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  • Office of Tax Simplification points way for salary sacrifice Posted on 14 November 2016

    At last Thursday’s International Auto Finance Network conference in London, a panel of industry speakers were “cautiously optimistic” that the Chancellor will indicate a “carve out” for cars from proposed changes to the rules on salary sacrifice and benefit in kind arrangements when he delivers his Autumn Statement on 23 November (see report here). On the same day, the influential Office of Tax Simplification (OTS) issued its response to an HMRC consultation on the topic. The OTS paper may point the way to what we can expect from the Chancellor.

    Three times - in the 2015 Summer Budget, last year’s Autumn Statement and the 2016 Budget Statement - the previous Chancellor drew attention to the effects of salary sacrifice schemes on tax receipts. In the 2016 Budget Statement, the Government said it wanted to encourage employers to offer certain benefits via salary sacrifice but not others. It said that pension saving, childcare and health-related benefits such as the Cycle to Work scheme would stay eligible. There was no mention of salary sacrifice and company cars.

    After the referendum, it appeared likely this wouldn’t be top of the Government’s priorities. Analysts noted most of the effects on tax receipts are from the very benefits the Chancellor had confirmed wouldn’t change. In August, however, HMRC issued what a consultation over a proposal to scrap salary sacrifice tax benefits for all benefits other than those identified in the Budget Statement. Unusually for a first consultation, no alternative options were presented.

    It was a ‘worst case scenario’ for car lessors: Cars included - and not only those on salary sacrifice schemes, but also all company cars where the employee has the option of taking a cash alternative.

    Lessors and associations responded with extensive lobbying and new research on the benefits of car salary sacrifice schemes for the low-paid, the UK car industry and the environment.

    Have the industry’s efforts been enough to convince the Chancellor to leave salary sacrifice car arrangements, as well as company cars with cash alternatives, unchanged? An indication of the answer comes from the OTS response to the HMRC consultation, published last Thursday. The OTS is an arms-length office of HM Treasury, and certainly under the previous Chancellor it has been highly influential in policy decisions.

    In its response, the OTS observes that the underlying principle here is that everyone should pay the same amount of tax and national insurance (NI) on the same remuneration package. The OTS doesn’t refer specifically to cars, but it points out that under the HMRC proposals, this would not be achieved. 

    The OTS response implies that regardless of whether an employee is paid all in cash, or is offered a company car with a cash alternative, or is offered a flexible benefits package including a car, the tax and NI cost will be the same.

    For that to work, the Government would need to move away from HMRC’s proposal to tax a salary sacrifice car based on the actual annual cost to the employer (e.g. lease expense) if higher than taxable value. Instead, tax would always be paid on the emissions-based taxable value of the car, as it is today.  

    The big change would be NI. A salary sacrifice employee, as well as an employee with a cash option, would pay NI on the value of the benefit. This might be based on the emissions-based taxable value of the car rather than cash expense.

    The implications for legislation are complicated and the OTS suggests the change might be made as part of a much wider review of tax on employee benefits. Combined with the quite minor overall effects on tax revenues, it seems likely all we will hear on or around 23 November is a progress report. In line with many other changes to the tax system made by this Government, implementation may be delayed for years, with further consultations to come over the details.

    With lower NI benefits, is there a future for salary sacrifice? For the lowest-emissions cars, the income tax will continue to be an attraction. Operators may also market schemes by focusing on the non-tax based benefits that the employee can’t obtain independently. Those benefits might include savings from the buying power of the employer and its scheme operator, superior levels of service and convenience, or more flexibility over what car is provided or for how long.

    This isn’t the end of salary sacrifice for cars, but equally last week’s OTS paper appears to suggest that a straightforward “carve out” from the salary sacrifice changes for company cars is looking unlikely.

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