Managing Your Employee Car Benefit
Car Benefit Solutions (CBS) reviews the costs and restrictions associated with driving company cars.Tags: Automotive ECOS Taxation
Car Benefit Solutions (CBS) provides the UK Automotive Industry with best-in-class Employee Car Ownership Schemes (ECOS) and regularly reviews the costs and restrictions associated with driving company cars. CBS is committed to continuously developing our solutions whilst reviewing the potential impact that external factors and alternative arrangements may have on the costs and management of company car fleets. This paper covers the rising cost of Company Car provision and highlights the impact that the Worldwide Harmonised Light Vehicle Test Procedure (WLTP) is likely to have on company car tax. It also makes considerations for alternative arrangements and addresses the potential risks associated for both dealer employers and their employees.
THE RISING COST OF DRIVING A COMPANY CAR
The cost of driving a traditional company car has risen sharply in the last five years, at a rate well above that of inflation. Essentially, this means that company car drivers and their employers are paying considerably more year-on-year through company car tax and Class 1A National Insurance Contributions (NIC) respectively. In some cases, the increase is as much as 220% over 5 years for maintaining the same benefit. The concern for employers and their company car driving population is that the problem will only get worse with further scheduled increases due in April 2019, compounded by the impact of WLTP on CO2 emissions.
WLTP & COMPANY CAR TAX
As the appropriate rate of Benefit in Kind (BIK) is derived from the CO2 emissions of a vehicle, WLTP is likely to increase the cost of Company Car tax as the emissions output is revised. It may also impact the VED rate, therefore increasing the P11D value of the vehicle.
Despite many manufacturers being well underway in offering a WLTP-approved range of vehicles, there is still uncertainty for many around the impact on the CO2 emissions of certain models and derivatives.
CAP HPI reported in June 2018 that WLTP is likely to result in an average CO2 increase of 10% across all sectors. Petrol plug-in hybrids, which many fleets have switched to over the last 2 years in a bid to reduce costs, will see the biggest average increase at 27.3%. Diesel still remains the company car fuel of choice and expect to see an average increase of 12.6%. Petrol and petrol hybrid will see a smaller average increase at 7.3% and 7.8% respectively.
Such increases will have a material impact on the cost of company car provision as both employee company car tax and employer NIC costs rise.
HOW COULD WLTP IMPACT THE COST OF COMPANY CAR TAX IN YOUR BUSINESS?
Taking into account the expected average increase on CO2 emissions as a result of WLTP, now is the time to consider the impact on your business as this will directly influence profitability in today’s increasingly challenging marketplace.
Each with a £35,000 P11D value
The illustration below provides a representation of the cost increases for each fuel type based on the average CO2 increases quoted by CAP HPI:
BENEFIT IN KIND RATES
Diesel remains the fuel of choice for company cars and still accounts for the majority of the model mix for most manufacturers. Scheduled increases and the impact of WLTP will result in an increase of twelve percentage points over just three years in this example. It follows the same increase for petrol/plug-in hybrids which many fleets have recently switched to in an attempt to reduce costs.
MONTHLY COMPANY CAR TAX (AVERAGE)
Benefit in Kind rates will continue to significantly increase the cost of company car tax for employees. Across all fuel types in this example the average monthly cost of company car tax has risen £125* with a significant spike between Apr 18 and Apr 19 due to scheduled increases in BIK rates and WLTP.
*Assumes 40% Marginal Rate of Tax
CLASS 1A NATIONAL INSURANCE CONTRIBUTION
The cost to the employer follows the same trend, as Class 1A NIC is also derived from the BIK rate.
On diesel vehicles in this example, this would equate to an increase of almost £50 per car, per month over a period of 3 years. A company car fleet of 50 cars would incur an additional business cost of £2,500 per month or £30,000 per year by 2020.
As the cost of providing a company car rises, it has an increasing influence on dealer behaviour, creating limitations and restrictions based on viability, expenditure and employee affordability. It is therefore becoming increasingly common for dealers to seek alternative solutions for their business, allowing them to regain control and determine the level of benefit they provide for their employees. To follow is a summary for some of the known arrangements being utilised by dealers and considerations that may need to be made to protect you and your business from compliance risk and the rising costs of company car tax.
HMRC introduced Average Banding arrangements to simplify administration in situations where employees frequently drive different cars i.e car dealerships. It is not intended to result in a higher or lower tax charge for employees and should be appropriately managed and reported to HMRC for the purpose of accurate BIK charges. This can create an admin burden and onus on employers to keep accurate records of vehicle allocation. Failure to administer and report upon Average Banding arrangements correctly will expose both the business and its employees to further Benefit in Kind liability, for which charges could be backdated by up to 7 years.
The increases to company car tax will still apply to Average Banding arrangements due to the calculations being based on CO2 emissions, so dealer employers can still expect significant cost increases for both their business and their employees.
OPTIONAL REMUNERATION ARRANGEMENTS (OpRA)
OpRA legislation impacts car schemes operated through a Salary Sacrifice initiative. The legislation ensures employees taking a company car in lieu of a cash alternative, pay tax on the “greater of” the company car benefit or the salary sacrificed.
When the legislation was announced, the Government detailed exclusions for Ultra-Low Emissions Vehicles (ULEVs) and car arrangements in place before April 6th 2017 until April 2021 or a “variation, renewal or modification of the arrangements” was introduced; whichever occurred first.
Since the legislation came into effect many employees will have entered into a new salary sacrifice company car arrangement and some will have renewed their vehicle under an existing Salary Sacrifice agreement, consequently the new rules can be enforced by HMRC.
It is important to note that Employee Car Ownership Schemes do not constitute Salary Sacrifice.
A Beneficial Loan, or Taxable Cheap Loan, provided by an employer to an employee or director where the interest rate is below Official Rate (currently 2.5%). The employee pays tax on the difference between the actual interest paid (if any) and 2.5% (or prevailing Official Rate) via form P11D with a subsequent adjustment to their tax code. If the loan exceeds £10,000 then it is treated as earnings and tax is due on the total amount of the loan or any aggregated loans.
A Beneficial Loan can be operated as part of an Employee Car Ownership Scheme and is typically used within the motor industry due to the level of discounts available, particularly for senior employees and directors.
Whilst the loans are a legitimate means of operating a Car Ownership Scheme, they must be structured correctly in order to comply with legislation surrounding Disguised Remuneration. For example, where a Close Company is not an authorised lender and is issuing Beneficial Loans, they may not be able to rely on certain exclusions for ECOS and therefore the arrangement could constitute Disguised Remuneration.
Employers should not only consider tax legislation when entering in to Beneficial Loan arrangements, but also Consumer Credit legislation. Unless ECOS agreements fall within the exclusions for Disguised Remuneration, the agreement can only be unregulated providing:
• Number of payments due is less than 12
• Payments made within a period of 12 months or less
• Provided without interest or other significant charges.
Any charges or contributions due by the employee for participating in the ECOS, as well as administration charges, costs or interest paid on their behalf, should be included within the total charge for credit and therefore such agreements would need to be regulated.
In order to enter into regulated agreements, the creditor must hold the necessary permissions from the Financial Conduct Authority (FCA). The penalties for executing and entering into agreements without the necessary permissions include unlimited fines and up to two years’ imprisonment.
EMPLOYEE CAR OWNERSHIP SCHEMES (ECOS)
An Employee Car Ownership Scheme (ECOS) is a structure recognised by HMRC for the provision of car benefit to an employee. ECOS often involves structured Credit Sale Agreements that transfer ownership of the vehicle to the employee at the outset and make use of Approved Mileage Allowance Payments (AMAPs).
Structured and operated effectively by a creditor with the necessary FCA permissions, ECOS can protect both employers and their employees from the rising cost of providing a Company Car, removing the associated limitations and restrictions of Company Car tax.
If schemes are not structured and operated in a compliant manner, Dealers and their employees may be exposed to further tax liabilities. Consideration must also be made at the end of the agreement to ensure that the employee does not profit from the arrangement.
BENEFIT IN KIND EXPOSURE
Where the expected Residual Value of the vehicle has not been considered carefully in line with the market, and the agreement does not include a properly structured ‘put option’, the ability arises for the employee to profit from the arrangement. Should an employee not retain their vehicle and settle the loan balance at the end of the agreement, the onward sale determines the actual market value of the car at that point in time. If this is less than the amount that the car was purchased from the employee for, they have profited and therefore tax would be due on such profit. Without a correctly structured ‘put option’, the employee is not protected against market shift and the costs for reporting on P11D and BIK implications could be significant.
EMPLOYEE CAR OWNERSHIP SCHEMES
Car Benefit Solutions
The flexible nature of Employee Car Ownership Schemes (ECOS) coupled with CBS expertise can protect employers and drivers from scheduled increases in company car tax, removing the associated restrictions and allowing dealers to regain control and determine the level of benefit they provide.
As title and ownership of the vehicle is passed to the employee at the outset, company car tax does not apply and the employer does not pay Class 1A NIC on the provision of the car benefit.
Designed, implemented and facilitated by CBS, ECOS also provides clients with additional security when compared to alternative arrangements, in a complete solution that includes full FCA permissions, properly structured agreements and the appropriate operating systems to ensure ease and clarity of use with minimal risk.
This arrangement facilitates significant savings for employers and allows the employer to take control of the level of costs and benefits they provide to their employees.
• ECOS is recognised by HMRC as a legitimate means of providing an employee with a car benefit. It is not a Salary Sacrifice arrangement and Optional Remuneration legislation does not apply.
• As the cost of repayments is not derived from CO2 emissions, the same uncertainty that applies to company car tax surrounding WLTP does not apply. Any increase in CO2 emissions as a result of WLTP can only effect the cost of Vehicle Excise Duty (VED) as it would any other arrangement.
• CBS have FCA full permissions to execute and enter into regulated agreements, taking any potential penalties away from you as the employer and minimising associated risk for your employees.
• CBS have developed, refined and sought guidance from Queen’s Counsel on the evolution of their ECOS product for over 16 years, making this the solution of choice for over 75% of the Top 100 Motor Dealers and 25 automotive manufacturer clients.
• CBS have a dedicated team of over 150 people on hand to support, train, guide and manage the 30,000 registrations per annum on their ECOS solution, committed to delivering an excellent customer experience throughout every stage of engagement.
DESIGNED BY CAR BENEFIT SOLUTIONS, CONTROLLED BY YOU.
To see just how much an ECOS solution from CBS could benefit your business and support profitability this year and going forward, please contact your Regional Manager.