Fleet News

SECOPs: are you ready when the taxman calls?

FEW letters are opened with more trepidation than those in envelopes marked ‘Her Majesty’s Revenue & Customs’.

If you are involved in the administration of Structured Employee Car Ownership Plans (SECOPs), a letter from Her Majesty’s Revenue & Customs (HMRC) around now could well be bringing bad news for your employees and drivers. Any doubts that HMRC is now fully focused on the issue of SECOPs are vanishing in a flurry of unwelcome post.

The principle of the SECOP scheme is as follows.

The Employee Car Ownership (ECO) scheme is a bit like an unsecured loan with the employee ‘buying’ the car.

A SECOP also uses an ECO-type contract but the employer ‘funds’ the car through the employee. The company makes the employee pay the monthly instalment for the car, but then re-credits the employee so that he or she is no worse off.

Those operating such arrangements (and there are over a hundred employers we know of) will have received, or may shortly receive, a letter from HMRC querying the arrangement.

These are actual quotes from recent letters issued by HMRC:

  • ‘As the payments are not mileage allowance payments by definition, they cannot be ‘approved’... consequently the full amount of the monthly expense falls to be taxed under PAYE.’

  • ‘For NIC purposes, as the expense advance is not a mileage allowance payment, it does not satisfy the definition of relevant motoring expenditure…the entire payment is therefore earnings and should be brought to account with other earnings in the same earnings period.’
  • ‘…such schemes are not suitable for inclusion in a PAYE settlement agreement.’
  • ‘…appropriate items should be payrolled each month…’

    This is not about a simple change in legislation, this is about changes to how company cars are taxed, and how high mileages and big discounts on list prices can possibly create unfairness.

    But it’s clear that HMRC has initially set its sights on the practical methodology.

    This could prove more fertile ground. HMRC’s attack is focused on three fronts – record-keeping, annual reconciliation and the use of loans.

    Record keeping

    It’s stating the obvious but without accurate and timely mileage records being submitted by employees, there is simply no way HMRC will accept the application of tax and/or NIC relief.

    An employer who cannot demonstrate what journeys an employee has undertaken has no chance of showing whether or not they were business journeys.

    Annual reconciliation

    Where annual reconciliation takes place, usually via a PAYE Settlement Agreement (PSA), HMRC is rejecting this approach for future years on the grounds that either:

    1) The nature of the sums involved does not comply with the PSA legislation or,

    2) Because the correct amount of National Insurance Contribution (NIC) was not accounted for in the correct ‘pay period’.

    This latter argument is often the fatal blow for SECOPs.

    For NIC payment purposes you have to pay the correct amount of NIC in the pay period (which could be a month or a week for most employees) and it’s not possible to go back after the month/week is ended and adjust the NIC paid retrospectively, which, of course, is precisely what a PSA seeks to do.

    Use of loans

    Loan reconciled schemes are taking off because many see them as an alternative to the PSA route.

    However, here we have also seen challenges. The primary problem appears to be that, in HMRC’s eyes, the payments into and out of the loan account have to be more than paper transactions.

    HMRC may look for proof that money was actually physically transferred and that the loans really exist beyond the accountant’s spreadsheet.

    There are also additional issues concerning the interaction of this approach with other loans extended to employees and, perhaps more significantly, Companies Act issues if it is proposed to include directors in the arrangements.

    This is not the end for SECOPs, of course, because full monthly reconciliation is not only possible but straightforward with the right tools.

    However, if you don’t have the detailed books up-to-date, you should expect – indeed anticipate – a challenge.

    The other good news, of course, is that HMRC has now announced that it will be holding a series of meetings with interested parties to help it define the future of employee car ownership plans.

    The meetings are being held on June 6, 7 and 27 and if you’d like to attend, email pa.harris@hmrc.gsi.gov.uk

    In the meantime, if there is any doubt as to whether the SECOP you operate may fall short, think about getting yourself some independent expert advice.

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