The 8th annual edition of Company Car and Van Tax has just been published by Eyelevel Books, in conjunction with KPMG, Ogilvie Fleet, Low Cost Vans and Fleet Operations.
Company Car and Van Tax 2018-19 has been fully updated and includes information on optional remuneration, salary sacrifice and car allowances.
The book covers everything a fleet manager or company vehicle driver needs to know about tax, including car benefit tax, fuel benefit tax, VAT, income tax, corporation tax, capital allowances, fuel duty, vehicle excise duty and national insurance contributions.
Published in conjunction with KPMG, Fleet Operations, Low Cost Vans and Ogilvie Fleet, and is available from amazon.co.uk, tourick.com and all good bookshops, priced at £50 paperback or £41.67+VAT PDF ebook.
The paperback will be available late June 2018, PDF is available now for immediate download.
21st April 2017
UK Fleet Operators anticipate greater demand for petrol vehicles
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Article published in Fleet World
Normally, when the government publishes the draft wording of a Finance Bill, the fleet press and commentators rush to give their thoughts, but that didn’t happen on 20 March when the government published Finance (No. 2) Bill 2016-17, the legislation that enacts the chancellor’s spring budget. They had good reason to hesitate, because the government’s proposals are complex and far-reaching and it seems that everyone has needed to take a little longer to work out what it all means. The key areas fleet managers need to be aware of are that the draft puts flesh on the bones of the new approach to salary sacrifice that was announced in the Autumn Statement and introduces a very different approach to cash allowances.
At least one major accounting firm has suggested that the new rules will also affect Employee Car Ownership Schemes (ECOS) but at the time of writing this is unclear, as is the position when an employee who has the right to a cash allowance instead of a company car selects a company car below their entitlement level, i.e. they ‘trade down’. Trading up was referred to in the draft legislation but not trading down.
This article ignores these uncertainties and concentrates on the things we definitely know.
As the government had already announced, from 6 April 2017 any tax and national insurance contributions (NICs) advantages under salary sacrifice arrangements will be withdrawn.
Just to recap, under a salary sacrifice arrangement an employee gives up the right to some salary and receives a benefit instead.
When salary sacrifice is used for cars, the employee saves tax and employees’ NIC, and the employer saves employers’ NIC. The employee pays benefit in kind tax under the normal rules for company cars. Historically, if an employee chose a relatively low cost, low-CO2 car they could make savings. Salary sacrifice schemes have predominantly been used to provide cars for employees who would not otherwise be entitled to a company car, most of whom have been basic rate taxpayers.
The draft legislation describes these arrangements as ‘optional remuneration arrangements’ (OpRAs). The industry knew that salary sacrifice schemes were being reviewed in 2016, but before last November they had no idea that the government would include cash allowances in the rule changes. This has been confirmed in the wording of the draft bill.
If your company operates a salary sacrifice arrangement or offers benefits such as company cars or the option to take a cash allowance in lieu of those benefits, you need to understand the new rules. Even employers that have never offered salary sacrifice but offer employees the choice between a cash allowance and a company car are caught by the new rules. An awful lot of companies, tens of thousands and maybe more, now have to consider how these changes affect them.
The draft legislation describes two types of OpRA, both of which will now be regarded as conferring a benefit on the employee.
And here is the key piece of information: if an employee choses to take a benefit instead of an amount of salary, they will be taxed on the greater of the salary given up and the taxable value of the benefit in kind.
The legislation includes provisions designed to stop people claiming that a particular type of benefit or form of salary reduction falls outside the scope of the rules.
There are transitional arrangements. If someone took a car emitting more than 75g CO2/km on a salary sacrifice scheme before 6 April 2017 they will be taxed under the old rules (the normal company car BIK rules) until the earlier of 6 April 2021 or the date when they modify or renew the deal. If the car emits less than 75g CO2/km the old rules continue to apply.
If an employee changes or renews the OpRA on after 6 April 2017 the new rules will apply from the date of the renewal or change. Amendments that arise because of matters that are not within the control of the employer or employee – e.g. the car is written off and replaced, or the employee is allowed to vary the arrangement because they take are on extended sick or leave or maternity leave – are not regarded as changes for this purpose.
Is a car emits more than 75 grams CO2/km and the employee has sacrificed salary, they will be taxed either on the normal basis for a company car (which is broadly; list price multiplied by a percentage based on the CO2 emissions of the car) or on the amount of salary they sacrificed, whichever value is the higher. To determine whether the benefit in kind or the salary sacrifice delivers the higher value, any capital contribution made by the employee towards the purchase of the car or payments for private use are ignored in the initial calculation (called the “modified cash equivalent”).
Once the appropriate amount has been calculated the employee gets credit for any capital contribution (capital contribution [max £5,000] x the appropriate percentage). Credit is then given for any private use contribution.
Fortunately, HMRC has provided an example of how this will work in practice. Assume an employee has a car for the whole of 2017-18, for which they sacrificed £300 salary per month, and they also paid £1,500 to get a higher spec car than their limit allowed. The car’s list price is £20,000 and it has an appropriate percentage of 17%. The normal cash equivalent value of the vehicle would be:
The modified cash equivalent is:
The sacrificed salary exceeds the modified cash equivalent, so the sacrificed salary will be used to calculate the additional amount to be treated as earnings and taxed.
Therefore the taxable amount is £3,600 less £255 (capital contribution of £1,500x 17%) = £3,345.
This approach also extends to free fuel supplied to an employee who gives up salary for the right to receive free private fuel paid for by their employer. They will be taxed on either the cash equivalent value of the fuel (calculated on the normal basis where the fuel multiplier of £22,600 is multiplied by the appropriate percentage based on the car’s CO2) or the amount of salary sacrificed by the employee for the benefit of the fuel, whichever is the greater.
So if an employee sacrifices £400 per month and their employer pays for private fuel for a company car with an appropriate percentage of 20%, the cash equivalent of the fuel benefit will be £4,520, the sacrificed salary will be £4,800, and as the sacrificed salary exceeds the cash equivalent value of the fuel, the employee will be taxed on £4,800 not £4,520.
A similar calculation needs to be made if salary is sacrificed in return for being given a company van or free private fuel for such a van.
It’s going to take some while for fleet managers and the fleet industry to get their minds around this sort of logic and there are a lot of consequences of these new regulations.
Professor Colin Tourick
Article published in Fleet World
This is the third time in the last twelve months that we have looked at salary sacrifice in this column, and I make no apologies for returning to it now. There are so many myths about the impact of the Chancellor’s announcement in November that it’s definitely worthwhile taking a deeper look.
Just to recap, in a nutshell, the changes the Chancellor announced were as follows:
If an employee takes a car emitting more than 75g/km of CO2 they will pay the higher of (1) the relevant level of Benefit In Kind (BIK) tax for that car or (2) tax on the amount of salary sacrificed. The changes commence on 6 April 2017 for new agreements and 6 April 2021 for agreements that were live on 6 April 2017. Cars with 75g/km or less (ULEVS – Ultra Low Emission Vehicles) are not affected by the changes.
So, let’s knock on the head some of the myths that have been flying about.
That’s not correct. The tax treatment has changed for some cars but employers can still offer salary sacrifice for cars.
Imagine a situation where you are about to start a new job and the HR person goes through a nice long list of all of the benefits of employment. “We also offer a simple scheme whereby you or a member of your family can drive a brand new fully-insured car using the discounts we have negotiated with our suppliers and the interest rate we pay when borrowing money. In other words, you get the benefit of our buying power.”
Wouldn’t that sound attractive to you? Well that’s still the position. Yes, some tax benefits will only be available for cars emitting more than 75g/km of CO2 from 6 April, but this doesn’t stop the employee getting the benefit of their employer’s buying power, whilst still enjoying other savings like employee National Insurance.
That’s not correct either. Cars that are ordered under salary sacrifice arrangements before 6 April this year will benefit from the old tax rules even if they are delivered afterwards. The 2021 date refers to how long the existing tax treatment of current contracts, and new contracts signed before 6 April, will be protected for.
Also, incorrect, and not just because the rules remain unchanged for ULEVs.
Salary sacrifice cars were always regarded as regular company cars for tax purposes. BIK tax rises annually and will continue to do so for all company car drivers. If the BIK tax an employee is paying on their car already exceeds the income tax on the salary being sacrificed, they will be unaffected by the new rules.
This point, which is explained in more detail in the Range Rover Evoque example below, has not received enough publicity. One leasing company carried out an evaluation of the effect of the new rules on their salary sacrifice clients. They started by assuming that every salary sacrifice employee currently driving one of their cars would have stared their contracts after 5 April. According to their evaluation, 46% of those drivers would be paying no more tax under the new rules than they are paying now in BIK tax. If they did have to pay extra tax, in most cases this would be less than £5 per month. Of course, the employees could avoid this extra cost by simply choosing lower-CO2 or cheaper cars.
We’ve already dealt with the tax benefits. Employers will no longer make Class 1A NI contribution savings on vehicles with emissions above 75g/km of CO2. But there has been little publicity about the fact that the Chancellor’s announcement does not affect employee national insurance at all, so there are still NI savings to be made. 75% of current salary sacrifice drivers in the UK are basic rate tax payers so this represents a 12% saving on top of the other discounts.
In fact the opposite appears to be the case. The day after the Chancellor’s autumn statement a couple of large companies announced that they were withdrawing their salary sacrifice schemes. However, leasing companies have said publicly that they have launched many new schemes since November. It seems that a backlog had built up whilst employers waited to hear what was said in the Autumn Statement. And many employers have realised that their employees value these schemes even without the tax benefits.
As already shown above, this is not correct. However, the savings will be good for ULEVs under the new rules.
Let’s now look at a couple of interesting examples. In the first example, we can see that there is still a saving to be made by the employer even though the CO2 of this vehicle significantly exceeds 75g/km.
|The employer’s position|
|Current||Post April 2017|
|Vehicle & CO2||92 g/km||92 g/km|
|Vehicle scale charge||20% (ave)||20% (ave)|
|Gross salary reduction||£366.53||£366.53|
|Benefit in Kind||£301.00||£301.00|
|Class 1 NI that would be paid on salary||£50.58||£50.58|
|Class 1A NI payable on gross reduction or taxable benefit, whichever is higher||£41.54||£50.58|
|Net saving per employee||£9.04||£0.00|
|Average annual net saving||£108.48||£0.00|
|Average pension saving per employee (if employer reduces gross pay for pension purposes)||£51.31||£51.31|
|Monthly net saving||£60.35||£51.31|
|Annual net saving||£724.20||£615.72|
ULEV vehicle example Current
And in this high-CO2 and high P11D value example the driver will see no increase, as they are already paying more in gross BIK than the gross salary being sacrificed.
| Range Rover Evoque – 40% tax payer
|The employee’s position|
|Current||After 6th April 2017|
|Value of the car (P11d)||£36,562.00||£36,562.00|
|CO2 emissions & Average HMRC BIK Rate||113g | 22%||113g | 22%|
|Gross salary sacrifice per month||£ 567.14||£567.14|
|Monthly BIK (P11d value x CO2% x marginal tax rate, divided by 12)||£ 268.12||£268.12|
|Income Tax saving (gross sacrifice x tax rate)||£ 226.86||£226.86|
|NI saving per month (this saving will remain)||£ 11.34||£11.34|
|Tax due (BIK or income tax whichever is higher)||£ 268.12||£268.12|
|Net cost to employee||£ 597.06||£597.06|
|(Gross cost – NI saving – Income Tax saving + Tax due)|
I suspect that once they do the sums, most employers will decide to stick with their salary sacrifice schemes. The calculations now have to be done slightly differently but the financial logic in favour of salary sacrifice for cars remains intact.
Professor Colin Tourick
The indispensable guide for UK fleet lessors, and in fact any British organisation that runs company cars, has just had its most recent update – the sixth edition of Company Car and Van Tax written by Colin Tourick.
The book, which is a supplementary publication to Tourick’s book on leasing and fleet management –Managing Your Company Cars – sets out the detailed tax rules, rates and allowances for 2016-17 and will be of interest to all fleet managers, fleet industry professionals or even employees who drive company cars, or their own car, on company business.
In addition to being a complete update on detailed tax rules, rates and allowances, contents range from car sharing to the more complex world of salary sacrifice schemes.
Tourick explained that the book is based on the Budget presented to Parliament by the UK Chancellor of the Exchequer on 16 March 2016.
Colin Tourick is a management consultant specialising in vehicle leasing and management. He has worked in senior roles in the leasing industry since 1980 and for the last 13 years has worked for some of the world’s largest banks, motor manufacturers and vehicle leasing companies.
He is a co-founder of the International Auto Finance Network, which runs conferences, carries out research and runs awards programmes for the fleet and auto finance industries. He is the Grant Thornton Professor of Automotive Management at the University of Buckingham.
Company Car and Van Tax is available from Amazon, tourick.com and all good bookshops. 80 pages.
[Original article here]
I understand that Treasury officials are embarking on a review of the future of business car taxation, no doubt in part because the new lease accounting rules will in due course place operating leases (contract hire) on lessees’ balance sheets. Presumably at some stage a file will be popped onto your desk proposing changes to the current arrangements.
This note represent no more than the thoughts of one humble citizen that you might like to consider before signing off any changes.
Every student of accountancy is taught about the “Canons of Taxation”, which were first espoused by Adam Smith in his book An Inquiry Into The Nature And Causes Of The Wealth Of Nations, one of the fundamental treatises on capitalism. Smith said that to in order to be good, a system of taxation should meet four tests, or canons. It should be fair, certain, convenient for the taxpayer and economical to connect.
Adam Smith would no doubt have had quite a lot to say about the way tax is currently charged on business cars. In some regards the current systems stretches fairness and certainty to the limit, so perhaps now would be a good time to put things right.
Fuel benefit tax is inherently unfair. 200,000 company car drivers pay this tax via PAYE. It is meant to tax the employee on the benefit they have received because their employer has paid for their private mileage. The problem is that it is payable in full even if the employer pays the cost of only one private mile in a year. In many – perhaps most – cases, the tax these employees pay exceeds the benefit of the free fuel that they are receiving. Please take the opportunity to fix this. At the very least, HMRC could provide guidance to employees to help them calculate whether they are actually receiving any net benefit. And prompting employers to review this area might also be helpful.
Company car benefit in kind (BIK) tax is designed to charge the employee for the benefit of having a car that is available to use for private mileage. This is a piece of cop-out language that governments have used for years to make life easier for themselves at the expense of the employee. For in truth an employee doesn’t benefit from having a car sitting on their drive at night, they benefit when they actually drive the car. However BIK tax charges the employee the same amount whether they drive 1 or 10,000 private miles per annum. Can this be fair?
There appears to be a disconnect between the government’s desire to encourage employees to take up low CO2 cars and the steep rise in the BIK tax that will be payable on these cars over the next few years. The driver of a car emitting 1-75 g/km of CO2 was taxed on 5% of the car’s list price last year and in four years’ time this will nearly quadruple to 19%. Is this rapid increase consistent with your government’s environmental credentials, and is it actually fair?
The U.K. is currently breaching EU air-pollution limits as set out in the 2008 Air Quality Directive, and the government is facing potentially huge fines from the EU. This is a very serious matter. It has been estimated that poor air quality causes 29,000 premature deaths each year in the UK. London has one of the highest levels of nitrogen dioxide and NOx emissions of any major European city, well over the approved limits. If you are going to change the tax system for business cars, you now have a golden opportunity to base it on one than one emission, including carbon dioxide, nitrogen oxides and particulates. The whole system – capital allowances, lease rental disallowance, benefit in kind tax, national insurance and VAT – should reflect this. And leasing companies should be given first year allowances to boost the take up of zero emission cars.
One thing that was definitely unfair – and breached the canon of certainty – was the reintroduction of the 3% diesel surcharge. Company car drivers have been told for some years that this surcharge would be dropped and they would have chosen their cars armed with this knowledge. They cannot now do anything about this but just have to pay the extra tax until their three or four year lease expires. They have therefore been trapped into paying this extra tax which in most cases will have increased their BIK tax payable by more than 10%. Drivers choosing new diesel cars now can make an informed decision in the knowledge that the diesel surcharge has been reinstated, but drivers already driving diesel cars – i.e. most company car drivers – cannot do so. Therefore the rapid re-introduction of this surcharge was certainly unfair.
When you make your decision about altering the current regime, please bear in mind how important it is that the new system should keep people in company cars rather than encouraging the use of privately owned (“grey fleet”) cars for company business. Otherwise we will have a health and safety nightmare, companies will have an additional administrative burden and there will be a rush to introduce Employee Car Ownership Schemes (which always add a significant administrative burden).
Should you decide to change the tax rules as a result of the lease accounting changes, leasing companies will almost definitely have to invoke the “tax variation” clauses in their lease agreements, adjusting the rentals they charge in order to retain their after-tax margins. Most UK lease agreements contain these clauses. It would be really helpful if you would grandfather the tax treatment of any existing business cars and allow these cars to be taxed under the old rules until their leases expire. Please don’t ask the leasing industry to recalculate the rentals on 1.3 million company cars. This will add a significant burden to them and also cause hassle with clients, many of whom will not understand the tax-based discounted cash flow analysis the leasing company has had to use in order to recalculate the rentals.
You said in the Autumn Statement that you plan to look at salary sacrifice for cars. When you do so, please take a holistic approach and look at the totality of the system rather than just the income tax and NI calculation for an individual employee, because there is some evidence that salary sacrifice is a net generator of income for the Exchequer. If you were to adopt a holistic approach I think you would discover that most salary sacrifice cars are acquired for use by employees who would not otherwise be entitled to a company car and who have never bought a new car before. This transaction therefore generates a new car purchase that would not otherwise have taken place. The Exchequer benefits in a whole variety of ways from this transaction. The car manufacturer (or importer) and dealer pay corporation tax on the profit they make on the sale; VAT is collected on the sale; BIK tax is payable by the employee throughout the period they have they use of the car and NI is payable by both the employer and the employee. Salary sacrifice also brings a new car into the UK car parc, one that will almost definitely be greener than the one it replaces. In addition, there are significant benefits for the employer. They know that when an employee drives their salary sacrifice car for business mileage they are doing so in a modern, reliable, low CO2, low NOx car rather than an older, less reliable, high CO2, high NOx car. There is much more to salary sacrifice than meets the eye.
And one final request. Please have a look again at the system for capital allowances on business cars. It is currently quite possible that if a company were to buy a business car for a 25-year-old employee today and sell it after three years they will still have not received tax relief (capital allowances) on the full depreciation of that car 42 years later when that employee retires aged 67. This is bizarre, unjustifiable and therefore unfair. You could resolve it by the stroke of a pen by allowing companies to claim balancing allowances when cars are sold. And if you fancy boosting investment and economic activity you might also like to look at increasing the current levels of writing down allowance, which at 8% and 18% encourage nothing at all.
Your humble citizen
Professor Colin Tourick is the Grant Thornton Professor at the University of Buckingham Business School.
Grant Thornton’s Automotive Messenger – includes Budget commentary from Colin Tourick. http://bit.ly/1I40bjB
You can read the original article here