Finance Bill - Company Car Effects 2017

Cash

Background


On March 20, 2017 the draft Finance Bill was published and seeks to enact the provisions that were first laid out in a consultation paper published by HMRC in August 2016.
These provisions are known as optional remuneration (OpRa) provisions and set out to discourage salary sacrifice schemes and increase tax on car schemes where cash alternatives are present. These are set out as Type A arrangements (salary sacrifice) and Type B arrangements (where a cash alternative exists).
The rules are as follows:
1) Where a car is provided under an arrangement where salary is exchanged for the car or a where a cash alternative is available, the income tax will be paid on the higher of the current benefit in kind (BiK) rules for cars or the cash alternative / salary sacrificed.
2) Where any other benefit is provided, income tax will become due on the amount sacrificed from salary for that benefit.

Exceptions:


Employer pension contributions
Employer-provided pension advice
Employer-supported childcare
Cycles and cycle safety equipment
Ultra-low emitting vehicles (Cars whose tailpipe emissions are less than 76g/km)

Grandfathering:


Where there is the provision of a car, the old BiK rules will continue to apply where an “arrangement is in place” on the 6 April 2017. An “arrangement in place” is taken to be where a customer order is placed with a provider. The old rules will continue until 6 April 2021.
For all other benefits, the old rules will continue until 6 April 2018 where arrangements are in place by 6 April 2017.

Fleet / Business Mileage Considerations:


Company cars where no cash alternative is available
Company cars where a cash alternative is available
Company cars provided under flexible benefit arrangements
Cars provided under salary sacrifice schemes
Employee car ownership schemes
Tax-optimised business mileage plans

Company cars where no cash alternative is available


Do the new rules apply here? – No
What are the effects of the new rules? – None
What are the alternatives? – Not applicable

Company cars where a cash alternative is available


Do the new rules apply here? - Yes
What are the effects of the new rules? – The new rules state that company car tax will be paid on the higher of the cash alternative or the current BiK rules. As such where companies offer generous cash alternatives, the cost to employees will increase. Where cash alternatives are modest, employees will continue to pay under the current rules.
What are the alternatives? – Removing all optionality from employees is essential. This includes optionality before employment has commenced.

Company cars provided under flexible benefit arrangements


Do the new rules apply here? – Yes
What are the effects of the new rules? – The new rules state that the employee will pay company car tax on the higher of the BiK or the gross salary exchanged for the benefit. Given that employees have already contributed to the cost of the car, the additional tax burden means that these schemes are of marginal financial benefit to 20% tax payers and are costly to 40% tax payers.
What are the alternatives? – Since benefit in kind taxes are rising year-on-year salary sacrifice schemes within flexible benefit arrangements have a limited shelf life. A leveraged car scheme funded by employee net pay is a much better alternative.

Cars provided under salary sacrifice schemes


Do the new rules apply here? - Yes
What are the effects of the new rules? – The new rules more or less mitigate the tax benefits for 40% tax payers and leave the financial benefit to 20% tax payers as minimal.
What are the alternatives? – A salary sacrifice car scheme is essentially an arrangement where an employee exchanges payroll tax for benefit in kind tax. Due to the fact that benefit in kind taxes are rising year-on-year salary sacrifice schemes have a limited shelf life in any case. A leveraged car scheme funded by employee net pay is a much better alternative.

Employee car ownership schemes


Do the new rules apply here? - Partially
What are the effects of the new rules? – Where an ECO scheme is properly implemented and is not structured to include an element of employee salary exchange, then the new rules do not have an effect. However, where a scheme is implemented that includes salary exchange then the new rules will mean that the salary exchanged for the mileage payments (AMAPs) will be subject to tax. ECO schemes can still deliver significant savings (>20%) over contract hire arrangements even without salary exchange.
What are the alternatives? – Brining interest-free employee loans into play could help mitigate the loss of salary sacrifice within ECO schemes, but where business mileage is high this will be a challenge.

Tax-optimised business mileage plans


Do the new rules apply here? - Unclear
What are the effects of the new rules? – As it is unclear if these arrangements will be subject to the new rules, it is difficult to say what the effects of the rules could be. It would seem that if these arrangements are caught by the new rules, then the benefit of doing so will be lost.
What are the alternatives? – Tax-optimised mileage plans can be structured in many different ways. If the scheme in hand is caught by OpRa, then it will need to be restructured.