The Government has begun a consultation into salary sacrifice schemes, including those that cover company cars, with proposals to charge income tax and National Insurance on them.
This is one of three areas affecting company cars that the Government currently has under scrutiny. The other two areas under review are changes in lease accounting and the tax treatment of ultra-low emission vehicles (ULEVs).
At this year’s Budget Statement, the Government said that it would look at the range of Benefits-in-Kind (BIK) that attract income tax and National Insurance Contributions (NIC) advantages when provided as part of salary sacrifice arrangements.
The Exchequer is concerned that it has missed out on a substantial amount of tax revenue as a result of such salary sacrifice schemes, where employees surrender a portion of their salaries in return for a benefit such as a company car and which have increased by 33% in the last five years.
As a result, HMRC has announced a 10-week consultation period that will be open until 19 October this year to which all interested parties are invited to make written representations.
The purpose of the consultation is to explore potential impacts on employers and employees should the Government decide to change the way the benefits code applies when a Benefit-in-Kind is provided in conjunction with a salary sacrifice or flexible benefit scheme.
The consultation is looking at proposed changes to tax legislation so that when a Benefit-in-Kind is provided through salary sacrifice, it will be chargeable to income tax and Class 1A employer NICs.
Normally, such a benefit would be exempt from income tax and NICs, although BIK taxation would be payable on the notional value of the benefit.
The consultation document suggests that in future, income tax and NIC should be charged at the greater of:
- the amount of salary sacrificed or
- the cash equivalent set out in statute (if any).
This would mean that where the normal taxable value of the benefit is higher than the amount of salary sacrificed, it would be subject to income tax and Class 1A NICs in the normal way.
Any necessary changes to tax legislation would be introduced from April next year.
However, salary sacrifice providers have already expressed concerns over the new proposals, including their possible impact on basic rate tax payers.
They have also highlighted the fact that charging National Insurance on the Benefit-In-Kind of a company car has a much bigger impact on employees paying the basic tax rate than it does on higher rate tax payers.
BVRLA, the trade body of the leasing and rental industries, has produced research which shows that 80% of salary sacrifice drivers are basic rate tax payers. In addition, many of them are public sector workers who have had to struggle with long-term pay freezes over the last few years and use salary sacrifice schemes to make their pay go further.
In a statement, the BVRLA said: “The average salary sacrifice car has CO2 emissions of just 104g/km, is less than 18 months old, and is more likely to meet the latest safety and emissions standards. These vehicles provide a more sustainable alternative to the older, more polluting grey fleet cars that staff might otherwise use for business travel.”
Scheme providers have also highlighted the numerous benefits of cars provided under salary sacrifice car schemes, especially when compared to employees’ own cars.
Research has shown that the very nature of the schemes encourages the uptake of cleaner, lower carbon dioxide emitting cars as they attract lower tax bills, thus helping the Government hit its clean air targets.
Some providers have also pointed out that the proposed changes may not even address concerns over missed tax revenues since cars are usually tax positive under a salary sacrifice scheme and benefit the economy in numerous other ways.
Research carried out by leading accountants, PwC, has highlighted that many salary sacrifice cars are net tax contributors due to the additional revenue from VAT on additional services, lease agreements and disposal costs.
At the same time, British-built models have proved popular in many salary sacrifice schemes, thus helping the UK economy. Furthermore, since cars are typically sourced through UK franchised dealers, they further support British jobs and wealth generation for the economy.