April 28, 2017

Changes to taxation of ULEVs dropped from Finance Bill

ULEV proposals put on hold but other changes go through

New benefit-in-kind (BIK) tax rates for ultra-low emission vehicles, due to take effect from 2020, have been dropped from the Finance Bill.

However, other changes, including the tax treatment of salary sacrifice and cash for car allowances, and new rules for Vehicle Excise Duty, have gone through.

The new tax treatment for ULEVs were confirmed in the Spring Budget and referred to 15 new bandings, of which 11 were for plug-in cars (sub-75g/km). The new rules were due to come into force from April 2020.

However, one of the knock-on effects of the snap election on June 8 announced by Prime Minster Theresa May is that the current session of Parliament is coming to an abrupt end and will be officially dissolved by the Queen on May 3.

In what is known as the wash-up period, the Commons and Lords decide what bills they want to let through and which they will effectively put on hold.

The Government plans therefore to remove a majority of the Finance Bill – 72 out of 135 clauses and 18 of 29 schedules – following discussions with the Opposition.

Only time will tell whether that means these have simply been delayed until the Autumn Budget or are now up for debate again.

What remains?

Optional Remuneration Arrangements (OpRAs) affecting salary sacrifice and cash allowance arrangements are still included along with the Vehicle Excise Duty changes.

The changes to salary sacrifice schemes will impact on all employers who provide such schemes for their employees and came into being from April 6.

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.

A similar principle will now apply to cash allowances where an employer provides a choice between a benefit or cash.

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.

New VED rules come into force

While there will still be no changes to VED for existing cars, the new regime from April 1 is now confirmed.

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, slightly less than the average £166 a year that motorists pay today,.

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.

What should companies do next?

In the light of the changes, many companies still face the same dilemmas that they did before, as the new rules for salary sacrifice, cash allowances and VED have already come into force.

Some companies may be mulling over whether offering cash to employees is a more straightforward, simpler and possibly cheaper alternative to offering a company car.

But this views the company car purely as a cost or a ‘perk’ – it doesn’t recognise that a car is often an essential tool which is an investment in the cost of doing business.

However, any organisations considering such a move should not rush into action without seeking expert help and advice. Talk to your fleet management advisor before making any changes, as you may find the cash allowances you set actually cost more than the company car programme.

Also, the benefit of company car schemes to employees in terms of recruitment and retention should not be under-estimated.