The Government could benefit from salary sacrifice for cars, just as much as employers and employees, a report suggests.
It’s long been established that a salary sacrifice car scheme can help boost an employee’s disposable income and mitigate an employer’s exposure through tax and national insurance (NIC) savings, as well as provide added benefits to staff, some of which might switch out of grey fleet.
However, a report from PricewaterhouseCoopers (PwC), seen exclusively by Fleet News, argues that car schemes provide a net financial benefit to HM Treasury, and deliver a range of benefits to the wider society.
That’s vitally important when the Government’s tax take has come under the spotlight, as it attempts to cut the deficit, and should cement its status as an employee benefit in the eyes of HM Treasury and HM Revenue and Customs (HMRC).
“It is quite clear: an individual salary sacrifice scheme is tax-positive in itself,” said Mark Sinclair, chief operations officer at leasing salary sacrifice provider Tusker, which commissioned the PwC report.
“There is such a misconception in the market place around the net effect of salary sacrifice. There is concern from employers as to whether schemes are sustainable for the long term and, in the last few years, there has been a lot of focus on tax planning. We wanted to demonstrate that, from a tax perspective, salary sacrifice car schemes benefit the UK as a whole.”
Tusker operates a rapidly growing fleet of some 13,500 vehicles of which 80% are provided through public and private sector salary sacrifice schemes. What’s more, a similar number of recipients are taking delivery of a new car for the first time as they replace a privately owned older model – and as a consequence delivering air quality benefits.
Using Tusker’s growth ambitions over three years as the basis for the calculations, the report found that the net cash benefit to HM Treasury would be delivered as a result of irrecoverable VAT on the finance element of the lease rental, an element of insurance premium tax (a salary sacrifice car would have comprehensive cover compared with many privately owned cars, which have cheaper third party fire and theft cover) and particularly VAT due on the disposal of vehicles by the provider.
Calculations provided by Tusker highlight the net benefit to HM Treasury of an average salary sacrifice scheme-provided car for a 20% and 40% taxpayer (see panel below).
As the figures suggest, the big financial gain to the Government comes in terms of VAT paid on disposal of the vehicle. While the negative and positive revenue flows are highlighted over three years, with disposal proceeds in year four, in reality cars are disposed of only weeks after the contract end date – almost all of Tusker’s salary sacrifice vehicles are on 36-month terms – but it may take up to three months for the VAT to be paid in the next return.
Having examined Tusker’s tax flow model, PwC – which can sell operators salary sacrifice schemes – said in its report: “Overall, the data shows that the salary sacrifice arrangement on its own can produce a tax-positive result.”
The report continued: “Furthermore, after taking into account the additional tax payments from the company, the arrangement overall becomes tax positive and helps drive additional tax revenues to the Treasury by promoting sales, in-life management and disposal of incremental new cars into the economy.”
Sinclair said: “The report shows that salary sacrifice car schemes are sustainable in the long term because HM Treasury is benefiting.
“Salary sacrifice schemes are tax-efficient to employees and employers, but we can prove they deliver a net tax benefit to Government and have wider benefits to society.”
A further direct net tax benefit to HM Treasury is that reductions in tax and NIC are offset by increases in other taxes, notably vehicle first registration fees, potentially fuel duty as well as insurance premium tax. One of the benefits of salary sacrifice schemes is that they reward employees and employers for choosing newer, lower CO2 emission vehicles. As a result, the report acknowledges the benefits of cars delivered through schemes also help to meet the UK’s environmental targets.
The latest CO2 emissions report by the Society of Motor Manufacturers and Traders (SMMT) highlights that average new car emissions in 2014 fell to a record low of 124.6g/km. However, new cars being added to the Tusker fleet average a significantly lower 101g/km.
Sinclair continued: “Salary sacrifice drives people into fuel-efficient, low emission vehicles and opens the door to them to choose hybrid and plug-in hybrid vehicles.”
What’s more, the average age of a car in the UK is 7.7 years, so the growth of salary sacrifice car schemes will result in the average age of vehicles reducing with a ready supply of typically three and four-year-old fuel-sipping, low emission models arriving in the second-hand market.
Acknowledging that one of the benefits to employees of taking delivery of a car via salary sacrifice is an increase in disposable income, the report added that consideration in the overall sustainability of schemes needs to be given to how that money will be spent: boosting economic activity, decreasing personal debt and increasing savings.
The report adds that salary sacrifice demand can also help sustain new industries and businesses, such as Tusker, that themselves will pay increasing levels of VAT and corporation tax as a result of expansion and recruit additional staff with payroll taxes also rising.
The report concludes that salary sacrifice schemes are also good news for the UK motor industry, thus aiding the wider economy, where vehicles and parts for those models are produced in Britain and vehicles serviced through the dealer network.
Indeed, one of the most popular cars supplied by Tusker through salary sacrifice is the Nissan Qashqai, designed and engineered in the UK and built in Sunderland.
The report said: “Continuing to support the UK automotive sector continues to be important to the UK Government and the UK population, particularly those employed directly, indirectly and for all of us who benefit from the success of the sector.
“Salary sacrifice is one area where continuing demand for the output from the UK automotive sector can be supported, by enabling employees to continue the demand for new vehicles. This in turn will continue to support the manufacture of new vehicles and the 80% of components manufactured in the UK that go into them.”
Sinclair concluded: “We are standing up for the fleet industry because salary sacrifice is a big growth area. The schemes are based on a robust model as well as driving value for employers and employees, and they are positive for HM Treasury and not tax negative.”