April sees introduction of new measures covering fleet and benefits taxation
April 2017 sees a tax change landmark which has significant repercussions for businesses running company car fleets or providing flexible benefits for their employees.
From April 1st 2017 major car tax changes take effect in a series of areas, including the tax treatment of salary sacrifice car schemes, cash for car allowances, Ultra Low Emission Vehicles (ULEVs) and Vehicle Excise Duty (VED).
Changes to salary sacrifice schemes
Following the Autumn Statement in November, the Government is bringing in a series of changes to salary sacrifice schemes from April 6th which will impact on all employers who provide such schemes for their employees.
With a few notable exceptions, including pensions, child care provisions, ULEVs emitting 75g/km of CO2 or less and cycle-to-work, the taxable value of a benefit under a salary sacrifice arrangement will now be the greater of the current value of the benefit or the cash forgone.
Going forward this will be the value employers will need to use for calculating income tax and class 1A NICs. Any contracts entered into before April 6 will be protected until a ‘change in arrangements’ has taken place.
For existing contracts, the Government has put in place ‘grandfathering’ arrangements so that, if a contract is in place before 6 April 2017, the new rules will not come into place until there is a change of arrangements or 6 April 2018, whichever is the earliest. Arrangements for ULEVs, accommodation and school fees will be protected until April 2021.
What about contracts post-April 6 2017?
Employers need to be aware that, if an employee starts a contract on or after 6 April this year, they will need to use the new rules immediately for that employee.
Some pundits believe it may be questionable as to whether there are actually ‘grandfathered’ arrangements in place in reality, as many flexible benefits schemes have an annual renewal and would mean that, in practice, a change of arrangements is likely to be triggered before the applicable date: either 6 April 2018 or 6 April 2021.
A ‘change of arrangements’ arises when a salary sacrifice contract starts, renews, ends or is modified or changed in any way. After a change of arrangements, the employer must value the benefit under the new rules.
Who will be affected?
All employers who provide benefits to employees in exchange for salary sacrifice will be affected. This will include any flexible benefits schemes where there is an element of salary sacrifice. In addition, where an employer provides a choice between a benefit or cash this will also be affected.
A common example of this is where an employee can choose between a company car or a cash allowance. In this case, they will also be taxed on the greater of the benefit-in-kind value or the cash equivalent.
What should employers do next?
All employers using salary sacrifice or cash alternative arrangements will need to be conversant with the new rules, in particular how and when they will impact on their reporting obligations.
In many cases, employers will need to report different taxable values for some benefits on the new P11D. There are also likely to be additional complications for those currently voluntarily pay-rolling benefits.
HMRC has already stated it will be providing guidance for employers who do not think that they will be able to update their software or systems in time.
Financial impact after April 6
For cars with CO2 emissions of 75g/km or less, there is no change after the new rules come into force, while for cars emitting more than 75g/km, there seems to be a general assumption that costs will escalate markedly after the new rules come in on April 6.
However, detailed analysis shows this is not necessarily the case. Take a Volkswagen Polo 3dr 1.0 litre BMT 75 StopStart EU6 Match, for example, which requires a reduction in gross salary of of £328.56.
The car has a P11D value of £13,430, CO2 emissions of 108g/km and attracts benefit-in-kind tax at 22%. Its BIK value, therefore, is £2,954.60 while its cash equivalent is £3,942.72.
Under current legislation, the car has a monthly net effective cost of £272.66 for a 20% taxpayer, rising to £289.13 under the new rules, an increase of £16.47 per month. See table.
|Employee||Current legislation||New legislation|
|PAYE tax saving||£65.71||£65.71|
|Total PAYE and NI saving||£105.14||£105.14|
|BIK tax payable||£49.24||£65.71|
|Net tax saving||£55.90||£39.43|
|Net effective monthly cost||£272.66||£289.13|
However, there is a greater impact for the employer, who previously enjoyed a net saving in NIC under the existing rules of £11.36, but a zero saving under the new legislation. See table.
|Employer||Current legislation||New legislation|
|NIC cost on BIK||£33.98||£45.34|
|Net NIC saving||£11.36||£0.00|
Changes to tax rules for ULEVs
According to measures announced in the Autumn Statement, there are also changes in the Benefit-in-Kind tax system which are intended to prioritise electric vehicles and other ULEVs, although the timing of the changes have attracted considerable criticism from industry bodies.
Under the new rules, Government will differentiate ULEVs, including electric vehicles and hybrids, from April 2020 by reference to how many zero emission miles a car can drive, as well as its CO2 emissions.
The changes from April 2020 are therefore as follows:
• 0 g/km – 2% (down from 16% in 2019/20);
• 1 – 50 g/km – between 2% and 14% depending on zero emission range (down from 16% in 2019/20).
|2020-21 company car tax bands|
Critics of the scheme say, however, that there is a considerable disincentive under current BIK rules to purchase ULEVS until 2020, as the current regime sees rates rise to as high as 16% for vehicles emitting 0-50g/km and 22% for vehicles of 76-94g/km in three years time – see table.
|CO2 g/km||BIK%||CO2 g/km||BIK%||CO2 g/km||BIK%|
Vehicle Excise duty set to rise
While there will be no changes to VED for existing cars, from April 1st for all new cars the duty in the first year will be set according to emissions, like today. Thereafter, in subsequent years there will be three duty bands – zero emission, standard and premium.
For standard cars – which covers 95% of all cars sold in the UK – the charge from 2017 will be a flat rate £140 a year. This is less than the average £166 a year that motorists pay today, although the new rates have been designed to increase revenues, which have fallen under the current rates as an increasing number of low emission cars qualified for the zero first year and standard rates.
Accordingly, the new rates introduce a higher first year rate for most cars, including most ULEVs, many of which will be subject to VED for the first time, although cars that emit no CO2 when driven will continue to be exempt from both rates.
The first year rate continues to increase as CO2 emissions rise, with the highest rate set at £2,000 compared to the current high of £1,120. See table.
|VED bands and rates for cars first registered before the April 1 2017 deadline and after.|
|Emissions CO2 g/km||First year rate pre April 17 (£)||First year rate post April 17 (£)||Total increase in first year (£)||Pre April 17 annual rate (£)||Post April 17 annual rate (£)||Total increase/ decrease in first year (£)|
For cars with a list price greater than £40,000 when new, there will be an annual supplement of £310 in addition to the standard rate, for five years.
As with the introduction of many new schemes, there are winners and losers with the new system. Many commentators have queried why ULEVs are now being subject to VED, rather than being incentivised with a zero rate as before.
For example, ULEVs emitting less than 50g/km of CO2 will from April pay £10 in the first year of registration and £140 per year thereafter. Currently they pay no VED at all.
The same applies to those emitting 51-75g/km. Currently paying no VED, from April they will be liable for £25 in the first year and £140 thereafter, while cars emitting 76-90g/km will face a charge of £100 in the first year and £140 thereafter.
Meanwhile, cars emitting 91-100g/km, also currently zero rate, will be charged at £120 in the first year, and £140 thereafter, an increase of £400 over the first three years of the vehicle’s operation.
If you would like to discuss any of the above tax changes and their impact on your fleet, please get in touch.