HMRC plans clampdown on ‘luxury’ salary sacrifice schemes


Fleet industry worried about future of company cars, as government aims to limit tax savings from benefits-in-kind

HMRC has announced plans to limit the tax and national insurance contributions (NICs) savings from salary sacrifice schemes – paid for by employees through reductions in gross salary – in a move that experts say could dramatically redefine both the scale and nature of workplace benefits.

Tax benefits on life insurance and mobile phones offered to staff via salary sacrifice, as well as schemes that encourage individuals to buy white goods through their payroll, are likely to be removed, while the fleet car industry is concerned that company vehicles could become a “target” for the taxman.

The Salary sacrifice for the provision of benefits-in-kind consultation paper, which closes on 19 October 2016, states that, in principle, the government does not believe benefits-in-kind should be provided by employers at a cost to the Exchequer through salary sacrifice arrangements.

It is proposing a change to tax legislation so that when a benefit-in-kind is provided through salary sacrifice, it will be chargeable to income tax and Class 1A employer NICs. This means that, even if a benefit is normally exempt from tax and Class 1A NICs, it will now be payable via the amount of salary sacrificed or the cash equivalent set out in statute (if any), whichever amount is greater. Effectively, any benefits that are classed in such a way will be treated no differently to the rest of the employee’s salary.

Debi O’Donovan, founder of the Reward & Employee Benefits Association, said: “The government wants to clamp down on salary sacrifice schemes by not subsidising some more luxury products that are being put through as employee benefits.”

She added that many employee benefits professionals agree that “abuses have crept in that could tarnish salary sacrifice for all”.

Life insurance and mobile phone schemes are specifically named in the document. The government also says there is evidence that the use of salary sacrifice is increasing, with the biggest growth areas including health screening and white goods.

There are a number of schemes, some aimed at public sector employees, that encourage individuals to purchase white goods, computers and televisions at a discount and pay them off over periods of up to two years. These are advertised as ‘effectively’ being interest-free loans.

Tax arrangements surrounding employer pension contributions (by far the most common use of salary sacrifice), employer-provided pension advice, employer-supported childcare and workplace nurseries will not change under the new arrangements.

The paper also emphasises that the government favours arrangements that encourage positive behaviours from employees, including bike-to-work schemes and health benefits. These are unlikely to be affected by the upcoming consultation.

There will also be no change where salary is sacrificed in return for intangible benefits that are not taxed and do not rely on a specific tax exemption – for example, when salary is exchanged for extra annual leave or flexible working hours. Payroll giving to charities will not be affected.

However, there is concern among fleet providers that the proposals could significantly curtail the provision of company cars. Matthew Walters, head of consultancy services at LeasePlan UK, said HMRC appeared to be ignoring the fact that company cars were already subject to additional taxation, and also raised concerns about whether the April 2017 date for introducing new arrangements was logistically feasible for employers.

“The principles put forward in the document simply do not take the tax treatment of company cars into consideration,” he said. “If applied in their current form, this would lead to two company car drivers who drive the same car being treated differently, simply because one driver is making a contribution to the cost of the car through gross salary.

“It is crucial that we continue to work with HMRC during the consultation period, to ensure this is understood. If not, cars could become an unintended target of the legislation as it currently stands.”

The Association of Car Fleet Operators said the timescale of the proposals was a particular concern, adding that it feared companies with active fleet programmes would be put “at risk”.

HMRC said the proposals did not prevent employers from providing benefits to their employees through salary sacrifice, but remove the tax and national insurance advantages that come from doing so.

The potential changes could mean organisations offer fewer benefits, said O’Donovan:  “The bigger implication is for employers that use salary sacrifice savings to fund the administration and costs of running flexible or voluntary benefits schemes. It will force employers to rethink their strategies behind why they offer so many benefits.”

Susan Ball, head of employers’ advisory services at financial advisory firm Crowe Clark Whitehill, said: “Under these plans, employers will continue to have to pay the administration costs of the scheme, but will not get the 13.8 per cent national insurance saving. Many employers will therefore be tempted to remove or reduce the salary sacrifice options available in future. They will have to balance this against the tensions this could cause with employees.”

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