The Finance Bill – the aftershocks

Article published in Fleet World

Last month’s article was entitled The Finance Bill –  a seismic shift for fleet managers and included an explanation of the new Optional Remuneration (OpRA) rules.

That article generated more reader response than we have had in nearly a decade of writing these articles, the general tenor of which can be summed up as “the Government is planning to do wha-aaaaat? Really?”

Given the importance of the Finance Bill we need to return to this topic this month. The changes will affect many fleet managers, quite possibly the majority.

We will look at the proposals again but from a slightly different angle; trying to work out why the government have introduced these changes and thinking about what you as a fleet manager need to be doing now to ensure that your company and your employees don’t end up being disadvantaged.

First let’s reprise what’s actually being proposed.

The draft legislation describes two types of OpRA; Type A and Type B.

Under a Type A arrangement the employee foregoes earnings in return for the benefit. This is the familiar scenario of a typical salary sacrifice arrangement. If an employee sacrificed salary and was given a company car emitting more than 75g CO2/km before 6 April 2017, they will continue to be taxed under the old rules (the normal company car BIK rules) until the earlier of 6 April 2021 or the date they modify or renew the deal. The new rules do not affect cars that emit less than 75g CO2/km – these arrangements continue as before.

Under a Type B arrangement, the employee receives a benefit (such as a company car) rather than some earnings. This is the one that is making people stop and think. You might think that if someone received a company car, the fact that they had been entitled to a cash allowance would become irrelevant and that they should be taxed under the benefit in kind rules for company cars. That’s what happened in the past and it made perfect sense.

However, that’s not what the draft legislation says. It says that if an employee who is entitled to either a cash allowance or a company car opts for the company car, they will be taxed on whichever generates the most tax.

In a few moments we will try (and largely fail) to explain the government’s logic but first we need to mention that the legislation contains safeguards against clever people trying to game the system.

If any OpRA is changed or renewed after 5 April 2017 the new rules will apply from the date of the renewal or change, except where this has been made necessary by a reason outside of the control of the employer or employee. For example, where the car has been written off and has to be replaced. In such circumstances the change will not be regarded as an event that triggers a move to the new rules.

So, to summarise, we now have two different arrangements:


Type A B
Applies when… …employee foregoes earnings and takes a benefit instead …employee is entitled to a cash allowance but opts to take a benefit instead (e.g. a company car)
Example Car salary sacrifice:

If the car emits more than 75 grams CO2/km the employee will be taxed on the higher of:

·        the cash equivalent value of the company car (broadly; list price x the emissions-based CO2 percentage) or

·        the amount of salary they sacrificed.


Free fuel salary sacrifice:

Employee agrees to forego some salary and the employer agrees to pay for free private fuel. The employee will be taxed on the greater of:

  • the cash equivalent value of the fuel (fuel multiplier of £22,600 x the car’s emissions-based CO2 percentage) or
  • the amount of salary sacrificed.


If the car emits more than 75 grams CO2/km they will be taxed on the greater of:

·        the cash equivalent value of the of the company car or

·        the cash allowance foregone


If you want to try to work out why the government has taken this approach to Type B arrangements, it helps to remember that the benefit in kind tax rules were designed to standardise the taxable value when an employee is allowed free private use of their company car. However, in reality they do nothing of the sort. If you and I drive identical company cars and pay income tax at the same marginal rate, but I drive 20,000 personal miles and you drive just 2,000, it stands to reason that I get more personal benefit from the company car than you do. But we still pay the same benefit in kind tax, which is clearly unfair. However, the system isn’t designed to be fair, it’s designed to be simple to administer and to generate a certain amount of money for the government.

Working out the real benefit an individual derives would be an administrative nightmare involving a personal evaluation of the benefit for each employee. However, one might argue that where the employee has the choice between two alternatives they will automatically take the one that is worth the most to them. Therefore, (according to the sort of logic HMRC adopts) if the employee takes the car but the cash allowance is worth more, the employee must value the car at least as much as the value of the cash allowance.

So if I choose a company car that generates a taxable benefit of £200 per month rather than a cash allowance of £300 per month, HMRC will say that I’m placing a value on the car of at least £300 per month and they will tax me on the £300 per month. Ouch.

We can safely assume that these new rules aren’t going to go away, whoever wins the general election. So we have to learn to live with them.

With Type A contracts the situation is clear. If you operate a salary sacrifice scheme you will need to evaluate the net cost of the new rules to the company and to the employees. We have a transition period but this only applies to existing contracts: where there is a new contract the new rules have to be applied. If an employee wants to sacrifice salary for a company car they need to know how much it will cost them. Talk this through with your supplier; they will be able to do the sums for you.

With Type 2 contracts the situation requires more thought. Many company car schemes give the driver the option to take a cash allowance, though in practice most employees chose the company car. But in future the mere existence of the cash allowance option risks creating a tax liability that could be far greater than the benefit in kind tax that the employee would have paid in the past.

Cash allowances have been an important part of flexible benefits schemes for decades. If you offer them, now might be a good time to review whether you should continue, and, if so, the amounts that should be on offer. It could well be that you find that for a whole group of drivers, particularly those who are only allowed to choose from a small range of cars, it might be worthwhile withdrawing the cash option completely.

If you have a group of drivers (say all employees at a certain managerial grade) who are entitled to either a company car (lease rental max say £400 per month) or a cash allowance of say £420 per month, you will find things become complicated. The BIK tax on those cars will vary according to list price and CO2 emissions whereas tax on the cash allowance will be static – and needs to be known by the employee before they order the car, because that’s the amount that will be payable if it’s higher than the BIK.

Most employees are likely to feel mightily aggrieved if they have to pay tax on a cash allowance they have not received, rather than BIK tax on the company car they have received.

Here again a conversation with your leasing company or fleet management supplier will be the order of the day. This stuff is not straightforward.

The aftershocks of the Finance Bill will be felt for some time to come.

Professor Colin Tourick