by Alastair Kendrick, MHA Macintyre Hudson
Most cars provided to an employee via a salary sacrifice scheme are obtained by the employer on a contract hire arrangement. Therefore the contract for the vehicle sits between the employer and the leasing company.
The employee makes a salary sacrifice from his/her earnings which meets the leasing costs for the vehicle.
There are special rules which apply to vehicles provided via a salary sacrifice arrangement which have been in place for some considerable years.
These rules permit those employers who take a car via a contract hire arrangement to get 50% VAT relief. This is on the basis that the usage of the vehicle is split 50/50 between business and private. This historical position is reviewed by HMRC from time to time and on the last occasion there was the suggestion it should be revised a 60/40 split on what was allowed. It was not accepted and the 50/50 rule continued.
There have, however, been suggestions by the EU that this adjustment should be performed on a vehicle-by-vehicle basis based on the car’s actual business to private usage. This would create significant administration and it is good to see that HM Revenue and Customs (HMRC) has not forced this on employers.
However, in a number of salary sacrifice schemes cars may be obtained for a family member rather than for the use of the particular employee. In other cases, cars have been provided to employees who are not going to do any business travel.
In both circumstances, it begs the question whether any VAT relief should be allowed.
The HMRC guidance is not clear, but it does suggest the 50% VAT block would only arise if the car is provided for business use.
Will HMRC suggest that if the car is provided for a family member of an employee, or when business use will not occur, no VAT relief should be taken for the leasing costs on that vehicle? Those employers who have entered into this type of scheme should take the appropriate VAT advice.