Salary sacrifice providers are bullish about the industry’s future despite sweeping changes announced in the autumn statement.
Employers will no longer be able to enjoy the national insurance (NI) savings salary sacrifice schemes offer from April 2017, unless the vehicle emits 75g/km of CO2 or less. So-called ULEVs (ultra-low emission vehicles) will continue to qualify, while any existing employer-provided car schemes made before April 2017 will be protected until April 2021. The new rules will also apply to cash-or-car company car schemes.
The Treasury says the emission level for exempt ULEVs may be updated in future, to be “consistent with any changes to the treatment of these vehicles within the car benefit charge”.
The changes, which also include other products and services obtained via salary sacrifice, are expected to raise an additional £1.05 billion for the Exchequer, based on an £85 million uplift in 2017/18; £235m a year for the following three tax years, and an extra £260m in 2021/22.
The Finance Bill, published on Monday, December 5, gave further details about the Government plans. It confirmed that the changes will apply to arrangements where the employee forgoes cash in exchange for a BIK, including salary sacrifice arrangements, flexible benefit packages with a cash alternative and BIKs where there is an option to take a cash allowance instead.
The Government says it will tax whichever is the greater amount; the BIK value of the car or the cash allowance sum offered.
The calculation will move away from BIK based on list price/CO2/fuel type to a comparison of BIK versus cash allowance value, with the greater of the two chargeable to income tax and NIC.
For example, a driver who was offered a cash sum of £5,400 (£450 per month), but decided to opt instead for a Volkswagen Golf, with emissions of 109g/km, would have to stump up an additional £86 a year if a 20% taxpayer, or £173 if in the 40% bracket. The employer would also pay Class 1A National Insurance (NI) on the higher amount, equating to an additional £59 in tax.
Alastair Kendrick, tax director at MacIntyre Hudson, told Fleet News: “We are disappointed that HM Revenue & Customs (HMRC) has not taken account of our representations on this point. This proposal will create a lot of work for employers while not creating any significant tax revenue.”
The Government says it will set out reporting requirements in forthcoming legislation and guidance.
Deloitte claims as many as 500,000 company car drivers could be hit with the changes – around 50% of the 970,000 employees identified by HMRC as paying BIK tax on a car. But exact numbers are hard to establish – the BVRLA estimates between 80,000 to 100,000 company cars are sourced through traditional salary sacrifice schemes, while FN50 figures from the UK’s top 50 leasing companies suggest a salary sacrifice fleet closer to 60,000 units.
Deloitte, in turn, estimates that up to half of the remaining company car drivers – some 360,000-450,000 employees – have a cash allowance option.
Despite the changes, the country’s biggest salary sacrifice provider, Tusker, believes it still remains an attractive route to a company car for both employers and employees.
It currently manages 310 salary sacrifice schemes and more than 20,000 drivers, and, with discussions ongoing with a further 200 organisations interested in launching a scheme, it believes its ambitious growth targets of 50% year-on-year are still achievable.
“We had four prospects ring us on the Wednesday afternoon immediately after the autumn statement and say ‘we want to launch a scheme as quickly as possible’,” said Tusker CEO David Hosking.
Research carried out by the provider over the past 18 months suggests that a scheme’s tax efficiency is not among the top five reasons for selecting a car.
Hosking continued: “There is no doubt that tax advantages were a big enabler for us in getting people into a scheme, but that’s been going down for the past six or seven years and it is set to go down significantly more as BIK rates go up over the next four years.”
The average NI saving per employer was £25 per month per vehicle five or six years ago, according to Tusker; this year it is £8.
“Next year that goes down again, because of BIK rates, so employers aren’t doing it for tax savings,” said Hosking.
Despite the changing tax picture, new research carried out by ID Insight Consulting suggests that if the perceived value of salary sacrifice is eroded, due to a hardening of the tax regime, employees would be more likely to dismiss them going forward.
More than three-quarters of drivers also said that they would be more likely to choose cash if BIK tax on cars was to be increased to match income tax on the cash alternative.
Industry trade body, the British Vehicle Rental and Leasing Association (BVRLA), said the partial reprieve for ULEVs was a ‘dangerous compromise’.
Gerry Keaney, chief executive of the BVRLA, said: “These tax changes could deter many employees from choosing a modern, safer, cleaner, company-provided vehicle and see them opt for an older, dirtier and more dangerous alternative.
“The average company car is well under two years old and emits less than 120g/km CO2. The average privately-owned car is around eight years old and emits more than 150g/km CO2.”
Analysis of around 5,000 cars which Tusker has delivered via salary sacrifice so far this year shows that 46% of drivers would not have been affected by the Government’s changes, because they either opted for a ULEV or because the drivers are already paying more in BIK than they are saving in tax.
Of the 54% that are left, 26% will have an average increase of only £2.44 per month and a further 25% will face an average increase of £7.44 per month. Just 11% of its drivers, said Tusker, would face a ‘significant increase’ of between £20-45 per month.
A high proportion (42%) of the cars supplied via salary sacrifice by Fleet Evolution already falls into the ULEV bracket.
Andrew Leech, managing director at Fleet Evolution, said: “We have seen a steady rise in ULEV orders since the latest plug-in hybrids were launched. With the likely decrease again in ULEV company car tax from 2019 and the increasing amount of product, we see this percentage as increasing significantly.
“However, employee education really is the key as they still have outdated views of what a ULEV is and the limitations.”
Tim Buchan, Zenith CEO, was similarly confident about the future prospects of salary sacrifice after the Chancellor’s partial reprieve.
“We are confident that with this mature tax structure in place, the market will continue to grow,” he said. “The Government’s stamp of approval provides a significant opportunity for us to introduce this benefit to new employee populations.
“Salary sacrifice for cars will continue to deliver for employees due to its convenience, ease of use, no credit checks or upfront payments and the value for money it provides for drivers.”
In fact, Hosking argues that the forthcoming changes to Vehicle Excise Duty (VED) and the Insurance Premium Tax (IPT) rise from 10% to 12% from June 1, 2017, announced in the autumn statement, will have a far bigger cost impact to fleets than the changes to flexible benefits.
“All the insurance experts I’ve spoken to are expecting IPT to go up to 20% over the next few years,” he said.
Fleets also face new company car tax bandings from 2020/21, with new ULEV bands determined by the number of zero-emission miles the vehicle can travel.