Company car tax has been relatively stable from a UK legislative perspective for a while, but that hasn’t stopped a growing number of employees opting for an alternative to a company car when presented with the choice.
However, there are specific tax implications for employees and employers, as this article shows, in considering the common alternatives of cash allowance, employee car ownership and the increasingly popular salary sacrifice.
The option of a cash allowance in lieu of a company car is the most common alternative offered by employers. Increasingly, it is the preferred option for employees working in all types of company – large, small, private and public sector. While administratively the simplest alternative, a cash option can leave employers exposed in areas of risk management. Difficulty can also arise in actually calculating the amount to be paid.
There are often cost and administrative savings from utilising solutions to pay a flexible allowance and full tax-free mileage rates as opposed to a fixed cash allowance and fuel-only reimbursement levels.
Income tax and NIC: A cash allowance should be paid via the payroll and is subject to income tax and national insurance contribution (NIC) in full.
Employer’s NIC: As with other remuneration payments, a cost for the employer arises by way of secondary Class 1 NIC at 13.8% via the payroll.
Corporate Tax (CT): Similar to other salary costs, a full corporate tax deduction applies on any cash allowances paid to staff.
VAT: There is no VAT on staff wages and salaries, including car allowances.
Points to consider
■ If business mileage costs are reimbursed below the full tax- and NIC-free rates the onus is on the employee to claim any tax relief and NIC relief is lost. By restructuring arrangements, full tax and NIC relief can be obtained and provided to employees directly without the need for separate claims or tax returns.
■ Where fuel is provided to cash allowance recipients the full cost (less any amounts reimbursed by the employee) must be reported on forms P11D with no apportionment for any business travel; the fuel scale charge only applies for company cars. A Class 1 NIC charge also often arises if the fuel is paid for with a company fuel or credit card.
■ Offering a cash alternative can prove costly for employers as corporate buying power and VAT recovery on lease and maintenance payments are lost.
Employee car ownership (ECO)
ECO arrangements came to prominence with the introduction of the emissions-based system of company car taxation as a way to mitigate the increased benefit-in-kind (BIK) charges. An ECO car looks and feels like a company car with one significant difference – the employee owns the car. As ownership rests with the employee there can be no company car benefit no matter how much support or discount the employer facilitates.
The employee purchases the car under a credit sale agreement and meets the monthly finance and running costs using a mixture of:
a) The income tax savings from no longer having a company car.
b) Maximum tax-free mileage reimbursement for business journeys.
c) A top-up payment from the employer via the payroll.
For the right employers, ECO offers significant cost reductions over a company car, but still provides sufficient risk management safeguards and control over the cars on offer.
Income tax and NIC: Payments under a) and b) above are tax and NIC free, any top up is paid via the payroll subject to income tax and NIC in full.
Employer’s NIC: Payments under b) are NIC free for the employer; payments via the payroll for c) attract secondary Class 1 NIC at 13.8%.
CT: A full Corporate Tax deduction applies for the payments under b) and c).
VAT: It is possible to recover VAT on the fuel element of the full business mileage rates under b) with receipts. Again, there is no VAT on any top up paid to staff.
Points to consider
■ Employees may be subject to credit checks in order to secure finance, this can lead to some staff being excluded from the arrangements.
■ HM Revenue & Customs has mounted a number of challenges to the operation of ECO, particularly with regard to NIC on mileage payments and the frequency of reconciliations. Employers should ensure their arrangements are robust and tax- and NIC-compliant on a regular basis.
■ With the significant reductions in CO2 emissions for many popular company car models, the tax saved from removing the benefit charge is often lower and can mean greater top-up payments are needed from the company, eroding the savings.
■ Many ECO schemes have been in place for a number of years and may no longer deliver the original level of savings, particularly where business mileage has reduced.
Expanding the opportunity to all staff to choose a company car and meet the costs using salary sacrifice has grown in popularity. The arrangements are particularly effective for low-emission cars where the BIK charge is lower than the salary being sacrificed, offering savings for employer and employee. Salary sacrifice also enable employees to benefit from corporate buying power/manufacturer support which would not normally be available in a retail transaction.
As with all arrangements combined with a salary sacrifice, careful consideration must be given to not only the financial and tax aspects, but also employment law and any wider impact on income and benefit entitlements.
Income tax and NIC, Employer’s NIC and CT: The car provided and funded by the employee’s sacrifice is taxed as a regular company car and is subject to the same rules as set out on pages 42-44.
VAT: HMRC is currently reviewing the position on VAT recovery for leased cars; particularly where provided in conjunction with a salary sacrifice which equals or exceeds the cost of the cars. In this case, one option being considered is for the employer to recover the VAT incurred on the full cost of the car (i.e. on both the lease and the maintenance charges). However, the corollary is that VAT would be payable on the amounts sacrificed by the employees, thus removing the current 50% VAT efficiency, increasing overall costs to the employee and eroding savings.
There would be several issues to iron out around any change in HMRC policy, for instance how to determine the cost of providing a car to an employee. So in the meantime businesses await an update with bated breath.
Points to consider
■ Opening up the company car fleet to the wider workforce can create a real difference to recruitment and perhaps increase current discount levels.
■ Managing periods of absence and sacrifices when on low or zero pay over such a long period can present national minimum wage and other legal challenges.
■ Managing early terminations and other causes of the employment ending.
■ A fleet provider experienced in operating salary sacrifice is crucial, as is a way staff can review cars and costs via sacrifice compared with running a car privately.
The tax position around company cars and alternative arrangements varies and no one solution will meet every employer’s or employee’s demands, but now is the time to address the position.
As the economy improves and the need to attract and retain staff increases in order to facilitate growth, company cars (whether business need or perk, or salary sacrifice related), structured alternatives such as ECO and cash allowances will be an essential element of the overall reward package for an ‘employer of choice’.
Employers should design and implement company car and/or cash allowance arrangements, and also address historic risk and reporting issues.
Those who are best-in-class in the area of cars and cash allowances typically offer a variety of options, but it is essential to understand the tax implications of any choice and which staff groups are suited to each. This generates a real win-win solution for both employer and employee.