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Surprising change in the treatment of cars and vans under salary sacrifice

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From 6 April 2017, new legislation changed the taxation of benefits provided via salary sacrifice. This legislation - the optional remuneration legislation (commonly known as OpRA) - affects benefits provided via salary sacrifice and similar arrangements.

On 6 July 2018, draft provisions for Finance Bill 2019 were published including a section titled 'Optional remuneration arrangements; arrangements for cars and vans'. One of these changes is that the amount foregone in relation to a car includes the amount foregone for any related benefits (examples being servicing and insurance).

These related benefits were previously specifically excluded from the legislation.

In the explanatory notes to the draft provisions, it is specifically stated that this change is correcting 'an oversight' in the original legislation and that 'the government decided to take action to protect the exchequer at the first opportunity'.

Some may be surprised about this change if they have been following the work of significant providers of benefits and their advisors in clarifying this point. A benefit provider publicly made statements that it had discussed this matter with HMRC and HMT to clarify the intention of the legislation. They confirmed their understanding in a publicly available press release and technical note released in September 2017 that HMRC expected the comparison to be between the following in order to tax the higher of the two:

  • the amount foregone relating solely to the car (and not any of the other benefits); and
  • the normal car benefit charge,

In HMRC's own guidance at EIM44070, this point is made very clear as follows: 'Where the amount forgone by the employee is in return for the provision of the car and also for the provision of connected benefits then an apportionment should be made on a just and reasonable basis between the amount relating to the car and the amount relating to those benefits.'

Given HMRC's guidance reflects the current law as written and not the new changes, it is difficult to accept that this is merely an amendment of the legislation to reflect original intention. One might consider that the current rules compare a lower value for the 'amount foregone' than the new draft legislation and perhaps the government is in fact looking to raise more money from the OpRA rules.

This new legislation is set to apply from 6 April 2019. No grandfathering provisions have been included to allow for those, having entered into arrangements for a new company car since 6 April 2017 based on the current rules, who might find that their employee car tax is higher, as well as the associated class 1A NICs for the employer. Given that grandfathering provisions for cars were put in place for up to four years from the introduction of the original OpRA legislation, we might expect to see calls for similar grandfathering for this draft legislation.

Practical implications

It is common for benefit providers to provide calculators for employees to use when choosing a car. These will include the expected tax charge. These will have been amended in 2017 following the clarification from the benefit provider and the HMRC guidance. These will now need to be amended for the new draft legislation. Given this, there will be extra administration costs for all involved in providing company cars.

Employers will need to speak to their company car provider to understand their position and consider whether to make changes to those cars offered to ensure that the value to be reported on the P11D in relation to this benefit is reasonable. With the car benefit charge increasing every year as the relevant percentage used to calculate it is based on a lower CO2 emissions figure each year, the benefit charge is high enough that it is the amount reported on the P11D in most cases.

However, for those small numbers affected, it could be a significant issue. Employers will need to discuss this with affected employees and ensure that the tax position is clear to all.

Tolley Guidance (