Salary sacrifice, company car tax and lease accounting under the microscope

HM Revenue & Customs (HMRC) has issued consultations on three key areas of tax policy affecting the fleet sector – salary sacrifice schemes, company car tax treatment of ultra-low emission vehicles (ULEVs) and lease accounting.

HMRC is inviting responses in writing from as many interested parties as possible for all three areas to gain as wide an array of opinions from employers, suppliers, trade organisations and any other interested parties.

Why salary sacrifice car schemes?

The Revenue has been concerned that it has missed out on a substantial amount of tax revenue as a result of salary sacrifice car schemes. And it has a noted a 33% increase in such schemes between 2009/10 and 2014/15.

HMRC’s consultation process is proposing to change tax legislation so that when a benefit, like a company car, is provided through a salary sacrifice scheme, it will be also chargeable to income tax and Class 1A employer NICs.

Normally, such as benefit would be exempt from both income tax and NICs, although BIK taxation is payable on the value of the benefit by the employee.

The consultation document suggests that the 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 now subject to income tax and Class 1A NICs.

Wider scope to consultation?

However, since the consultation details were published, there have been reports that HMRC has widened the scope of its consultation to include cash for car schemes as well as salary sacrifice.

If correct, it appears that thousands more company car drivers could be brought within the scope of the HMRC investigation and see their tax arrangements overhauled.

An HMRC spokesman is reported to have told industry newspaper, Fleet News: “We are not looking just at traditional salary sacrifice, we are looking at when an employee can get a cash sum.

“In this case, there will still be a direct convertibility to cash, and so the amount we will tax on the person who takes the car is the higher of the taxable values. This is based on CO2 emissions or the car allowance that the employer considers to be the same value – the car allowance amount.”

Top accountant Deloitte estimates as many as 500,000 company car drivers could be hit with the changes – around 50% of the 970,000 employees identified by HMRC as paying benefit-in-kind (BIK) tax on a car.

Reaction to the proposals

The British Vehicle and Rental Association has been leading industry responses to the consultation process, which closes at 11.45pm on October 19, and has pointed out that the HMRC proposals penalise the lower paid.

BVRLA chief executive Gerry Keaney said: “These schemes offer a valuable way of rewarding and retaining staff, particularly for many public sector organisations who have had to struggle with long-term pay freezes.”

Meanwhile, the Association of Car Fleet Operators, said, in response to news that HMRC was widening the scope of its consultation to cover cash for car schemes: “This has the potential to fundamentally change the landscape of fleet provision.”

The consultation process is intended to air as many differing views as possible, and anyone with a vested interest can make theirs known to HMRC at the following email address:  employmentincome.policy@hmrc.gsi.gov.uk or by visiting this webpage:

https://www.gov.uk/government/consultations/salary-sacrifice-for-the-provision-of-benefits-in-kind

Tax treatment of ULEVs

HMRC is also looking into the tax treatment of Ultra Low Emission Vehicles within the current company car tax structure, and is proposing new tax bands based on how many zero emission miles a vehicle can be driven in pure electric mode.

It is seeking views on how the company car tax system can be adapted to take into account the growing number and variation of ULEVs, while at the same time encouraging their uptake.

The consultation paper says that the UK’s top six selling ULEVs in 2015 had varying zero emission ranges but were classified into only two ULEV company car tax bands.

Moreover, this meant that cars capable of between 32 and 340 zero emission miles were currently in the same band.

It has now suggested an alternative approach to differentiate between ULEVs for the purposes of company car tax, based on how many zero emission miles a vehicle can drive, as well as its CO2 emissions.

The paper suggests that the current 0-50g/km band could be further divided into five bands: less than 20 zero emission miles; 20-39; 40-69; 70-129; and 130-plus zero emission miles.

The Vehicle Certification Agency, the UK regulator, has a database of the zero emission miles capability of all vehicles, and would make it readily available for comparative purposes, says HMRC.

HMRC also says its proposed structure would provide “a clear incentive for manufacturers to move beyond vehicles with reduced CO2 emissions but limited electric mile range, which risk being driven in combustion engine mode most of the time”.

Anyone who would like to contribute to the HMRC consultation on ULEVs can do so by emailing : RHMTETTAnswers@HMTreasury.gsi.gov.uk or see webpage:

https://www.gov.uk/government/consultations/company-car-tax-for-ultra-low-emission-cars

Lease accounting consultation

Finally, HMRC is seeking views on how new lease accounting rules will impact the treatment of leased assets, and how tax legislation will need to adapt.

For the last three or four years, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have been working on a common standard of accounting for all leased assets, including company vehicles.

The new standard, IFRS 16 Leases, becomes mandatory from 1st January, 2019, but qualifying companies will need to ensure that they produce a set of comparative accounts for 2018.

The new standard is intended to bring all assets on leases of more than 12 months onto the balance sheet, giving a more complete picture of a business’s financial commitments.

This new approach to lease accounting, called the ‘right of use’ model, differs substantially from the current standard, which does not require operating leases to be reported in company accounts.

Under the new model, a lessee, or leasing company customer, would identify the right to use a leased asset on their balance sheet and incur a corresponding liability for future rental payments.

The proposed lease accounting rules would apply to all publicly quoted companies that report to the standards of the IASB and public sector organisations. Publicly listed companies already have to make a note to the annual report reflecting any operating lease liabilities.

However, most small and medium-sized enterprises currently report to the UK’s generally accepted accounting principles (GAAP) and will be unaffected until UK standards converge with those of the IASB. There is no deadline for this at present.

An HMRC spokesman said: “We would particularly like to hear from lessees, lessors, professional agents and representative bodies. We are happy to meet with stakeholders to discuss the issues, views and concerns and any alternatives.”

Anyone who would like to contribute to the HMRC consultation on lease accounting can do so by emailing: paul.hindley@hmrc.gsi.gov.uk or see webpage: https://www.gov.uk/government/consultations/lease-accounting-changes

The deadline for this particular consultation is October 30 2016.