Fleet News

Tax compliance vital for salary sacrifice schemes

Employers are being urged to check they are compliant with Government tax rules if they plan to offer their employees a car through a salary sacrifice scheme.

Providers and Her Majesty’s Revenue & Customs (HMRC) report a growing number of organisations are setting up schemes to offer a car via salary sacrifice.

However, ACFO chairman Julie Jenner told Fleet News that following a recent meeting with HMRC and Treasury, Government officials raised concerns about some salary schemes.

“Salary sacrifice schemes offer those employees who wouldn’t normally qualify access to a company vehicle while at the same time providing organisations with an excellent recruitment tool, as well as generating revenue for the Treasury through company car tax,” she said.

“However, it is extremely important that all schemes are approved by HMRC, otherwise you may fall foul of tax rules further down the road.”

Salary sacrifice can offer an employee a company car at a lower than expected cost, with the savings on income tax and National Insurance Contributions (NIC) outweighing benefit-in-kind (BIK) contributions.

Meanwhile, the employer pays a more tax efficient remuneration and reduced NIC. It can also cost the employer nothing to introduce a salary sacrifice scheme – providing they put buffers in place to cover excess mileage and damage – as it is managed as a normal company car scheme. Such a scheme also eliminates the ‘grey fleet’ risk.

Dan Rees, senior manager, Deloitte Car Consulting, said: “Employers and employees have the right to arrange the terms and conditions of their employment, which includes the remuneration package, provided each is treated correctly for income tax and NIC.

“In addition to correct income tax and NIC treatment on the various elements of the remuneration package, HMRC is interested in whether the employment contract has been effectively varied.”

He continued: “There are steps that should be followed for the design of a compliant scheme and Deloitte would recommend that employers seek HMRC’s assurance prior to launch and clearance once a car has been delivered and the sacrifice commenced.”

Tusker witnessed growth of more than 100% with salary sacrifice car schemes in 2011, with more than 65 live schemes now making up almost 40% of its fleet.

David Brockwell, finance director of Tusker, said: “We are currently adding new schemes at the rate of two to three per month.”

In 2011, HMRC interpreted a ruling in the European Courts involving VAT on retail vouchers, which Brockwell believes does not materially affect the tax treatment of cars provided under salary sacrifice car schemes, but it could leave some schemes exposed if they haven’t been put in place by an experienced provider with the appropriate experience and expertise to avoid the pitfalls.

He added: “It’s also imperative that any salary sacrifice car arrangements should be reviewed in their entirety to ensure all the constituent elements, such as maintenance, are correctly treated.”

Zenith says once a scheme is in place the employer can ask HMRC for clearance. They should provide full details of the scheme, including payslips and the new contractual arrangements.

Throughout the communications both prior to and after scheme launch employers must take care to ensure that the correct wording is used.

For example, the HMRC is clear that salary sacrifice is not ‘paid from gross salary’. It is a contractual reduction to the right to salary, not a payment from a salary.

The communications must not give rise to any suggestion that the scheme is being run in a way which conflicts with HMRC guidance and the detail of the wording is important.

Alastair Kendrick, tax director at MacIntyre Hudson, told Fleet News that he was seeing some schemes in which employee contracts had not been changed, but were covered by a ‘side agreement’.

“This can be argued not to be an effective salary sacrifice,” explained Kendrick. “We have seen this particularly in NHS schemes.”

Kendrick said other issues included the salary sacrifice not running for a relevant period so it was not effective; the VAT 50% adjustment being sought for cars not available for business use; and employees given permission to buy the car if they left their employer, putting the VAT position in jeopardy.

Alphabet has seen a 400% increase between 2010 and 2011, all be it from a small base. Paul Hollick, sales and marketing director at Alphabet, said: “The subdued economy is spurring people to looking beyond the traditional channels for financing and acquiring cars.

“Salary sacrifice cars are strongly motivating, green and they save money. They’re a win-win for firms and employees. As the concept becomes more widely understood and accepted, we expect it will move further into the mainstream over the next year.”

He continued: ““Setting up a salary sacrifice scheme is quite straightforward as long as you bear in mind that HMRC will want to see evidence that the salary sacrifice is effective.

“This normally requires a change in the contract terms of employees. HMRC will want to want to see employment contracts of salary sacrifice users to make sure that that they have given up their contractual right to some of their cash remuneration in return for receiving a car as a benefit-in-kind.

“A reputable and experienced scheme provider will be able to advise on these aspects although salary sacrifice customers should always get input from their own legal, tax and pensions advisors as well.”

Leasedrive reports its salary sacrifice product MyCar has seen growth within its public sector clients of 65% per cent this year.

“Our corporate clients operating salary sacrifice schemes have also grown by around 12%,” said Roddy Graham, commercial director at Leasedrive Group.

“Of equal interest is that within our current live prospect pipeline we are actively discussing salary sacrifice with 36% of the total pipeline.

“We are confident that well-structured and operated salary sacrifice schemes will continue to develop and grow next year.”

A HMRC spokesman said: “HMRC is seeing an increasing number of car schemes, but we are not aware of having found schemes that fall short of compliance with the published guidance.”

David Rawlings, director at fleet consultancy firm BCF Wessex, concluded: “Salary sacrifice is very simple, but it does need to be executed correctly and you need the right documentation in place. If it is correctly executed, HMRC will have no concerns.”

Click here for fleet funding best practice and procurement insight

Leave a comment for your chance to win £20 of John Lewis vouchers.

Every issue of Fleet News the editor picks his favourite comment from the past two weeks – get involved for your chance to appear in print and win!

Login to comment


No comments have been made yet.

Compare costs of your company cars

Looking to acquire new vehicles? Check how much they'll cost to run with our Car Running Cost calculator.

What is your BIK car tax liability?

The Fleet News car tax calculator lets you work out tax costs for both employer and employee