Salary sacrifice drivers could be hit with higher costs after HMRC claimed it always intended to tax the ‘package’ of benefits they receive with their car.
Insurance, maintenance, tyres and breakdown cover, the fleet industry was told, would not be taxed when a new tax regime for so-called Optional Remuneration Arrangements (OpRA) was introduced.
However, less than a year later, HMRC now says their omission was an “oversight” and they should have always been included in the original legislation.
Tax officials told Fleet News that the error had not been identified during the initial consultation on the OpRA policy proposals. It is now looking to correct what it described as a “mistake” and is consulting on the changes, which will apply from April 2019.
Industry estimates suggest that for those drivers affected, it could cost them an additional £100-240 in tax per year. Employers will also end up paying more Class 1A National Insurance.
Employment tax specialist Alastair Kendrick said: “When those added costs are taken into account the question is whether the employee is better off than if they had used their salary to buy an equivalent vehicle personally or via PCP.”
The leasing industry, which has seen the funding device grow in popularity over the past few years, is lobbying Government to introduce a transitional arrangement or to introduce grandfathering (exemption from a new law) for those drivers that took out salary sacrifice deals from April 2017.
Jay Parmar, director of policy at the British Vehicle Rental and Leasing Association (BVRLA), said: “This change could see some employees, who entered into a new arrangement on or after April 2017 in good faith, being affected. This is why the BVRLA is calling for transitional arrangements to be put in place so that the planned changes only apply to new arrangements entered into on or after July 6, 2018 (when the changes were announced).”
Zenith, working with the BVRLA, is also pushing to secure grandfathering for employees who entered into arrangements since April 2017.
Claire Evans, head of fleet consultancy at Zenith said: “It is our view that these employees based their decisions on the interpretation of the OpRA legislation written at that time and should be protected against unbudgeted for BIK tax increases.”
However, HMRC appears to be standing firm. A spokesman told Fleet News: “The Government does not believe that grandfathering is appropriate – the changes intended simply ensure the rules work as intended.”
The fleet industry fought hard to protect the benefit when the OpRA rules were first outlined and was successful in winning an exemption for ultra-low emission vehicles.
However, SSE took the decision last year to pull out of its salary sacrifice scheme, closing it to any new entrants, after it claimed the new rules increased administration and lessened the benefits achieved.
Simon Gray, head of fleet and travel at SSE, explained: “The view was that if a suitable scheme became available, and we were confident that the Government would not change any legislation that would impact the scheme during its life, then we would look at this again.”
However, he says the removal of apportionment relating to maintenance costs, means he can see no benefit in re-evaluating a scheme unless legislation changes significantly.
Nevertheless, providers insist that a large number of cars will not be impacted by the latest tax change and it could even make the rules easier to apply.
Adrian Hulme, senior consultant for employer solutions at accountants BHP, confirmed that some drivers will not be affected as the benefit in kind (BIK) figure is already higher than the sacrifice amount.
However, he said others will see an increase in the amount of income tax they pay on their company car BIK as a result of the changes.
He told Fleet News: “From 2019/20, when you have to take into account the salary sacrificed for the ‘package’ element too, employees’ BIK tax bills will inevitably be larger.
“This is because the benefit figure will in most circumstances become the total amount of salary sacrificed, which will be higher than the benefit figure calculated in the ordinary way.”
The change won’t affect P11Ds or tax bills until April 2020 and it doesn’t affect cars first supplied prior to April 6 2017.
SG Fleet told Fleet News that based on its analysis of the worst-case scenario, with no grandfathering, 43% of the 14,000 vehicles currently on its system will be affected. More than a third of those (36%) will see their monthly company car tax bill go up by less than £10 or under £120 a year.
Looking at the cars it has ordered in the past six months, Zenith said fewer than half will be impacted by the latest legislation change. “The average impact, where there is one, will be around a £10 per month increase,” said Evans.
Jon Lawes, managing director of Hitachi Capital Vehicle Solutions managing director, also believes the impact will be relatively small, estimating that some drivers could see increases of £10-£20 a month (£120-£240 a year).
However, he said: “Treating the car and its side benefits in the same way should also make it easier calculate the taxes that are owed.”
Chris Salmon, SG Fleet commercial director, was also quick to stress that HMRC was currently consulting on the changes. “We are actively engaged in this discussion process, because customers will potentially be left with a situation where they have multiple calculations under the previous rules, the new rules from April 2017, and this change again for April 2019.
“HMRC did introduce grandfathering before (the introduction of OpRA in April 2017) and we hope they will offer grandfathering again because we think it’s somewhat unfair to change the rules mid-cycle for customers.”
Salmon said that if the proposals do go through, SG Fleet is hopeful HMRC will appreciate the “significant complexity” and will be lenient regarding any tax incorrect calculations.
It has contacted some 200 customers that could be affected by the proposed changes to let them know it was working through the detail and to provide guidance.
He said: “We’re proactively discussing the proposed changes with our clients to ensure they are aware and to flag we are there to assist with any adjustments to their processes.”
Paul Gilshan, chief executive at Tusker, one of the biggest providers of salary sacrifice in the UK, insisted that if the proposed changes go through, they will have “very little impact to the pricing of salary sacrifice cars”.
Hulme also believes it will not diminish the core soft benefits of the product. But, he said: “Ultimately it will have an impact. The change is potentially making a car more expensive to obtain through salary sacrifice.
“The effect may just be on the choice of car. It could encourage employees to look at the ULEV market which is not affected by the OpRA tax rules.”
Hulme said some employers may be deterred, but the opportunity to run a brand new vehicle on a just add fuel basis, where all the other costs are taken care of, is still a great benefit to offer and one employers should not dismiss.
“This shouldn’t be seen as an end to salary sacrifice, just a chance to refocus on the true value and convenience employers are providing to their workforce through the company car scheme,” he said.
Lawes continued: “A salary sacrifice vehicle is cheaper at the start of its life because companies can often buy them at a discount and pass that discount on to their employees.
“It is more convenient throughout its life, as extras such as road tax and breakdown cover are bundled in. And, by virtue of being a newer vehicle, its resale value is protected at the end of its life.”
Lawes is advising fleet managers to be transparent about the changes and to inform employees. “Be flexible,” he said. “The past few years have demonstrated that Government policy can change swiftly, so fleet policies should be able to react swiftly too.
“Contact your company car provider to see what they can do for you.”
Further details on the changes can be viewed on the HMRC website by clicking here.