place.
There are concessions within the rules which leave some who would otherwise be caught excused to April 2018. In all other instances employees will only get caught at April 2018.
3. Is HMRC ready for the change?
It is the case that in the majority of instances, HMRC does not have the detail to ensure the correct sum is coded out for the individual employee.
Clearly, HMRC has for those who historically exercised the right to take a company car (rather than taking the cash) details of the benefit in kind on the company car and not of any cash alternative.
It is not until the P11d is submitted for the year to 5 April 2018 in July that HMRC will have the full picture. So we will not see tax codes corrected until the form P11d is processed by HMRC by which time employees will have underpaid.
It is fair to say therefore that most employees who have a cash or car option in their contract will because of this change, find themselves underpaid. T
his is most unfortunate for those employees who did not appreciate the cost of these changes and because of the way these have been rolled out did not have an opportunity to get their code right at the beginning of the tax year.
In hindsight, it is a shame that employers could not have been asked by HMRC to provide the information for those impacted employees so their tax codes at April 2018 could have been put on a correct basis.
I know there is also concern that those impacted by the change in 2017/18 tax year will have had an incorrect coding adjustment so now face an underpayment for that tax year.
4. What do employers now need to do?
They need to ensure they understand the new rules and who will be impacted.
There is a very good guidance note produced by HMRC at Appendix 12 of the 480 booklet (guide to expenses and benefits).
- The employer needs to ensure they have the additional information they will need for the forms P11d at July 2018
- They will need to alert those employees who are impacted and consider whether they should introduce changes to their policy to mitigate the tax impact