The £365m Diesel Tax Grab

Colin Tourick quoted in Fleet News, October 2017

Manufacturer discounts of up to 35% on some new cars have called into question the relevance of the P11D price in company car tax calculations.

The P11D value of a company car comprises the list price, including VAT, plus any delivery charges, but does not include the car’s first registration fee or its annual road tax.

However, almost nine out of 10 respondents to a Fleet News poll think the P11D price is failing to reflect the true value of the benefit.

One fleet manager told us: “The only winners with higher P11D prices are the HMRC by getting more revenue from the drivers’ benefit-in-kind (BIK) liability.”

Another said: “The current system is about raising revenue, not assessing the benefit.”

Company car tax was reformed in April 2002 to an emissions-based system, with the charge calculated by applying a percentage figure to the P11D price of the car. The car’s fuel type and CO2 emissions determine the appropriate percentage.

Karen Hilton, head of sales operations at Carwow, told Fleet News the list price is becoming “increasingly obsolete, and not just in the company car market”.

“Dealers make offers across the board, knowing a company car will have tax calculated on the recommended retail price (RRP) makes little sense to the driver,” she said.

On the Carwow site, the most popular company cars include the Audi A3 where the average cash saving to a buyer is around 7%; the BMW 2 Series and 5 Series, which have average RRP savings of 10%; the Mercedes E-Class, where savings average 11%; the VW Passat with savings of between 16% and 19% and the Renault Zoe with savings of up to 35% against the list price.

“However, what is clear is that with offers available almost as standard on some models, the method of calculating tax for company vehicles is out of date viewed against how the market is operating,” said Hilton.

Some manufacturers have moved to make the P11D price more effective for company car drivers. Ford has restructured its Mondeo range – including cutting P11D prices by up to £3,000 – to increase its appeal to fleets and company car drivers by offering more equipment and lower tax bills.

A spokesman said: “More than 85% of Ford Mondeos are driven by professionals as a company car, meaning they pay BIK tax based on its P11D price. 

“To minimise tax liability, prices are reduced by £3,000 (on Vignale), £2,500 (on Zetec and ST-Line Editions) and £2,000 (on Titanium Edition) – meaning savings of up to £720 over three years (on ST-Line Edition 2.0 TDCi 150PS, for 40% tax payer) plus £300 on the employer’s fleet National Insurance (NI) costs.”

He added: “The same analysis is an ongoing process across Ford vehicle lines. Mondeo has highest fleet mix, hence the latest news on it.”

Vauxhall has previously done the same with Insignia, recognising the need to make P11D pricing more attractive to company car drivers.

James Taylor, Vauxhall fleet sales director, said: “We recognise the requirements of both fleet operators and company car drivers and try to ensure the Vauxhall range is optimised  to be competitive on BIK and NI contributions.

“As part of our overall wholelife cost and total cost of ownership strategy, we actively review our pricing and positioning and evaluate those elements affected by P11D in order to be highly competitive. This strategy saw us reduce P11D pricing on like-for-like models when we recently launched the new Insignia. 

“Fleet operators and company car drivers made P11D savings of more than £2,500 compared to the previous model as part of our plan to offer low wholelife costs to our customers.”

Vauxhall also launched the Astra with much lower P11D pricing and was one of the pioneers of high-spec, low P11D trims aimed specifically at company car drivers with Tech Line.

James Dower, senior editor, Black Book at Cap HPI said the gap between the P11D price and transaction price can sometimes be “sizeable”. 

“It therefore makes lots of sense to reduce the list price and, in turn, lessen the margin in the vehicle as the car will look more attractive on company car lists from a BIK perspective,” he said. 

Caroline Sandall, deputy chair of fleet representative body ACFO and director of ESE Consulting, says that the gap between the P11D price and the transaction price has been a “bone of contention” for as long as she has been in the industry. However, she said: “Increasingly, the P11D price bears little resemblance to price paid so is not an accurate reflection of the value of the benefit received. 

“Discounts are now so common that the vast majority of private users can achieve some form of reduced price, as well as lease companies and fleets who outright purchase.” 

So should more manufacturers follow Ford and Vauxhall’s lead or HMRC change its method of calculation? Sandall believes it is something that needs to be looked at, but recognises it is not a simple change to make. 

“Nevertheless, the industry should be able to come up with something that works for all purchasers to simplify the system.”

She also argues that the plug-in grant should be taken into consideration.

“It is time for the industry to tackle this issue and find a solution that is more effective for business users than the current published list price approach, especially when considering the price applied for BIK purposes,” she said. 

However, not everybody agrees that manufacturer discounts make BIK payments based on the P11D price hard to justify.

Colin Tourick, professor of automotive management at the University of Buckingham Business School, said: “I don’t think there’s an anomaly with company car drivers having to pay BIK tax based on P11D price. In fact, I think it’s the only workable solution. 

“Various discounts may be available to leasing companies when they buy cars. These discounts change frequently and in many cases the leasing company won’t know what the net price will be until they find a dealer with the vehicle in stock and strike a price. That’s too late in the transaction for the company car driver; when they are browsing through the leasing company’s online quoting system they need to know the BIK tax they’ll be paying. 

“The only fixed, certain number in the whole system is the P11D price. HMRC can check this number easily and two employees in the same company who drive the same model of company car will pay identical BIK tax.”

He also notes that the overall tax-take the Government levies from company car drivers would not be reduced if the system was based on discounted prices. 

“They’d just hike up the rates to compensate,” he said. “So no one would gain but the system would be way more complex and almost certainly unworkable.” 

Furthermore, Tourick does not think the Government should apply plug-in grants to the P11D price. “BIK tax on these cars is already low, though sadly set to rise, so the incentive to choose them is already there,” he said.

“The aggregate amount of grant is capped and once the limit is reached it will no longer be available, so you could have two drivers choosing the same car and one pays less BIK because they got their order in before the pot ran out. 

“And finally we again have the fact that if the total BIK tax the Government collected was to be reduced, they’d ramp up the rates elsewhere. So I think it’s best to leave things unchanged.”

Article published in Fleet World

Normally, when the government publishes the draft wording of a Finance Bill, the fleet press and commentators rush to give their thoughts, but that didn’t happen on 20 March when the government published Finance (No. 2) Bill 2016-17, the legislation that enacts the chancellor’s spring budget. They had good reason to hesitate, because the government’s proposals are complex and far-reaching and it seems that everyone has needed to take a little longer to work out what it all means. The key areas fleet managers need to be aware of are that the draft puts flesh on the bones of the new approach to salary sacrifice that was announced in the Autumn Statement and introduces a very different approach to cash allowances.

At least one major accounting firm has suggested that the new rules will also affect Employee Car Ownership Schemes (ECOS) but at the time of writing this is unclear, as is the position when an employee who has the right to a cash allowance instead of a company car selects a company car below their entitlement level, i.e. they ‘trade down’. Trading up was referred to in the draft legislation but not trading down.

This article ignores these uncertainties and concentrates on the things we definitely know.

As the government had already announced, from 6 April 2017 any tax and national insurance contributions (NICs) advantages under salary sacrifice arrangements will be withdrawn.

Just to recap, under a salary sacrifice arrangement an employee gives up the right to some salary and receives a benefit instead.

When salary sacrifice is used for cars, the employee saves tax and employees’ NIC, and the employer saves employers’ NIC. The employee pays benefit in kind tax under the normal rules for company cars. Historically, if an employee chose a relatively low cost, low-CO2 car they could make savings. Salary sacrifice schemes have predominantly been used to provide cars for employees who would not otherwise be entitled to a company car, most of whom have been basic rate taxpayers.

The draft legislation describes these arrangements as ‘optional remuneration arrangements’ (OpRAs). The industry knew that salary sacrifice schemes were being reviewed in 2016, but before last November they had no idea that the government would include cash allowances in the rule changes. This has been confirmed in the wording of the draft bill.

If your company operates a salary sacrifice arrangement or offers benefits such as company cars or the option to take a cash allowance in lieu of those benefits, you need to understand the new rules. Even employers that have never offered salary sacrifice but offer employees the choice between a cash allowance and a company car are caught by the new rules. An awful lot of companies, tens of thousands and maybe more, now have to consider how these changes affect them.

The draft legislation describes two types of OpRA, both of which will now be regarded as conferring a benefit on the employee.

• Under Type A arrangements the employee foregoes earnings in return for the benefit (e.g. a salary sacrifice car)
• Under Type B the employee receives a benefit rather than some earnings (e.g. takes a company car rather than a cash allowance).

And here is the key piece of information: if an employee choses to take a benefit instead of an amount of salary, they will be taxed on the greater of the salary given up and the taxable value of the benefit in kind.

The legislation includes provisions designed to stop people claiming that a particular type of benefit or form of salary reduction falls outside the scope of the rules.

There are transitional arrangements. If someone took a car emitting more than 75g CO2/km on a salary sacrifice scheme before 6 April 2017 they will be taxed under the old rules (the normal company car BIK rules) until the earlier of 6 April 2021 or the date when they modify or renew the deal. If the car emits less than 75g CO2/km the old rules continue to apply.

If an employee changes or renews the OpRA on after 6 April 2017 the new rules will apply from the date of the renewal or change. Amendments that arise because of matters that are not within the control of the employer or employee – e.g. the car is written off and replaced, or the employee is allowed to vary the arrangement because they take are on extended sick or leave or maternity leave – are not regarded as changes for this purpose.

Is a car emits more than 75 grams CO2/km and the employee has sacrificed salary, they will be taxed either on the normal basis for a company car (which is broadly; list price multiplied by a percentage based on the CO2 emissions of the car) or on the amount of salary they sacrificed, whichever value is the higher. To determine whether the benefit in kind or the salary sacrifice delivers the higher value, any capital contribution made by the employee towards the purchase of the car or payments for private use are ignored in the initial calculation (called the “modified cash equivalent”).

Once the appropriate amount has been calculated the employee gets credit for any capital contribution (capital contribution [max £5,000] x the appropriate percentage). Credit is then given for any private use contribution.

Fortunately, HMRC has provided an example of how this will work in practice. Assume an employee has a car for the whole of 2017-18, for which they sacrificed £300 salary per month, and they also paid £1,500 to get a higher spec car than their limit allowed. The car’s list price is £20,000 and it has an appropriate percentage of 17%. The normal cash equivalent value of the vehicle would be:

• £20,000 less capital contribution £1,500 = £18,500 x 17% = £3,145

The modified cash equivalent is:

• £20,000 x 17% = £3,400 (the capital contribution is ignored).

The sacrificed salary exceeds the modified cash equivalent, so the sacrificed salary will be used to calculate the additional amount to be treated as earnings and taxed.

Therefore the taxable amount is £3,600 less £255 (capital contribution of £1,500x 17%) = £3,345.

This approach also extends to free fuel supplied to an employee who gives up salary for the right to receive free private fuel paid for by their employer. They will be taxed on either the cash equivalent value of the fuel (calculated on the normal basis where the fuel multiplier of £22,600 is multiplied by the appropriate percentage based on the car’s CO2) or the amount of salary sacrificed by the employee for the benefit of the fuel, whichever is the greater.

So if an employee sacrifices £400 per month and their employer pays for private fuel for a company car with an appropriate percentage of 20%, the cash equivalent of the fuel benefit will be £4,520, the sacrificed salary will be £4,800, and as the sacrificed salary exceeds the cash equivalent value of the fuel, the employee will be taxed on £4,800 not £4,520.

A similar calculation needs to be made if salary is sacrificed in return for being given a company van or free private fuel for such a van.

It’s going to take some while for fleet managers and the fleet industry to get their minds around this sort of logic and there are a lot of consequences of these new regulations.

• When choosing their company cars, employees need to know how much tax they are going to pay. Currently this is normally shown on the leasing company’s quotation screen. In future, these screens will have to be modified to provide the correct figures, and the systems will have to hold information about cash allowances, capital contributions, personal contributions, etc.
• Employers are going to have to decide whether to keep cash allowances at current levels or reduce them. If the company offers a generous cash allowance scheme many employees will find that they are being taxed on a cash allowance they haven’t received.
• The new rules may reduce the incentive for employees to choose low CO2 cars. Employers have to decide how they wish to manage this, or indeed whether this is important to them.
• Salary sacrifice schemes still work, but the interplay between salary sacrifice, cash allowances and ‘normal’ company-car based benefits in kind tax mean that leasing companies are going to ensure that their quoting system provide the employee with all necessary information on which to base a decision about whether to enter into the salary sacrifice arrangement.

Professor Colin Tourick

Article published in Fleet World

This is the third time in the last twelve months that we have looked at salary sacrifice in this column, and I make no apologies for returning to it now. There are so many myths about the impact of the Chancellor’s announcement in November that it’s definitely worthwhile taking a deeper look.

Just to recap, in a nutshell, the changes the Chancellor announced were as follows:

If an employee takes a car emitting more than 75g/km of CO2 they will pay the higher of (1) the relevant level of Benefit In Kind (BIK) tax for that car or (2) tax on the amount of salary sacrificed.  The changes commence on 6 April 2017 for new agreements and 6 April 2021 for agreements that were live on 6 April 2017.  Cars with 75g/km or less (ULEVS – Ultra Low Emission Vehicles) are not affected by the changes.

So, let’s knock on the head some of the myths that have been flying about.

1. “Car salary sacrifice schemes have been banned.”

That’s not correct. The tax treatment has changed for some cars but employers can still offer salary sacrifice for cars.

Imagine a situation where you are about to start a new job and the HR person goes through a nice long list of all of the benefits of employment. “We also offer a simple scheme whereby you or a member of your family can drive a brand new fully-insured car using the discounts we have negotiated with our suppliers and the interest rate we pay when borrowing money. In other words, you get the benefit of our buying power.”

Wouldn’t that sound attractive to you? Well that’s still the position. Yes, some tax benefits will only be available for cars emitting more than 75g/km of CO2 from 6 April, but this doesn’t stop the employee getting the benefit of their employer’s buying power, whilst still enjoying other savings like employee National Insurance.

2. “Salary sacrifice schemes will end in 2021.”

That’s not correct either. Cars that are ordered under salary sacrifice arrangements before 6 April this year will benefit from the old tax rules even if they are delivered afterwards. The 2021 date refers to how long the existing tax treatment of current contracts, and new contracts signed before 6 April, will be protected for.

3. “Salary sacrifice is going to become more expensive for everyone.”

Also, incorrect, and not just because the rules remain unchanged for ULEVs.

Salary sacrifice cars were always regarded as regular company cars for tax purposes. BIK tax rises annually and will continue to do so for all company car drivers. If the BIK tax an employee is paying on their car already exceeds the income tax on the salary being sacrificed, they will be unaffected by the new rules.

This point, which is explained in more detail in the Range Rover Evoque example below, has not received enough publicity. One leasing company carried out an evaluation of the effect of the new rules on their salary sacrifice clients. They started by assuming that every salary sacrifice employee currently driving one of their cars would have stared their contracts after 5 April. According to their evaluation, 46% of those drivers would be paying no more tax under the new rules than they are paying now in BIK tax. If they did have to pay extra tax, in most cases this would be less than £5 per month. Of course, the employees could avoid this extra cost by simply choosing lower-CO2 or cheaper cars.

4. “The changes do away with tax and national insurance benefits.”

We’ve already dealt with the tax benefits. Employers will no longer make Class 1A NI contribution savings on vehicles with emissions above 75g/km of CO2. But there has been little publicity about the fact that the Chancellor’s announcement does not affect employee national insurance at all, so there are still NI savings to be made. 75% of current salary sacrifice drivers in the UK are basic rate tax payers so this represents a 12% saving on top of the other discounts.

5. “Many companies are withdrawing from salary sacrifice schemes.”

In fact the opposite appears to be the case. The day after the Chancellor’s autumn statement a couple of large companies announced that they were withdrawing their salary sacrifice schemes. However, leasing companies have said publicly that they have launched many new schemes since November. It seems that a backlog had built up whilst employers waited to hear what was said in the Autumn Statement. And many employers have realised that their employees value these schemes even without the tax benefits.

6. “Salary sacrifice is now only worthwhile for ULEVs.”

As already shown above, this is not correct. However, the savings will be good for ULEVs under the new rules.

Let’s now look at a couple of interesting examples. In the first example, we can see that there is still a saving to be made by the employer even though the CO2 of this vehicle significantly exceeds 75g/km.

ULEV vehicle example Current

And in this high-CO2 and high P11D value example the driver will see no increase, as they are already paying more in gross BIK than the gross salary being sacrificed.

I suspect that once they do the sums, most employers will decide to stick with their salary sacrifice schemes. The calculations now have to be done slightly differently but the financial logic in favour of salary sacrifice for cars remains intact.

Professor Colin Tourick