Employers have been warned by fleet representative body ACFO and tax experts against taking knee-jerk decisions to abandon salary sacrifice car schemes and removing the car or cash allowance choice from employees amid proposed new Government rules.

As Parliament debates the draft 2017 Finance Bill, which outlines the new rules for limiting the tax and National Insurance benefits of salary sacrifice car schemes and cash alternatives, there are clear differences with regards to the actions companies are taking.

More than a third (34.4%) of respondents to a Fleet News poll said they would be ‘less likely’ to introduce a salary sacrifice scheme, while 16.7% said they were ‘less likely to retain’ one. 

Power systems provider Rolls-Royce told Fleet News that it would be closing its salary sacrifice car scheme, while other organisations are considering the implications. Additionally, some employers have already highlighted to staff what the Government is proposing, while others are seeking “absolute clarity” prior to issuing any form of communication.

More than a quarter (28.9%) of respondents to the poll said they were not taking any action yet. 

Employees who opt for a salary sacrifice arrangement or take a company car in lieu of a cash alternative will pay tax linked to the greater of the taxable value of the vehicle or the cash alternative (salary sacrifice or cash allowance) – but only if the car emits more than 75g/km.

Ultra-low emission cars with CO2 up to 75g/km will be exempt from the new rules.

The measure will impact on all contracts for car salary sacrifice/cash allowance arrangements entered into on or after April 6, 2017. 

Those employees already in contracts before that date will be protected from the new rules until April 2021. 

There are also implications for employers, who will no longer be able to take advantage of national insiurance savings on salary sacrifice cars unless they are up to 75g/km.

The final content of the Finance Bill 2017 will be subject to confirmation at the spring Budget 2017.

ACFO deputy chairman Caroline Sandall said: “It is very tempting to see the scale of change and look to react by closing or limiting schemes but that is not necessarily the right next move.

“This is not the end of salary sacrifice as it will still work for many cars. Businesses must consider the impact of the change taking into consideration employer position on CO2 limits and available cars – there are many cars that are largely unaffected, others will perhaps become more attractive, such as ultra-low emission vehicles, and others will become less attractive. But that doesn’t mean the destruction of choice lists; it just requires careful consideration of the impact on available vehicles.”

Where vehicle choice is available, Sandall suggested that employees would be able to find cars that represented “good value”, but added: “The new rules may signal a change of selection patterns and different vehicles becoming popular, but many fleets may well find that, when they look at the impact, a healthy choice of good value vehicles remains.”

Similarly, employers offering a car or cash option should examine the new rules closely and, according to Sandall “adjust policy accordingly”.

She said: “Some fleets may look at reviewing allowance levels but others may take no action at all. It very much depends on the allowances available versus the car choice lists.”

She added: “It’s important for employers to be looking at the immediate impact – especially on any orders in place that will be affected by this change; employers may want to offer options to any drivers who will be impacted, including cancelling orders.

“But it is vital that drivers receive sufficient communication to fully understand what the new rules mean for them and be permitted to look at alternative options. Analysis of the impact of these changes can take some time so consideration should be given to immediate order patterns to ensure drivers are fully aware of the financial impact of any new car they order that will be impacted by the change.”

However, Rolls-Royce has already decided to close its car salary sacrifice scheme. Launched two-and-a-half years ago and with more than 1,000 vehicles taken up, fleet manager Claire Bowman said as employees’ three-year contracts came to an end they would not be renewed.

Bowman said: “It is a shame, but the financial benefits will no longer be there for employees so we will abandon the scheme.”

She continued: “We have yet to decide whether to end the scheme now or continue it until April; we will then communicate our decision to employees.”

Rolls-Royce also has in place a cash allowance scheme involving 200 employees that have opted out of having a company car. Those employees pay tax on the payment at their marginal rate with Bowman saying: “The tax position does not change for those employees with the new rules.”

Unipart Group, which has had a salary sacrifice scheme since the 1990s with about 350 employees taking a car, and a similar number opting for a cash allowance, is adopting a ‘wait and see approach’. 

It is consulting with its tax advisers and fleet manager Martyn Rees said: “When we have obtained absolute clarity we will communicate with our colleagues. We don’t want to scaremonger.” 

Salary sacrifice schemes have been popular across the public sector and whether the changes will deter public sector fleets from launching new schemes remains to be seen. 

Following publication of the Finance Bill, an NHS Employers’ spokesman said: “The new rules are likely to make it more expensive for employers to run salary sacrifice car schemes. While it is too early to assess the impact of the new complex tax calculations, feedback suggests affordability could be a more significant issue for employers.”

Nevertheless, he added: “We believe that salary sacrifice for cars will continue to be an attractive option for many NHS staff and we welcome the exemption of low emission cars and the protection for existing arrangements.”

That view is supporting by car salary sacrifice provider Tusker, which reports increased interest in its schemes, since future tax treatment was confirmed in the autumn statement. Several new schemes have now been given the green light.

While the Finance Bill is in draft form, the Government is accepting responses to its proposals. A spokesman for the Local Government Association said: “We will study the implications of these announcements for the use of employee incentives as tools to improve recruitment, retention and productivity. We will respond to consultations.”

Many fleet managers spoken to by Fleet News declined to comment directly saying they were involved in discussions with HR departments, finance directors and professional advisers as to how the new salary sacrifice/cash allowance rules would impact on current schemes.

Paul Taylor, fleet manager at construction and regeneration group Morgan Sindall, where about 800 employees opt for a cash allowance, summed up the mood, saying: “We are waiting for the view from HR as to what the impact will be and the way forward. No actions have been taken as yet.”

However, some employers which operate salary sacrifice and cash allowance schemes, said they had immediately posted the Government’s autumn statement announcement on their intranet sites to alert employees ahead of getting to grips with the detailed implications.

Alastair Kendrick, director at tax adviser   MacIntyre Hudson, advised companies that employees who are driving more than 5,000 business miles should be in a company car although, in some cases, it may also be appropriate for staff travelling fewer miles to have a company car. 

“Companies must take decisions at board level with all available information to hand, there are many scare stories being spun including the death of salary sacrifice,” he said. 

Dan Rees, associate director, Deloitte Car and Mobility Consulting, said: “Salary sacrifice for cars continues to provide employees with a neatly packaged fully maintained and ‘hassle free’ car, with no requirement for deposits or credit checks. Employees will need to continue to do their own diligence on the cost comparison elements between a salary sacrifice car and a private alternative.”

He highlighted that the ultra-low emission vehicle carve out will become “more and more attractive” as the 2020/21 tax year nears, when new benefit-in-kind tax rates provide significant incentives for those cars - 16% down to 2% for the ‘cleanest’ cars.

Rees said: “There will be possible uses for those cars in fleets for certain driver populations and they will look more attractive in salary sacrifice schemes.”

However, he added: “Fleets must not let benefit-in-kind tax alone drive the fleet decision-making and car selection process, otherwise high mileage drivers could spend all day on the motorway in an ultra-low emission vehicle using petrol/diesel mode, not electric and never charging them.”

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